Tax Detail

There are over one million properties in New York City. And each year, the New York City Department of Finance (DOF) has the unenviable task of fairly and accurately assessing these properties by January 15.

Most properties in New York City are valued by what is known in the appraisal parlance as the “income approach” to value. Under this valuation method, the city uses actual or estimated income and expenses to arrive at a net operating income, which is then capitalized to determine a property’s present value.

In an effort to promote transparency, the DOF will mail out notices of property value to property owners and managers throughout the five boroughs at the same time it publishes its new assessment roll. The notice will indicate essentially how the city estimated its market value by disclosing the underlying components of the income approach (i.e., income, expenses, cap rate, and square footage).

By law, assessments in New York City are presumed valid and the onus is on the property owner to prove the city’s estimate of market value wrong. Therefore, property owners must scrutinize these notices and ensure the city is working with correct and updated information. This will be the only occasion when the city will disclose how it valued a particular property, and any inaccurate or outdated information could have a significant impact on the taxes. (The tax bills issued in late June will merely set forth the assessment and corresponding estimated market value, not the underlying components of valuation.)

Unequal Values

Because assessments are income-driven, not all space is valued equally. Retail space, which generates more income, is valued at a higher rate on a per-square-foot basis than its residential or garage counterparts. Similarly, industrial or storage space is valued at an even lower rate based on a lower revenue-generating potential.

Therefore, it becomes vital for property owners to not only ensure that the city is using the correct overall square footage, but also that the allocation or breakdown according to actual use, as of the taxable status date of January 5 of the same year, is correct. It is important to realize that the notice of property value will not set forth the breakdown of the gross building area. Property owners therefore will need to contact the DOF or a tax certiorari attorney to obtain this information.

While the income, expenses, and cap rate may be subjective variables in the assessment equation, the square footage of the property is not. The city refers to a property’s square footage as the “gross building area” (GBA) because it taxes property owners on every square inch of the property, from outside brick to outside brick. Gross building area consists of all enclosed areas of the building; attics and cellars are not included if they are not used as living area or commercial space. The accuracy of the GBA and allocation of square footage is important for two reasons. The first: it may be overstated. The second reason, which may have an even greater impact, is that not all space is assessed at the same rate under the income approach.

One of our clients recently asked us to investigate the accuracy of their building’s square footage as listed on the city’s notice of property value. The client is the cooperative board of a large Greenwich Village apartment building with residential, retail, and garage space. The board believed that the city had been overstating the overall square footage for decades. Indeed, it had. But there was more to it than that.

Engineer’s Report Needed

In order to contest the GBA of a parcel, the city requires an engineer’s report along with a stacking plan delineating the actual use and square footage calculations of the entire space. In most cases, blueprints were analyzed and inspections were conducted. Ultimately, it was discovered that the city was overstating overall square footage by nearly 10 percent. What was also discovered, however, was that the city was over-allocating the square footage of the retail and residential portions of the building, when in fact the excess square footage was being used for less valuable purposes. The city corrected the GBA, reducing it by roughly 10 percent, and recalculated its allocation of the residential, retail, and garage portions based upon the actual use, resulting in a $3.6 million refund to the client.

Most of the time in setting values for properties, the DOF simply uses the same square footage it has had on file for decades and relies on the Department of Buildings (DOB) to provide it with updated information.

But what if, unbeknownst to the DOB, the use of certain space in the property has changed? Or what if the information was incorrect to begin with when obtained decades ago? Again, because assessments are presumed correct, it is the taxpayers’ and their counsel’s job to ensure the city is working with correct figures.

The lesson to be learned: take heed of the city’s notice and make sure the city is using the correct overall and allocated square footage figures in determining its assessment. The payoff could be rewarding.