Early tax assessment shows drop in value.

The value of commercial property dropped so dramatically over the last year that it will cost the city somewhere between $250 million and $300 million in property tax revenues, the new budget director, Abraham Lackman, said last week.

Higher sales tax collections could help offset that figure, but with a projected $2 billion budget gap, it is unclear yet where the new administration will turn. So far, Mayor Rudolph Giuliani has not yet reiterated former Mayor Dinkins' pledge to freeze the average tax rate that has one year left to go, nor has he instead agreed to freeze the property tax levy.

The tentative assessment roll will formally be released by Jan. 14 and could come out as early as Jan. 13, officials said. The Department of Finance is still working on the roll, as is customary up until just before its release as assessors go over the numbers and make adjustments.

The new tax rates will be set in June for July property tax bills.

Last week, Mayor Giuliani appointed Marc V. Shaw as the new Commissioner of Finance. As the City Council's finance director, Shaw has been its numbers maven on both budget and finance issues. He recently served as an ex officio member of the Real Property Tax Reform Commission which completed its work last week and would be the natural leader to help shape any draft legislation.

Giuliani has also enlarged Shaw's role to include being a fiscal policy advisor, working with Lackman and the new administration to develop a strategy for economic development and other budget issues.

Lackman said the preliminary assessment figures show a decline of $1.7 billion in assessed valuation. The final roll that was released last May showed billable assessments of $78.18 billion and was $1.001 billion dollars less than the year before.

Most of the decrease is being fueled by the drop in value of Manhattan office buildings, particularly in the Downtown market. But reports of Midtown buildings with double digit million dollar decreases are also surfacing.

As owners and brokers well know, tenants signing new leases are paying much less in rent than those with lease signed in the mid-19808 or earlier. This will effectively reduce the income on these buildings for several years to come and provide a continuing downward trend, officials predict. Downtown however, of 329 buildings, 223 are pre-World War II, While making up 67 percent of those commercial properties, they reflect only 34 percent or nearly 40 million square feet of the 116 million square feet of total commercial square footage Downtown and only 25 percent of the total assessed value of $7.6 billion. With that market in the doldrums, that number should drop significantly.

Brokers, however, painted a slightly rosier picture for Midtown that is reflecting the continued absorption of its limited space.

In the last three years, many owners prudently insisted on signing only short leases with smaller tenants and some of those will come due shortly as the upturn swings along.

Stephen B. Siegel, president of the Edward S. Gordon Company, already notes a firming of lease prices.

Indeed, he has seen some rise in Rockefeller Center and a few scattered prime Midtown buildings. For good prime power floors, he said, rents are climbing up into the high $30s a square foot to low $40s range. "Some of those are the taking prices, " he added.

While those numbers cannot replace leases signed in the $50 to $60 range, they are certainly better than the high 20s to low 30s prices seen merely a year ago.

Bruce E. Mosler, vice chairman of Galbreath Riverbank Realty, said "It is fairly clear that we're not going to see the same heyday rents in the 90s. The leases that are up are going to be renewed at lesser numbers."

But Molser also sees a tremendous liquidity in the market, but with all cash buyers, who as a result are buying at a discount. "That is what is making New York and other cities interesting to invest in," he said. "Things are improving but there is no ability to finance so people aren't paying the same prices as they were able to pay in the 1980S.

Siegel also still sees the higher cap rates needed to complete these sales.

Since there's no new construction and since the supply side has come to a halt, demand is beginning to increase for space, Mosler added, predicting it will be a good year in the numbers for owners, with less in the way of free rent and work concessions.

"Space is being absorbed in Midtown and large blocks of space are becoming extinct," Siegel agreed. "It will drive up the prices."

He believes Lackman's announcement was ill-timed and does not reflect total market conditions. "The drop has kind of bottomed out," he explained. The new assessments are reflecting income and expense data submitted at the end of August, in some cases numbers that were already a year old and showing large vacancies.

But a Department of Finance drop in assessment can translate into large savings for both owners and tenants.

Siegel explained that if taxes go down in an occupied building, the savings will accrue to the tenants, but if the building is empty, it will benefit the owners.

Real estate values in general in the last three to five years have dropped off substantially as a result of three things, Mosler said. "One is clearly the net numbers vis a vis leasing; secondly, the lack of financial liquidity in the marketplace; and together with general hard times, have all caused real estate to devalue. Assessments on property should continue to come down," he predicted.