Court overturns system for 421a tax abatements.

A New York State Supreme Court judge has overturned the method the New York City uses to calculate property tax payments under the 421a abatement program.

The ruling could affect tax payments for both the developers of projects as well as cooperative and condominium owners whose buildings were constructed under the 421a program. The city said it is considering an appeal.

Lawrence B. Finkelstein, a partner in Stadtmauer Bailkin Levine & Masyr, and former director of tax incentive programs for Hougins Preservation and Development, said if this case is upheld, it would make a "dramatic" change in the tax liability of all 421 a buildings and all certiorari proceedings would have to consider the effects of this decision for this or any other prior years.

The case, involving 108 Fifth Avenue, a 51-unit condominium, was brought when the building's attorneys, Seiden, Stempel, Bennett & D'Agostino, realized tax payments under the 421a program were being made based on the application of the phase-in percentage to both the increased value from the new construction and to the pre-construction assessment -- known as the mini-tax." The attorneys, labeled this process "double taxation" since the Department of Finance was counting the pre-construction value twice, once in the mini-tax, and once as part of the phase-in. Judge Stanley Parness agreed and ruled in their favor.

Jay Gordon Seiden, a partner with Seiden, Stempel, Bennett & D'Agostino, who litigated the case, said: "We caught the city with their hands in the cookie jar." Seiden said that although the primary beneficiaries of the lawsuit will be individual unit owners, which could number as many as 20,000, developers will be impacted where they own unsold units.

It will be easier, Seiden said, the determine if co-ops are overcharged because there is one assessment, whereas condominiums have each lot taxed separately. He cautioned that the double taxation is not readily apparent and that owners should seek legal advice.

Kevin Smith, a partner with Stroock, Stroock and Lavan said, "What is interesting about this decision is that it will have a serious effect and will benefit anyone in the 421a program."

Although the decision was property specific, Seiden said, other buildings may be able to become a member of a class action that he is attempting to certify through the International Plaza case, another lawsuit with the same 421a issues being argued in the Appellate Division on appeal from a decision favorable to the city.

Smith said a class action would be hard to certify, but both he and Seiden said owners could start their own "plenary" actions or may be covered under open petitions appealing property tax assessments from past years.

"Creative attorneys will be coming up with an approach for suing the city for back years," Smith added. "A plenary action would state that the city has not made a mistake in calculating the taxes but has made a mistake of law and attack the prior years, but the city will say there is a calculation error."

Regina Fader, Joseph Lauer and Edith T. Spivack represented the city's Corporation Counsel and none of them would comment on the litigation.

Smith cautioned owners with 421a programs not to make a deal or sign a stipulation to settle property taxes without protecting rights to get additional monies back from the city.

Most of the tax certiorari attorneys use the same boilerplate for petitions which contain clauses protesting the way tax exemptions are calculated, so attorneys say those properties that did not settle last year may be covered. One problem, Stroock Senior Associate Donald Liebman said, is that the Tax Commission will not usually allow a settlement on property taxes without agreeing to abandon an Article 7 claim to improper abatement calculations, which attorneys say are really two independent issues. "It's an all or nothing proposition," Liebman said, adding that more people will be going into lawsuits to protect the abatement claim.

A prior year's abatement claim is currently being litigated by Olympic Tower through an Article 78 proceeding. Olympic Tower received a favorable decision from Justice Stanley Parness -- who was also the judge on this case -- and the city's appeal is scheduled to be heard in the Appellate Division in March.

Another possibility is something the city did in another 421a matter where when Corporation Counsel agreed to settle the property taxes they also agreed to abide by whatever abatement calculation decision came down from the court concerning the year being settled. That is unlikely the happen here, Smith said, because too many properties would be affected and the city is expected to "vigorously" defend its calculation.

Owners who believe they are affected by this latest 421a ruling should also file applications to protect the tentative property tax assessment which is being released this week, Seiden said. Owners have until March 1 to file such an application.

The case, begun in the framework of a certiorari action, hinged on a 108 Fifth Avenue condominium that was affected by a change in the 421a laws in 1981 regarding the way the city calculated these abatements. "You are supposed to pay on the mini-tax and phase-in on the new assessment -- the city phased-in on the two added together," Seiden said. Finkelstein, the former 421a administrator, likened the compounding to the 2.2 percent fuel pass-alongs that years ago became part of the base rent for calculation of rental increases for stabilized apartments.

Even though the city said no building had actually paid more, it was conceivable, Seiden said, that a taxpayer could be paying more property taxes under the new language than without an abatement. He cited a situation where the property would have a very high minimum -- or pre-construction assessment -- where the payment would be more by the seventh or eighth year.

Judge Parness appears to agree with this line of reasoning, Finkelstein said, that this could not have been the intent of the legislature because in the later years under certain circumstances, the owner could have a tax liability greater than it would have been had he never received the exemption.

"That is absolutely the case and could happen," Finkelstein said, "but only where there is a large commercial component to the building."

Finkelstein said this could affect a building such as Trump Tower, because the building it replaced had a relatively high value. "Effectively there would be no exemption (in later years) because you would have to pay the mini-tax plus the non-exempt portion," he said.

Smith, the 421a attorney for Trump Tower, said the building would not be affected because its taxes were calculated on the earlier method.

Seiden said owners will have to wait for the case to be reviewed by the upper court and meantime "protect the record." On an individual building, he said, the amount of money will not make an impact, "but on the whole city it could be $100 plus million in over-charges."

Finkelstein said he is working with at least one project where this ruling would have a significant impact on the financial bottom line because the mini-tax value would be taken out of the computation of the exemption. Depending upon the tax rate, since the pre-construction assessment is over $1 million, Finkelstein said the ruling could mean at least $100,000 or more each year for the property. "It's great for a developer," he said, "not so great for the city."

Mary Ann Rothman, executive director of the council of New York Cooperatives, said, "We will try to get a clear understanding of the issues and communicate them to our member buildings so they can take the appropriate actions."