Court rules against SBEA on valuation.

Two recent court decisions highlight New York City's problems with real estate valuation. On December 15, in a case brought by New York City against the State Board of Equalization and Assessment (SBEA), Justice Stanley Parness nullified rates for two years as having been arbitrarily set. Once he had dealt with the equalization rates and ratios for these two tax years, 91/92 and 93/94, the judge was then able to rule on other matters where these rates were an issue.

On January 5, coincidentally, the taxable status date for city properties, Justice Parness ruled on an important Downtown matter regarding 67 Broad Street. The case, known as Beaver & Broad Associates, set values for the property that were well below those determined by the city assessor.

The 67 Broad case was argued by tax certiorari attorneys Podell Rothman Schechter & Banfield. Herbert S. Podell, a partner with the firm, said "It's a great decision, with a tremendous reduction in the end for the last year. This is the most recent decision treating the problem Downtown, which is empty, obsolete office buildings."

Justice Parness, who tried the matter in Manhattan's Supreme Court, set equalization rates as ratios of 45 percent for the two years - 91/92 and 92/93 - he had nullified in the previous SBEA decision. Equalization rates are applied to the full market value to determine an assessment. For the other years, the judge used the SBEA rates and added it to the capitalization rate to form a combined rate.

Tax certiorari attorney Steve Resnick, a partner with Lawrence J. Berger, P.C., tried another case regarding property on Second Avenue that was decided by Justice Parness, also on December 15. Here, the judge used the 45 percent "city" ratios for all the years under review, ranging from 89/90 to 94/95.

"The judge was trying to do rough justice," said Resnick of the 45 percent ratios. "He's not looking to put the city out of business with a low ratio. He gave them a good ration. The SBEA may be out of a job. And meanwhile, he's using 45 percent, even though the city didn't stipulate to it."

In the early 1980s, the SBEA ratios were often in the 50 percent range and the city would always argue to uphold those ratios. But by the late 1980s, as the market rose dramatically, the city was quietly using a 45 percent of sale ratio to set assessments. As the 1990s have taken hold, SBEA ratios have been in the mid-30 percent range for both residential properties where they have hovered in the low 30s and for commercial properties, where they were in the 37 to 39 percent range. Attorneys explained that a lower SBEA ratio would make a property valued at a million dollars overassessed, but it might be correctly assessed at a 45 percent ratio. Current city market values are set at 45 percent, so a lower SBEA ratio would make many of those properties overassessed.

In the SBEA decision, the judge took particular notice of an earlier decision he had made in One New York Plaza that was upheld by the State Court of Appeals. In his 1991 ruling, he determined the market value of that asbestos-laden skyscraper to be $193.8 million. Using the SBEA data resulted in a market value of $550 million with a rate of return less than 4 percent.

He wrote "this demonstrates the SBEA's values do not reflect the true nature of the market for the year at issue."

Joel R. Marcus, a partner with Pottish Freyberg Marcus & Velasquez, who tried the One New York Plaza case, said he was unhappy about the SBEA decision because effectively it will deny the use of the SBEA ratios for 91/92 and 92/93 to petitioners, who are then left with very limited choices. "The city's arguments, if applied to earlier years, would have resulted in a lower equalization rate when it was higher than the city's 45 percent. It's disingenuous of the city to only challenge rates which they think unfairly benefit taxpayers while failing to address equalization rates in earlier years that they knew were excessive and penalize taxpayers."

The SBEA rates are used to balance the value of the four tax classes and the amount of taxes paid by each. They are primarily used in determining local state aid figures for items like education. "They are not primarily designed to formulate ratios to use in certiorari cases," said Hubert J. Brandt, of Peter H. & Hubert J. Brandt. "The law makes them secondarily useful for the purposes of certiorari because there isn't any other quick easy way to get to evidence for these trials."

A spokesperson for the SBEA said they have not yet decided to recalculate the two years under review or appeal the ruling.

Edith I. Spivack, assistant corporation counsel for the city, said "We were successful in that case and the court did not support the state board's position and our points were well taken. We consider that a decision favorable to the city."

Upon learning of the SBEA decision, former Finance Commissioner Carol O'Clereacain, who filed the action, said "That is marvelous. I feel vindicated and I think that [former-Special Counsel] Martha Stark and [Deputy Commissioner] Kevin Koshar and his troops should feel really good about it. This was really Martha, because it was all about them valuing co-ops with selling prices. It's one more indicator for the need for property tax reform.

When Finance tried to negotiate with the SBEA over the three-year old data as well as the co-op values the SBEA was using, the agency said they were backlogged. Robert Von Ancken, MAI CRE, president of James Felt Appraisal & Consulting, who was present at some of the meetings, said "Their data indicated the values were going up and everyone knew they were going down. The discussion was to skip some data and use more recent data. But they said they didn't have the staff."

In the 67 Broad matter, Justice Parness also took the opportunity to say the value of the tax liability that the city sought to sustain "appears inconsistent with the City's recently announced 'Wall Street Plan' to stimulate a revival of the lower Downtown Financial District through various incentives, including tax relief."

"According to Podell's calculations, the owners of the Downtown building will receive $7 million in refunds, along with a significant amount of interest dating back to the 87/88 tax year.

The court found that by January, 1990, it was clear this building "as well as similar Downtown office buildings, faced bleak financial futures."

By the tax years of 91/92 and 92/93, the court said the city's appraiser "absolutely ignores the fact that both major tenants had left the building by 12/31/91, prior to the tax status date of 1/5/92."

Justice Parness noted when the owners tried to reorganize under Chapter 11 bankruptcy, that the "Court found that poor market conditions precluded same and permitted foreclosure to proceed."

William E. Banfield, a partner with the Podell firm, said the court found it was appropriate in this building to really look at it as a retail holding action. "You really wouldn't tear down the improvement. It's just a taxpayer with a vacant office building above."

Von Ancken did not work on the case, but believe the 67 Broad decision was appropriate. "It's unusual that a judge computes a value," he noted. "It's obvious from several decisions in the past that he doesn't like a discounted cash-flow analysis."

This building, once the home of ITT, was valued at as much as $62.7 million by the city in fiscal year 1992, even when the property was essentially vacant. The petitioner's appraiser, Jerry Haims, valued the property at $7 million for that same year.

The great disparity in values, and the city's harsh stance in insisting values were rising even as the market was falling, is what prevented the matter from being settled before trial.

In his decision, Justice Parness noted the disparity in values was due not only to how each approached income capitalization, but the manner in which they referenced the property's income and expense data and the capitalization rates each employed.

The city, naturally, used lower capitalization rates, ranging from 8.5 percent to a high of 10 percent, while petitioner's cap rates ranged from a low of 9.5 percent in 87/88 to a high of 13.39 percent for 91/92 and 13.03 percent for 92/93.

"The capitalization rate should reflect the return a prudent investor would expect on this investment to obtain a particular income stream," said Justice Parness.

Spivak said they were studying the Beaver and Broad decision, as well as the Second Avenue matter and deciding what to do.

Banfield said, "I think the city should take a long hard look before appealing because what the judge said about the earlier years is a finding in favor for them, but considering that it's the city it's entirely possible that they will appeal just as a reaction."

Resnick said Judge Parness also cut taxes at 84 William Street, a case they tried last year. "He cut it dramatically," said Resnick. "Downtown he has the opinion that everything is worthless." Resnick noted Judge Parness is "absolutely strict with the tax status date "because with certiorari, "you can always come back next year."