Pre-assessment strategy can keep taxes down.

Come next January 15th, the Department of Finance will publish the City's tentative real property tax assessment roll for the 1995/96 tax year. Right now the Assessor is in the midst of her field work, visiting properties, reviewing income and expense statements and making judgements about the strength of the real estate market. To the degree that the Assessor is influenced by the recent flurry of reported lease signings, the net absorption of space or, subconsciously or otherwise, by the City's looming budget deficit, owners may be shocked when the tentative roll is published.

Most owners still face a weak market, or, in the case of Downtown, one that is outright moribund. Dealing with free rent periods, rich Tenant Improvement letters, tenant bankruptcies, renegotiated leases and other variables many owners have much to tell the Assessor about the true value of their properties.

A prudent owner, however, should not wait for the Assessor to lower the boom. He can be proactive and take steps now, during what is called the pre-assessment period, by working with tax reduction counsel to evaluate his properties' operating results for real property tax assessment purposes and to develop a strategy to bring pertinent information to the Assessor's attention. A strategy that stresses an individualized analysis of each property is needed to differentiate a particular owner's property from the scores of others being reviewed by an over-worked Assessor.

As a start, an owner must understand the Assessor's methodology for setting the 1995/96 assessments. In New York City, the practice of assessing real property has undergone a transformation as a result of changes in the market and the advent of the computerization of the Assessor's office. In the mid-1980s, the Assessor was instructed to re-assess properties on the basis of even higher sales prices of comparable properties. Since in recent years there have been few sales of record and these have not warranted substantial increases in assessed values, the Assessor now determines assessed value primarily through capitalization of the prior year's net operating income before debt service, depreciation, and real property taxes.

Last July, the Department of Finance distributed the 1995/96 Assessment Guidelines (the "Guidelines") to the Assessor and made them available to the public. Generally speaking, the Assessor was instructed to follow the income approach to value and to use a property's 1993 income and expense figures taken from either the Income and Expense Statement filed with the Tax Commission last Spring or the 1993 Real Property Income and Expense form ("1993 RPIE") adjusted to reflect rent concessions and similar expenses amortized over the life of any new lease. In contrast with last year's guidelines, income and expenses are to be updated from reported levels only if additional and more recent data is available. Most importantly with respect to major commercial and residential buildings, the Guidelines categorize properties by location and type throughout the City and provide a range of capitalization rates for each. The Guidelines also set forth gross income and expense ranges for the Assessor to use as a check on the RPIE data and in valuing vacant or owner-occupied space.

For Class A high-rise office buildings in the Plaza District, for example, the guidelines instruct the Assessor to assume annual gross income of between $27 and $57 per square foot, a market asking rent of $37.25 per square foot, and annual operating expenses of between $8.60 and $14.20 per square foot (averaging $11.75 per square foot) exclusive of debt service, depreciation and real property taxes. A vacancy rate of 14 percent (down from 15.8 percent in last year's guidelines) is assumed.

With the Guidelines in hand, the Assessor will first create a pro forma analysis of a property utilizing available gross square footage data and a building's 1993 income and expense information. To the extent that the I2EQ forma analysis differs from the Guidelines, the Assessor may make adjustments and then apply a cap rate. For Class A buildings in this district, the Guidelines recommend applying a cap rate of between 7 and 12 percent, with the "market" cap rate set at 8.1 percent. For buildings with known asbestos that has not yet been removed, the Guidelines also allow the cap rate to be increased by one-half to 1 percent, depending upon the extent of the asbestos burden. Obviously, many variables may enter into this process, including judgments made by the Assessor on the validity of the income and expense data and, in particular, the selection of a cap rate.

From an understanding of how the Assessor does her work, there is much that an owner can do to protect his interests. First, he and tax counsel should analyze both his property's 1993 and 1994 operating results (the latter projected) to identify extraordinary or nonrecurring factors. By adjusting for these "special" items, a "true" net operating income for both years can be set. The property's cap rate should then be calculated for each year's results based upon its 1994/95 final assessed value and the results compared to the cap rate range set forth in the Guidelines.

Second, building operations should be reviewed to identify conditions that might warrant application of a higher cap rate. For example, if there is unabated asbestos or if the building enjoys existing leases at above-market rents but those lease will soon expire.

Third, any recent appraisals of the property or the sale of comparable properties should be evaluated in terms of their potential impact on the value of the property under review.

Once the foregoing analysis are complete, a judgement can be made as to whether to provide supplemental information to the Assessor. If the judgment is yes, it is crucial that tax reduction counsel write a specific and analytical argument for submission to the Assessor. The written judgement should be accompanied by supporting documentation. For example, it should include copies of newly-signed leases or renewals at rents lower than existing rents in the building or with "free rent," a tenant improvement contribution, "take over" expenses or other concessions that reduce the effective rent.

Likewise, a current rent roll and a schedule of vacancies and anticipated lease terminations may demonstrate that a property's economic future is relatively more precarious than the 1991 RPIE would indicate. Other evidence, such as an appraisal made for a bank or reports on the presence of asbestos, may also document the decline in a property's market value and may be shared with the Assessor. Expenses which appear to exceed the norm must be reasonably justified in order to support a lower valuation.

A successful program of minimizing real property taxes requires a careful analysis of the property in question and of current City assessment policies. Looking to the 1995/96 tax year and thereafter, the strategy outlined above lends itself to the development of a multi-year tax reduction program. Certainly, in a depressed market, owners who provide an accurate picture of the declining economics of their properties to the Assessor are most likely to enjoy the most accurate assessed values. On the other hand, owners who ignore the opportunity to act during the pre-assessment period and merely wait for their protest hearing before the Tax Commission risk paying more than their fair share of taxes on their properties.