Lowering Your Tax-Assessment Value: How to Be Legitimately Gloomy

As discussed in our overview article, "Challenging Your Tax Assessment," the city is required to assess the values of co-ops and condos as if they were rental buildings. This means that your building's value isn't based upon the sale price of units, but on a comparison of monthly charges in similar rental buildings.

Because maintenance charges for co-op apartments or common charges for condo units aren't equivalent to rents in the marketplace, however, the tax certiorari attorney who is challenging your building's assessed value must, first, estimate rents based on a survey of comparable rental buildings. Then, your attorney must deduct from this your operating expenses (utilities, payroll, etc.) plus those additional costs (interior apartment maintenance) which would be incurred by a landlord in a rental building but aren't reflected as a cooperative or condominium expense.

To do this, the attorney looks at your property's conditions in order to reduce the bottom-line value. The most important factors here are those affecting 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).

Spending for a Rainy Day

In addition, you can also diminish the value of your property for tax purposes by considering those significant future costs for major repairs or for periodic replacements of short-lived items such as roof coverings and hallway finishes. Your attorney can do this in two ways. First, the amortized cost of completed work can be added to the operating expenses. Since these costs, for accounting purposes, are likely to have been deemed improvements — and thus a fixed asset rather than an operating expense — it's critical that you let your attorney know the details of this work and the associated costs, since this information will not have been provided in the Tax Commission income-and-expense statement your building will have filed and to which he will refer. That's because the income-and-expense statement reports only traditional operating expenses.

Second, and equally important, your attorney should include the anticipated cost of major work not yet begun. Not only do such future expenditures increase your estimated operating expenses, but they can also constitute a "cost to cure”," which can be deducted from your building's assessed value.

The theory underlying this analysis is that a prospective purchaser of a building requiring major expenditures 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, a 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 major repair expenses aren't known outside the co-op or condo, and so must be brought to the attention of anyone assessing the property.

Storming the Castle Village

A dramatic exception to this rule came 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 lowered the assessed value by more than $1 million. 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.

Your tax cert attorney should be turning up the gloom. It can pay off, legally and legitimately.

Richard A. Steinberg is a partner with Brandt, Steinberg & Lewis.

Adapted from Habitat January 2009. For the complete article and more, join our Archive >>