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Property Tax Resources

Sep
17

Environmental Contamination Reduces Market Value

Protest any tax assessment that doesn't reflect the cost to remediate any existing environmental contamination.

Owners of properties with environmental contamination already carry the financial burden of removal or remediation costs, whether they cure the problem themselves or sell to a buyer who is sure to deduct anticipated remediation expenses from the sale price. Fortunately, New York law allows those property owners to reduce their property tax burden to reflect their asset's compromised value.

Tax types

Most local governments in the United States impose a property tax on real estate as a primary source of revenue, levied and calculated by either ad valorem or specific means. Latin for "according to value," ad valorem taxes are imposed proportionately based upon the market value of the property. Thus, the higher the market value, the higher the real estate tax.

Specific taxes, on the other hand, are fixed sums without regard to underlying real estate value. School, county and town governments nearly always compute real property taxes using the ad valorem method, whereas lighting, garbage or sewer districts typically apply specific taxes. Because school and county/town taxes account for the overwhelming majority of a property tax bill, property owners frequently use assessment litigation concerning the market value of the subject property to reduce assessments and, as a result, lower the real property tax burden.

The cardinal principle of property valuation for tax purposes is that assessments cannot exceed full market value. Many states including New York codify this in their constitutions. The concept of full value is regularly equated with market value, which is the highest price a willing buyer would pay and a willing seller accept, both being fully informed.

Disagreements often arise if the subject property is afflicted with environmental contamination. The treatment of environmental contamination and remediation costs is of particular concern to both owners and municipalities. Owners seeking to depress taxable values and thereby reduce their tax burden claim these expenses dollar-for-dollar off the market value under the principle of substitution. In other words, a proposed buyer would not pay more than $8,000 for a parcel worth $10,000 which needs $2,000 of remediation.

On the other hand, municipalities would prefer the adoption of a rule (either via legislation or court decision) barring any assessment reduction for environmental contamination. Otherwise, they claim, polluters would succeed in shifting the cost of environmental cleanup to the innocent taxpaying public, in contravention of the public policy of imposing remediation costs on polluting property owners and their successors in title.

Pivotal case

Fortunately for property owners, a seminal 1996 court decision guides the treatment of environmental costs to cure taxable value in New York. In Commerce Holding Corp. vs. Town of Babylon, the petitioner purchased 2.7 acres of land in the Town of Babylon, Suffolk County. A former tenant of the property had performed metal plating on the premises and discharged wastewater containing multiple heavy metals into on-site leaching pools, ultimately resulting in the severe contamination of the parcel. The owner filed tax appeals and argued the value of the property should be reduced by the considerable costs needed to clean up the parcel.

As expected, the town's position relied on a public policy approach and urged the court to reject any argument for a reduced assessment. Ultimately, the case traveled to New York's highest court, which summarily rejected the public policy arguments that polluters should not be rewarded with lower assessments.

Instead, the court applied the constitutional and statutory requirements of full market value assessments, holding that the full value requirement is a "constitutional" mandate which cannot be swept aside in favor of public policy. Thus, property must be valued as clean, with the value reduced by the costs to cure the remediation per year. Challenges seeking the limitation or outright reversal of the Commerce Holding case have been continually rejected.

A recent clarification

The New York State Court of Appeals did not address remediation again in a property tax litigation context for almost 20 years after Commerce Holding. In a 2013 case, Roth vs. City of Syracuse, a property owner sought to have the assessment on certain rented properties reduced because of the presence of lead-based paint.

The court declined to expand the application of Commerce Holding in this case for two significant reasons. First, the owner continued to rent the buildings and collect income. Second, the owner had not taken any steps to remove or remediate the lead paint and restore the properties. Thus, to successfully claim an assessment reduction, a property owner should not stand idle but take definitive actions to remediate the property. 

Jason M. Penighetti is an attorney at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLC, the New York State member of American Property Tax Counsel, the national affiliation of property tax attorneys.
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Dec
31

Trouble Coming in 2010 Assessments

"Tax assessors usually remain behind the curve of market trends."

By Joel R. Marcus ., as published by Real Estate New York, November/December 2009

All New York City property will be revalued on Jan. 5, 2010. Although that date is not yet here, rest assured that trouble awaits commercial property owners in this revaluation.

First of all, tax assessors usually remain behind the curve of market trends because the Real Property Income and Expense form requires mandatory filing of income and expense statements, which show only the property's calendar year 2008 performance. Since the market fell off a cliff after September 2008, these operating statements don't demonstrate the dramatic loss in real estate value.

Adding to the burgeoning taxes is the five-year phase-in of actual assessments mandated by New York law, whereby each increase over the past five tax years is added to the transition assessment or taxable assessment in 20% increments. Therefore, even if the actual assessment remained the same or was lower, the transition assessment, to which the tax rate is applied, would still reflect the impact of the prior five years' increases.

Hotels took the worst hit in the recession, suffering a 50% decline in earnings. The horrible expense ratio they now exhibit compounds their plunging profits. Instead of expenses approximating 70% of income, hotels find that costs may equal or exceed gross room revenue.

To create property tax assessments, the city employs a gross income multiplier, which ignores actual expenses. While the occupancy of many hotels has decreased along with their room rates, they still have to provide a level of service, staffing and other expenses that leaves marginal hotels or properties operating in the red. Hotels may find some degree of relief because the Tax

Commission has expressed a willingness to consider expenses in setting tax assessments. However, even here the old 70% ratio method has more traction with the tax authority.

Owners of condo properties with many unsold units find themselves in a tough bind. Condos do not generate rental income and sales are at a virtual standstill, yet condos are valued as if they were rental properties. This squeeze of higher property taxes and little income throws owners into the hands of their lenders.

Since rental income from conventionally rent-producing apartment buildings has only declined 10% to 15%, not much relief in tax valuations can be demonstrated by objective calculations. Moreover, data from luxury rentals is also derived from the 2008 calendar year filings, which, as mentioned, are not yet showing the full measure of market fall-off. Often, too, the burnoff or expiration of abatement programs significantly raises taxes.

Office and other commercial properties will show their decrease in income more slowly because the 10-year lease, which is most common, often masks the drop in fair market rental value. The only reduction seen in the market comes from increasing vacancies and renewals at lower rents. The impact of reduced rents, loss of operating and tax escalation income associated with the signing of a new lease and establishment of a new base year will not be fully realized for several years. In the meantime, income statements mask the problem by showing lease cancellation income and, in the case of new leases, the straight-lining of free rent and the amortizing of leasing commissions and tenant work.

To bring real estate taxes down to a viable level, a difficult task even in normal times, owners will need sophisticated analysis and effective presentation. A compelling presentation to the assessor regarding the rise in capitalization rates is paramount.

Hotels need accurate data to reflect current conditions, including labor and staffing requirements. They must also show the assessor how the increase in new rooms and new hotels precipitates lower rates and higher vacancies.

Condos need to create valuation models using realistic market conditions, high capitalization rates and a broader mixture of comparable assessments and data. Showing condo price reductions will not prove your case.

Office and commercial properties must clearly demonstrate the lack of any net absorption of space, indicating a 15% vacancy and loss factor in a 100% occupied property. In addition, any large vacancy is likely to be sustained for the foreseeable future, thus, the need for downward adjustment of occupancy.

MarcusPhoto290Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys. He may be contacted at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr
08

Be On Guard over Shift to GIM

"The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

By Joel R. Marcus, Esq., as published by Real Estate New York, April 2008

The Tentative Assessment Roll for 2008/2009 demonstrates a significant shift in assessments for class 2 properties (rented apartment buildings, cooperatives and condominiums). This is due to the New York City Department of Finance abandoning the time-honored approach of net income capitalization in favor of the gross income multiplier (GIM) approach, which for the very first time ignores age, condition, location and expense factors. The key question for owners is: are these new assessments as accurate as they were before the new GIM technique was employed?

Different Methods, Different Results

First, what are the differences in the past and present methodologies and where are the pitfalls in adopting one formula over another? Net income capitalization has been used by assessors and endorsed by New York State courts for more than a century. In 1962, the New York Appellate Division ruled that value arrived at by capitalization provides the surest ground for sound appraisal. In an earlier case, the New York Court of Appeals determined that: "the net income of a property is more persuasive evidence of what a property is worth than using a sales price derived from a similar property. What an investor will pay for a property is measured in large part by the amount and certainty of the income that can be obtained."

The Finance Department provided two reasons for renouncing the capitalization approach: 1) expenses for some buildings were higher than others leading to lower assessments, while in some cases the expenses may have been overstated by the owner. 2) using the GIM eliminated the need to study expenses or expense ratios and offered a simpler, more predictable one-step method.

While GIM offers more predictability, it fails to provide more accuracy. GIM is not seriously employed by any major developer, investor, lender or appraiser today, nor has any New York court embraced it.

In the most recent edition of its handbook, the Appraisal Institute warned appraisers to be careful when using this GIM method. The handbook cautions that all properties used as a basis for this approach must be comparable to the subject property and to one another in terms of physical, location and investment characteristics. If properties have different operating expense ratios this method may not be comparable for GIM valuation purposes.

The GIM approach presents one overriding problem. It is applied to all residential property regardless of location, age physical conditions or the level of services. Also, using GIM throws retail rents, antenna, signage or health club income into the mix, thus, offering the distinct possibility of grossly inaccurate and unfair assessments for many types of properties.

In addition, many substantial valuation disparities occur due to factors such as rent controls, rent stabilization and complexes composed of a large group of buildings. There may be substantially different expense ratios for an aging multi-building housing complex and a 100-unit, mid-block, non doorman apartment house in the West Village. These differences generate unfair tax assessments.

Legal Flaws in GIM

Initially, the Finance Department used different GIMs depending on income level and whether the property is rental, co-op or condominium. This directly violates state law, which mandates that these properties must be assessed uniformly. Therefore, the New York City Law Department ordered Finance Department to make changes; co-ops and condominiums had their assessments lowered and rentals saw their assessments increase.

The fact remains that for all rent-producing properties, the city possesses detailed real property income and expense information from legally mandated filings, and requires detailed statements by CPAs in all but the smallest assessment challenges. This surely provides a database for accurate net income capitalization and takes into account location, condition and other significant factors which ordinarily would render GIM suspect.

As the Finance Department begins to use the GIM to derive property tax assessments, owners need to be on guard against property tax increases. When these increases appear, an owner's only defense is filing a property tax appeal. Income capitalization may be down, but it is not out.

MarcusPhoto290Joel R. Marcus is a partner in the New York City law firm Marcus & Pollack, LLP, the New York City member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at: This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
08

ICAP Would Trim Developers' Incentives

Under the proposed ICAP legislation, retail facilities benefits would be dramatically reduced

"Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2008

The Industrial and Commercial Incentive Program is New York City's largest commercial real estate incentive program, with approximately 15,000 applications filed since its 1984 inception. KIP provides partial real estate tax exemptions for new and renovated industrial and commercial buildings in most areas of the city. While the program's renewal seems certain, it's likely to undergo significant legislative revisions.

Critics contend that lClP operates at a substantial fiscal loss for the city, with approximately $371 million in real estate tax revenues foregone in 2006 alone. The city demands reforms to the current ICIP. Specifically, they want to restrict benefits to commercial and manufacturing buildings in geographic areas that truly require special real estate tax incentives to encourage construction, stimulate employment and foster significant new economic activity. Most knowledgeable developers disagree with restricting the program's benefits and eligibility and want the program extended unchanged. In the proposed legislation, three elements are particularly noteworthy:

1. Abatement vs. Exemption

The current IClP offers tax exemption for new and renovated buildings based upon building assessment increases directly attributable to construction, i.e. "physical increases" described in the application. Industrial and commercial buildings located in special exemption areas also qualify for exemption from assessment increases arising from inflation or market value appreciation, i.e. "equalization increases." It appears ICIP amendments will provide a tax abatement rather than an exemption. For that reason, the revised legislation is generally referred to as the Industrial and Commercial Abatement Program. While exemptions reduce the amount of assessment subject to real estate taxation, abatement's are tax credits that directly reduce tax liabilities imposed upon the property. A project's abatement base will reflect the difference between the assessed value of the completed building and 11 5% of its pre-construction assessed value.

2. Reduction of Retail Eligibility

Under the proposed new lCAP legislation, benefits for retail facilities would be dramatically reduced and would depend upon the type of project and its location. Critics of KIP contend that new retail facilities frequently displace sales from existing locations in the city rather than create new economic activity. Retail space within newly constructed or renovated commercial buildings in Manhattan south of City Hall would remain eligible for [CAP benefits. Commercial buildings in Manhattan between City Hall and 59th Street would not be eligible for abatement benefits on any retail space greater than 5% of the total floor area. In regular commercial benefit areas, retail space in excess of 10% of the building's floor area would not qualify for abatement benefits.

3. Reduction of Eligible Construction Period

The old ICIP program called for commercial or industrial construction work to be performed between the date the first building permit is issued and the sixth taxable status date (Jan. 5) there after. Failure to meet these construction benchmarks would not mean denial of benefits but merely serves as a cap on the exemption base.

Under ICAP, owners generally would have to complete new buildings within five years of the permit date and renovation projects within two years of the permit date. Failure to complete construction within these periods would mean revocation of all abatement benefits granted from inception. The abatement base would be limited to physical assessment increases within three years after the permit date for new buildings and one year after the permit date for renovations. ICAP would reduce the lClP construction period from almost six years to one to three years, depending upon whether the project is a new or renovated structure. Clearly, ICAP offers far less generous benefits than those available under KIP. To capture lClP benefits, owners must 1) file a preliminary application with the New York City Department of Finance prior to June 30,2008 and 2) obtain a building permit no later than July 31,2008. These dates are critical if owners want to qualify their projects under IClP rather than ICAP.

MarcusPhoto290Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Dec
08

421a Changes Increase Property Taxes

By Joel R. Marcus, Esq. as published in Real Estate New York, December 2007

The new law also curtails exemption benefits for as-of-right areas

"The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens."

On Aug. 24, Gov. Eliot Spitzer signed into law three bills that dramatically revamped New York City's 421a exemption program. The program was created in 1971 to encourage the construction of new multifamily dwellings by granting a partial exemption from increases in real estate taxes resulting from the new residential construction.

The new law compared to the old law. The previous law covered only projects commend prior to July 1,2008 and made 421a benefits available in any area of the city, except for those areas identified as geographical exclusion areas. The areas not classified as exclusion areas are commonly called "as-of-right' areas. The exclusion areas generally included portions of Manhattan between 14th and 96 th streets and the Williamsburg-Greenpoint areas of Brooklyn. Projects qualified for benefits in the exclusion zones if at least 20% of the units were created as affordable housing or if the developer purchased negotiable certificates for creation of affordable housing units off-site.

The new law, however, greatly expanded the exclusion zones throughout the city to include all of Manhattan and most of Brooklyn's Carroll Gardens, Cobble Hill, Boerum Hill, Park Slope, Sunset Park and Downtown Brooklyn; along with parts of Long Island City, Astoria, Woodside, Jackson Heights and Willets Point in Queens. Projects started between July 1,2008 and Dec. 27,2010 in these areas qualify for benefits only if at least 20% of the building's units are affordable to families whose income at initial occupancy doesn't exceed 60% of the area median income.

The new law reduces 421a benefits outside the exclusion zones. The controversy surrounding the new citywide exclusion zones may obscure the fact that the new law dramatically curtails 421a exemption benefits for as-of-right areas.

Under the old law, all assessment increases in excess of the pre-construction assessment, commonly known as the mini-tax, were exempt. Under the new law, benefits for as-of right projects are restricted to the first $65,000 in assessed valuation per dwelling unit. The cap increases by 3% each year, beginning in 2009/10. For the current tax year, the cap is equal to $7,750 in actual taxes per unit ($65,000 x 11.928%).

The new law also dramatically reduces tax benefits for nonresidential space in new multifamily dwellings. Under the old law, up to 12% of the building area could be used for commercial purposes, without loss of exemption. Developers often incorporated valuable retail space in their buildings to lease at market rates while enjoying full 421a exemption benefits. Under the new law, all commercial space in a building is considered one unit and is subject to the $65,000 exemption cap, greatly reducing the tax break for commercial space.

To demonstrate the effect of the exemption cap, consider a new 100,000-sf condominium building with 100 dwelling units and one retail unit constructed in an as-of-right area. The building includes 12,000 sf of retail space and carries a $100,000 mini-tax. The completed building is assessed for $1 5 million. Under both the old and new laws, the project would qualify for a 15-year exemption benefit.

Under the old law, taxes during the construction period and for the first 11 years after completion equaled the mini-tax multiplied by the tax rate. Assuming that the 2007/08 tax rate of 11.928% remains in effect, annual taxes for the entire building would equal $1 1,9280 approximately $118 per residential and retail unit. The exemption would not be affected by the retail space as it does not exceed 12% of the building's floor area. Under the new law, taxes for the entire building, including the retail space, would still be the same mini-tax ($100,000) each year during construction. However, for the first 11 years after construction is completed, the 101 - unit building would be subject to the exemption cap, as adjusted. For the first year, only $6,565,000 (101 units x $65,000) of the building's $15-million assessment qualifies for exemption. Taxes for the fiat year of the benefit period would exceed $1 million for the building or approximately $9,960 per residential and retail unit, a 1,000% increase. The new law will likely affect the feasibility and pricing of all new projects.

MarcusPhoto290Joel R. Marcus is a partner at the law firm of Marcus & Pollack LLP: a member of American Property Tax Counsel, an affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Feb
15

New Methodology Hits Hotels with High Taxes

"For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate."

By Joel R. Marcus, Esq., as published by Real Estate New York, February 2007

The Department of Finance does an abrupt about face by dramatically ratcheting up the new 2007/08 property tax assessments after issuing generally lower ones last year. This represents one of the largest leaps ever in hotel assessments.

The Finance Department raised the tentative hotel assessments citywide by an average of 35%. However, the increases were even more pronounced for some of the City's premier hotels. For example, the Marriott marquis saw an increase from $162.5 million to $227.2 million (an 80% change), the Grand Hyatt went from $75.1 million to $135.4 million, and there were over 40% jumps at The Pierre, Sheraton Manhattan, Le Parker Meridian, Waldorf, and Roosevelt Hotels. The outer boroughs were not spared either, as Brooklyn hotels' assessments increased by 74%. Queens hotels' assessments jumped by 34%, while Staten Island saw a 19% increase and the Bronx only experienced a 6% jump.

Some city newspapers speculated that industry leaders and consultants met with the City last year and convinced them to change the method of arriving at the assessed value for hotels. This new method may have contributed to the modest assessments for the 2006/07 tax year because the Finance Department was using only out-of-date 2004 filings, which covered a period when hotels were not doing as well as they are now. This year, by using current 2006 figures, the new methodology dramatically increased assessments.

For over 75 years, hotel assessments took into consideration the fact that a hotel comprised both a piece of real estate and an operating business. Numerous court cases pointed out that using business income and expenses for assessing hotel buildings was incorrect. The courts reminded assessors that business income could not be used to assess real estate. Instead, some method of allocation or extraction had to be employed to remove the income related to furniture, fixtures and equipment and franchise and business value.

In New York City, assessors accepted this premise but chose different approaches over the years to accomplish the job. In some years, they deducted a factor for business value when using sales to value hotels. In recent years, since sales no longer form the basis for assessing most commercial properties, income capitalization has become the primary valuation method. Hotels were sometimes assessed by applying higher capitalization rates, sometimes by deducting business income and sometimes by applying an expense ratio of 75% to room revenues before capitalization. All these approaches have now been abandoned.

Under the new method, assessments are based on a unique gross income multiplier formula where room revenues are converted into market value. The record indicates that this formula is not used anywhere else in the country.

The first step in the new formula calls for estimating room revenue by taking the latest income statement and adjusting it upward to account for normal occupancy, alterations and so on. A percentage of food, beverage, conference and exhibit revenue is then added to this room revenue number. The total gross income thus derived is divided by 365 and then multiplied by 960 for luxury hotels. According to the Finance Department, this calculation provides a fair market value for the hotel's real estate. Should the hotel also contain apartments, retail, office, garage, signage/billboard, telephone or other income, the net income from these categories is then capitalized and added to the prior calculation. To determine the assessment value, the assessor multiplies by 45% the final number derived from these steps.

To illustrate how the new formula works, consider a hotel with a room income range of $295 to $371. The new formula puts the hotel's income at $475, with an estimated market value of 4456,000 per room, an assessment of $205,200 per room, and property taxes of $22,572 per room. These calculations give no effect whatsoever to the age and condition of the property, its franchise, its advertising budgets or whether it is a union or nonunion operation.

The unfairness and inaccuracies of this new method of valuing hotels are overwhelming, so much so that the assessors have already spoken our decrying this methodology and claiming it was a contrived deal made by a consultant and the industry leaders. The Chief reported in a May 2006 article that David Moog, the assessor's union leader, claimed the method violated good assessing practices and was an improper way to determine fair market value.

The views expressed in this article are those of the author and not those of Real Estate Media or its publications.

MarcusPhoto290Joel R. Marcus is a partner in the New York City law firm of Marcus & Pollack LLP, the New York City member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Environmental Contamination Reduces Market Value

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Read more

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