Tax Challenge

Do you think your building’s tax bill is too high? Well, why don’t you make like David and go up against the Goliath known as the Department of Finance (DOF)? Many do and find that you can fight City Hall – and sometimes win. Still, it’s no walk in the park: protesting your property tax assessment may seem cut and dried on paper, but New York City policies litter the process with hurdles. These make challenges tricky and the outcomes uneven during a long, drawn-out process that can be unfairly stacked against taxpayers.

How It Works

The city evaluates real property every year. This means the assessed values can, and historically do, change annually. New York State’s Real Property Tax Law Section 581 requires that property held as cooperatives or condominiums must be valued as if it is a rental. This means that values for co-ops and individual condo units are not based upon the sale prices but on a comparison to similar rental buildings.

The Department of Finance’s (DOF) property division requires annual filings of Real Property Income and Expense (RPIE) statements from all property owners whose tax lots have a total assessed valuation of over $40,000. There are exceptions to this filing requirement, which include individual residential condominium units and residential cooperatives with less than 2,500 square feet of commercial space (not including garages). By law, the RPIE filings are confidential and cannot be obtained by the general public. Consequently, the property division has an enormous amount of property rental data by neighborhood and applies this data to create income and expenses for the condominiums and cooperatives. From this fictitious income model, the net operating income can then be capitalized to create a Full Market Value (FMV) to which an equalization rate -– currently stated at 45 percent – is applied to create a total assessed value. A “capitalization rate” or “cap rate” is a term used by investors to determine what rate of return an amount of principal will bring.

Starting with the 2008/2009 tax year, however, rather than using the capitalization, or income, approach, DOF began utilizing a gross income multiplier to assess residential property. From the DOF income and expense statistics, they create a multiplier to the gross income of the building, which is then used to ascertain the FMV. DOF then applies the equalization rate, currently 45 percent, to the FMV to generate an assessed value. (The “equalization rate” is the ratio of FMV of all the properties in a given tax class to the assessed value.)

It should be noted that both the tax commission and the city’s corporation counsel still use the capitalization of income method during their review of a property’s assessed value.

The tax year starts out on or about January 15th when the finance commissioner certifies the release of the tentative property tax rolls. These rolls contain the tentative assessed valuation of each and every parcel and building in the city. They are “tentative” until the city releases the so-called “final” roll on May 25. So long as the appropriate applications are filed on or before March 1 and a petition is filed with the court on or before October 24, a “final” assessment can be changed – even years later.

The city values both the land and the so-called improvements – i.e. buildings – that have been erected on each tax lot and the sum becomes the total assessed value. Each residential condominium owner has a separate tax lot and receives his or her own individual assessment. The building is valued as a whole and the individual tax lots receive their assessed value based upon their share of common area elements. This sometimes is based on the relative purchase prices of the units as set forth in the offering plan. Sometimes, the retail space or parking garage in a condominium project will also have its own assessed value. In large, mixed-use projects, such as the Time Warner Center, the office portion and hotel portions will also have individual assessments and tax lots.

Because cooperatives are corporations, the co-op building generally receives one assessed value for the building that is totaled along with its land value. Here too, a retail space or a parking garage may be carved out as a separate condominium lot while the balance of the building may be held in a cooperative form of ownership. This hybrid of a cooperative and condominium is known as a “cond-op.” Such parcel segregation will not have any tax effect on the co-op corporation itself. In the case of co-ops, individual shareholders have their maintenance and property taxes divided up, typically based on the number of shares. However, the DOF property division maintains records on each cooperative apartment to keep track of the co-op/condo abatement, STAR, veteran’s and senior citizen exemptions, which would reduce that individual shareholder’s property tax liability with respect to the entire building’s tax burden.

Tax Cert to the Rescue

Once the roll is released, your managing agent or board of directors/ managers often hires a tax certiorari attorney to handle the protest of the tentative assessments. In the case of condominiums, the board of managers should create a bylaw authorizing the retention of attorneys who concentrate in handling real estate tax protests. This bylaw may already exist within the offering plan. The tax certiorari attorney will then prepare an application to be filed with the tax commission which is, by law, supposed to be an independent agency charged with holding fair and impartial hearings. The application must be filed on the appropriate form and must include an income and expense document, specifically designed for co-ops and condos, known as a TC203. Unlike rental buildings, which generally must file current income and expense statements, the tax commission allows co-ops and condos to file a two-year old statement since the city recognizes that the annual statements are not made final until after the March 1 filing deadline.

As part of the income and expense statements, co-ops and condos are required to disclose the rental information on sponsor/holder of unsold share units and units owned by the co-op. This rental information is broken down between rent-regulated and unregulated units.

Property values can come in three flavors: they can be over-assessed, under-assessed, or properly assessed. Often, at the time an application must be filed, it is difficult to come to an opinion as to the above category of a subject property because during the six-week filing period, there is no time to conduct an in-depth analysis. If a proper application has been filed with the tax commission, and an RPIE has been properly filed during the prior fall with the Department of Finance, then the tax commission has jurisdiction to review the current assessed value, as well as the prior year’s assessment (provided that an application and a petition to review the prior year’s assessment have been served upon the city.)

The tax commission hearings begin in April. It is virtually impossible to have every one of the 40,000 to 60,000 cases filed each year heard before the final roll is released in late May. The commission starts to hear cases with a total assessed value in excess of $11 million first, along with a smattering of other, smaller cases. Since these matters comprise a large share of the city’s tax levy, this creates more stability for its budget-making process. Cases not heard in the spring will nevertheless obtain hearings throughout the summer and into the fall.

When the property is given a date for a hearing, the representative must analyze the assessed value of the subject co-op or condo property by creating a fictitious rental building. For co-ops and condos where there are still sponsor/holder of unsold share units, the rents of those units will be part of the income equation and those rents will be used for some guidance as to the rental value of the building as a whole.

While RPIE data is confidential, income and expenses filed with the tax commission by owners of rental buildings are matters of public record and that data can be obtained through a Freedom of Information Request to the Department of Finance.

Most certiorari attorneys maintain huge databases of these income and expense filings along with other data available from DOF as to building size, age, class, number of units, and apartment, retail, garage, and office square footage. The attorney will examine the subject property and the apartment sizes and then query his/her proprietary database for rental buildings of similar age and type (walk-up and elevator), to be used as income comparables. This will help determine if the subject property is, or is not over-assessed. Further, the co-op’s or condo’s expenses may often be adjusted to reflect the expenses of comparable rent-producing buildings.

Typically, management fees and repair and maintenance expenses are lower in co-ops and condos then in rentals. Additionally, since the units are owned by individuals who are responsible for their own painting and appliances, adjustments are made to reflect those expenses as well. With this income and expense model, the net operating income can then be capitalized using a cap rate appropriate to the area and the income to derive an indicated assessed value. At a typical tax commission hearing, the preceding analysis, along with a list of comparables is presented to a hearing officer who has been deputized to hear tax commission cases.

One of the major problems faced by co-ops and condos is the effect of rent deregulation and increasing neighborhood market rents as they might relate to the subject property. If there is shareholder-owned commercial space, market rents will also be applied as opposed to the actual maintenance collected, which is generally less than what would be collected if that space was rented in an arm’s length transaction.

Decisions, Decisions

Determinations by the tax commission are never made at the hearing. These decisions are generally available between two to six weeks after the hearing. In the event the tax commission makes an offer to reduce the assessment, that offer must be accepted within 45 days or it is automatically withdrawn. When an offer is made, the attorney will contact the managing agent or the board to discuss the pros and cons of the offered reduction. If the offer is accepted prior to the publication of the final assessment roll, the reduced assessment will be reflected on the July tax bill. If acceptance takes place after the roll is closed, the reduced assessment will generally be reflected prior to the payment due for the next tax period in October or in January. In those instances, a credit for the overpayment of taxes will appear in the DOF records. A refund application must then be made to obtain that overpayment. In recent years, the DOF has been able to make that refund within two months, which is a vast improvement from the 1990s when refunds could take six months.

If no satisfaction is received – either an offer is not made or is made and not accepted – then the certiorari attorney must file a petition to review the assessment with the New York State Supreme Court by October 24 in order to allow a further review by the tax commission or the city’s corporation counsel. Essentially, the majority of buildings must file all of these forms every year and it can take several years to obtain an acceptable reduction on one or more back years.

After two years of unsatisfactory results before the tax commission, an attorney may file a “Real Estate Tax Audit Report Form” with the corporation counsel, also known as the law department. The audit report form requires much more detailed income and expense data than either the tax commission or RPIE forms, along with information relating to the mortgage, depreciation, insurance, and building employee wages.

While this procedure can be initiated with two open petitions or tax years, attorneys generally will accumulate three, four or more petitions prior to initiating this process. Basically, the same analysis that is conducted for the tax commission must be presented to the law department. In recent years, law department policies on offering reductions is that they must be satisfied that a property is over-assessed by more than ten percent of the assessed value before making an offer for reduction. Accordingly, if they determine that the property is over-valued by only eight percent, no reduction will be offered. There are, however, not many properties that are over-assessed by 10 percent, thus making this policy a difficult hurdle to overcome and leaving the property unfairly burdened.

For example, if a property is assessed at $5 million, but the law department only finds an overvaluation by $400,000 or eight percent of the assessment, which would result in a refund of roughly $40,000 – assuming a ten percent tax rate – then no offer will be made. If the number of years under review is five, this would have resulted in a refund to the taxpayers of approximately $200,000. Instead, they are now out of luck and the overpaid taxes remain in the city’s treasury.

This law department review is known as a “pre-trial conference” and is therefore not before a judge but is merely between the building’s certiorari attorney and the city’s legal assistant.

Again, the city lawyers operate on the legal assumption that the finance department has set an appropriate assessment. It is very typical for a case to be conferenced several times before an offer is made and then only if the parameters above are met. Unfortunately, these conferences take between three or more months to be rescheduled thus adding another year or two to the process. If the city attorney makes an offer there are generally no time parameters for acceptance. But the city’s position is that even if accepted by the taxpayer, it can withdraw the offer at any time while it wends its way through the law department’s internal approval process, which can also take more than a year.

If ultimately approved by the law department, the city sends an order to the state supreme court justice in the county where the property is located. This order directs the DOF to correct its records and adjust the assessment, which will then create tax credits for the overpayment of the taxes over several years. The certiorari attorney will apply to have the credits refunded as an overpayment. As you can see, obtaining a reduction of the assessment and an appropriate refund, is not fast, easy, or a sure thing.

Gloom Is Good

When protesting evaluations, it pays to be (legitimately) downbeat.

By Richard A. Steinberg

Tax certiorari attorneys – those lawyers who represent taxpayers in the protest of their real estate tax assessments – are not, as a group, an especially gloomy bunch. (At least, no more so than anyone else these days.) But when advocating for a client before the New York City Tax Commission, in court, or in settlement negotiations with the city’s corporation counsel, we bring as much gloom and doom to the table as we can credibly muster.

The reason is simple: every year, each property in the city is to be assessed in its condition as of January 5, the taxable status date. Thus, not only are changes in the general market to be considered in fixing this annual valuation but the actual condition of the particular property must also be taken into account. And if those specific circumstances lessen the value of a building, we must bring it out with as much force as possible.

By law, co-ops and condos are to be assessed by an economic approach (capitalization of net income) that translates the operating bottom line into a market value. Thus, any downward change in net income should lead to a reduction in assessment and the taxes that are based on that valuation.

Because maintenance charges for shareholder units are not the equivalent of rents in the marketplace, however, the tax certiorari attorney challenging the assessed value of a co-op or condo must estimate rents based on a survey of comparable rental buildings. The expenses then deducted from this projected gross income to arrive at the bottom line used to calculate value reflect a combination of the actual operating expenses of the co-op (utilities, payroll, etc.) supplemented by those additional costs (interior apartment maintenance) which would be incurred by a landlord in a rental building but are not reflected as a cooperative or condominium expense.

In formulating this hypothetical income and expense statement, the attorney will look to the specific conditions in the property to reduce the bottom line and the consequent value indication. As the income utilized in this analysis is derived from the general marketplace (other than any commercial income received from third parties), the attorney’s focus will be on those aspects of the property that will increase estimated operating expenses. In this context, the most important factors are those which affect the building’s physical plant: the exterior (façade, roof, etc.); the mechanical systems (elevators, HVAC, etc.); and the overall condition of the common areas (lobby and hallway finishes).
Significant costs to be incurred for major repairs or periodic replacements of short-lived items such as roof coverings and hallway finishes can be used to diminish the value of the property for tax purposes in two ways.

First, the amortized cost of work which has already been completed can be added to the estimated operating expenses, thereby reducing the net income applied in the capitalization process and lowering the indicated assessed value. As these costs are likely to be deemed improvements for accounting purposes and thus carried in the fixed asset account rather than as an operating expense, it is critical that the tax certiorari attorney be specifically apprised of the details of work and the associated costs as they will not be included in the tax commission’s income and expense statement, which provides only for the reporting of operating expenses.
Second, and equally important, are those anticipated costs for major work not yet begun. While future expenditures necessary to maintain the property can be used to increase the estimated operating expenses in the same manner as those costs which have already been incurred (that is, as an additional expense item), they can also constitute a “cost to cure” which can be deducted from the value indicated by an economic approach.

The theory underlying this analysis is based on the commonsense notion that a prospective purchaser of a building requiring a major expenditure to maintain its economic value will seek to deduct that cost from any purchase price proposed for the property. For example, if a building is worth $10 million based on the income it produces but must undergo a $1 million façade renovation to continue to generate that income, the prudent buyer would seek to pay only $9 million for it to account for the anticipated cost to cure the façade defect.

In most instances, the nature and existence of the major repair expense are not known outside the co-op or condo and thus must be brought to the attention of those who will be specifically dealing with the assessment of the property.

A dramatic exception to this rule was provided in the case of the Castle Village cooperative, a prewar, six-building complex overlooking the Hudson River just north of the George Washington Bridge. In May 2005, the retaining wall over the Henry Hudson Parkway collapsed, burying cars and closing the highway. When the next assessment for the co-op was published by the city in January 2006, it did reflect a reduction from the 2005 valuation but only to the extent of $540,000 in assessments. My firm protested the cooperative’s assessment to the tax commission and presented estimates for repair of the wall which far exceeded the extent reflected in the city’s lowered assessment.

Combining these cost estimates with the customary income and expense analysis brought additional reductions from the tax commission, exceeding $1 million in assessed valuation. The final assessment for 2006 was thus fixed at about the same level as 2002 despite the significant growth in residential values over that period.

That may seem like common sense. But remember, when common sense is in short supply, your tax cert attorney should be turning up the gloom. It can pay off.

What is Your Condo’s Tax Appeal?

January 15 is nearly here – and so is the beginning of the next protest season.

Here are nine things you need to know about a challenge.

By Joseph B. Giminaro

Congratulations on being elected to your condo board! Like many people who are managing property today, you may be feeling confused about what to focus on. Keeping your building costs under control is always a priority, so start with your biggest expense – real estate taxes.

In response to the financial crisis, Mayor Michael Bloomberg has announced that he intends to increase property tax rates. Although you cannot contest the tax rate, you can appeal your real estate tax assessment, which is the basis for determining your property tax. Your taxable assessment is multiplied by the tax rate to determine how much tax you owe.

The next opportunity to contest your assessment is in January 2009 for the upcoming tax year 2009/10. With real estates taxes expected to go up, here are ten things you should know about the city’s assessment process and appeal procedures.

1. Strength in Numbers
Condos are unique because each unit has its own deed and block and lot designation for tax purposes. This is true for residential and commercial units. However, since commercial units are valued differently for assessment purposes, and their owners often file separate appeals, the focus here will solely be on the assessment practices relating to residential units.

Although each residential unit is separately assessed, it does not mean that owners must go it alone in contesting their assessments. Most boards have authority under their bylaws to file appeals on behalf of all residential units. If not, the board will need to get written consent from each unit-owner in order to file a protest on their behalf. It makes sense for all residential owners to file a joint appeal. You are more likely to be successful if you present a unified argument.

2. Assessments Happen Every Year
On January 15 of each year, the New York City Department of Finance releases its tentative assessment roll for the upcoming tax year, which begins July 1 and ends June 30 of the following calendar year. The final assessment roll is published on May 24.

3. Comparables, Comparables, Comparables
Condo buildings are assessed at 45 percent of the city’s estimated full market value for the property, but determining its value is not as straightforward as it may seem. Condos are not assessed based on sales price but on the rental value of comparable residential properties. Simply put, the city will look at rental buildings of similar age, location, and quality to estimate the rental income for your property.

Attorneys who specialize in real estate tax appeals can provide you with this research. They can generate studies showing the rental data for comparable buildings to support your case for reduction. Condo owners often wrongly focus on the sale price of their units, when what is relevant is the rental market in your neighborhood.

In 2008, the city changed its assessment practice by adopting a valuation method known as the “gross income multiplier” (GIM). The GIM method assumes that most buildings have similar expenses on a per square foot basis. To account for differences in the rental values among buildings, the city created a table of GIM factors to be applied depending upon the estimated rental income. To determine the market value using the GIM, one multiplies the building’s gross income by the applicable GIM factor.

By using the GIM, assessors are no longer taking into consideration your actual expenses, in effect penalizing those who spend more on the upkeep of their property than those who do not, and ignoring higher than average expenses peculiar to your building.

4. On Appeal: Net Income Method
The good news is the New York City Tax Commission, which is the agency that hears assessment appeals, does not use the GIM when reviewing your case. The tax commission continues to rely on the more traditional net income approach that takes into consideration your actual building expenses. To help build your case, it is important to highlight special ongoing expenses that the assessor may be ignoring (i.e. high repair costs, special staffing needs, etc.).

5. Filing a Tax Commission Appeal: the March 1 Deadline
The board may appeal the assessment by filing an Application for Correction of Tentative Assessment with the tax commission on or before March 1. Be sure to prepare early and adhere to all of the filing deadlines.

6. Things to Know When You
Appeal

As part of your appeal, you must submit the building’s most recently completed income and expense data. You will also be asked for information relating to the rental income for any unsold units. This question is sometimes left unanswered. Make sure you complete this section since the tax commission will not grant a reduction if this information is not supplied.

7. The Courts: Appealing Your Tax Commission Protest
If you do not obtain relief from the tax commission, you can file a petition with the New York State Supreme Court to keep your appeal open for further review. Be sure you comply with the petition deadline since it is subject to change.

8. Applying for the Refund

If you obtain an assessment reduction prior to the publication of the final assessment roll, the tax savings will be reflected in your tax bills. If the reduction is obtained later, your attorney will need to file for a refund.

9. The New Tax Protest Season Begins January 15, 2009

January 15, 2009 is rapidly approaching. This is when the new assessments will be published for tax year 2009/20010. It also is the beginning of the next protest season. Now is the time to review your assessment situation and begin planning your tax appeal strategy.

Editors Note: Dealing With Refunds

One last point of importance is how to deal with a tax refund. It is not unusual for assessment cases to go on for several years before there is a resolution. This can create confusion as to who is entitled to the refund if the unit has been sold during the intervening time. The board will want to insulate itself from any controversy between current and former owners. You should consult with your attorney about how to deal with this.

Fighting for AIR:
A Success Story

When challenging a tax assessment, you need three things: facts, facts, and facts.

By Eric Weiss

How do we, as tax cert attorneys, approach a typical case? It’s elementary. Here’s how we laid out our strategy in one recent challenge.

The subject property was a Noho Artist in Residence (AIR) loft building built in 1910 and converted to a cooperative form of ownership in 1971. The building had six floors and 13 apartments, including two retail units on the ground floor. Department of Finance records showed the total building area as 43,020 square feet of which 35,850 feet was residential and the remaining 7,170 feet retail. Consequently, the average apartment size was a spacious 2,758 square feet.

The assessment history:

2005/2006 – $1,278,000

2006/2007 – $1,350,000

2007/2008 – $2,821,500

The total assessed value for 2008/2009 was published as $3,685,500, which comes to $85.67 per square foot. With the assessment almost tripled from three years ago, the cooperators were greatly concerned about their ability to pay their real estate taxes on an ongoing basis. The quarterly tax bills, including the abatement, would be slightly more than $50,000. Without any relief, over the next five years the bills would continue to increase to about $395,000 per annum, assuming a tax rate of 13 percent in 2012/2013

Officers of the co-op placed a call to our office and scheduled an appointment. Three shareholders came to this meeting very well prepared. They had reviewed the Department of Finance’s website and examined the comparables that the city had posted for their building. The two comparables turned out to be one building located in Chelsea and the other in the Flatiron District. The cooperators felt these were not good choices, and I had to agree.

More importantly, the shareholders brought along a memorandum they had prepared that summarized the condition of their building. The memo made it obvious that their property was not the renovated upscale loft building inhabited by celebrities that sometimes come to mind when talking about loft co-ops in Soho and Noho.

The salient facts presented to me at this meeting, and that I would later convey to the tax commission hearing officer were:

1. There had never been a gut renovation.

2. There had never been an upgrade of the mechanicals in the building – the electrical, plumbing, and waste stacks were the original ones from 1910.

3. There was but one plumbing stack, which meant there could be but one bathroom in each large loft. Further, the waste line would not allow for kitchen garbage disposals.

4. This was clearly a building run on a “shoestring”: there was no doorman and no super, and it was self-managed.

5. As in most AIR buildings, much of the space in each unit consisted of studio and storage areas. These lofts were not purely living spaces but ones with essentially industrial uses.

6. Worse for the long-time residents, recent development by others cut off views to the north, east, and west.

Additionally, the shareholders supplied me with photographs, which made it clear that these lofts were not in the best condition. From these photos, it was also obvious that the residents were involved in artistic endeavors. The shareholders were also not seeking nor could the poor artists afford to upgrade the building to a chic modern edifice. These facts were extremely important in relaying the uniqueness of their building so that it would be difficult to compare it to, nor use income from, buildings which clearly had greater amenities.

The retail space in the Noho area is generally quite valuable. This AIR building is also in close proximity to the shopping district along Broadway. Fortunately, however, for me and for the cooperators, I did not have to look for comparable retail income since the retail space was leased to others directly by the co-op itself, and not by its sponsor. Furthermore, both retail leases were fairly recent, one having been made in 2003, and the other in 2007. Consequently, I could rely on the current income from those leases for the retail income component of my analysis.

Counting the average size of each unit as 2,758 square feet, and recognizing the lack of amenities, I estimated that if they were to be rented, the average income from the residential lofts would be around $3,750 each per month. Thus the income for the entire residential component would total $585,000. I added to that the $360,000 actual rent from the retail leases. Therefore, the total income came to $945,000 or $21.97 per square foot.

The expenses shown on the co-op’s income and expense statements came to $127,284 or $2.96 per square foot. This is extremely low, but reflects the lack of amenities a resident would have in a more upscale or normal apartment building. There were no wages whatsoever, and the only professional fees incurred were for the recent retail lease.

To equalize the expenses that would normally occur in a residential rental building, I added an additional $10,000 for building management professional fees and office expense. This brought the management expense to a more traditional six percent of the $945,000 total income. Additionally, the repair and maintenance item was also low (the shoestring effect). Therefore, I added another $22,000 to bring the repair and maintenance item up to $1 per square foot. The adjusted total estimate for the expenses then came to $159,284 or $3.70 a square foot. This expense factor is again extremely low compared to a rental building, but would be a more than a reasonable number for an AIR loft building.

While there were virtually no rent-producing residential loft buildings to compare to the economic model I created, there were certainly a number of co-ops with lower assessment per square foot factors in close proximity to the subject property.

My economic analysis, along with a list of comparables, was prepared, along with an affidavit from the building’s treasurer for submission of the photographs, the two commercial leases and the memorandum describing how the building’s features set it apart from some of the more typical loft co-ops. With these materials in the file, I was ready to go to the tax commission for a hearing to review the building’s assessed value.

The hearing took place in late October 2008. As is typical, it was scheduled with 29 other properties, including other cooperatives, residential and commercial income-producing properties, and owner-occupied properties. Although the values three and four years ago did not seem excessive, when the case came up on the calendar because of the recent steep increases in value, I told the hearing officer, a former assessor, that this was a case with very compelling facts. I asked him to examine carefully the analysis and supporting documents. He recognized the very large increased values and told me that he would take a good hard look at the case.

In mid-November, our office received the commission’s ruling. There was an offer to reduce the 2007/2008 value from $2,821,500 to $2,685,000. For 2008/2009, the reduction offered was from $3,685,500 to $2,825,000. The tax savings for the cooperative would include a refund for 2007/2008 and first half 2008/2009 tax years and further reductions would be reflected in future tax assessments.