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Assessor guidelines published by city.

Assessor guidelines published by city

True to her word, Department of Finance Commissioner Carol O'Cleireacain has made available to the public certain guidelines issued to New York City assessors.

These "cap rates," or capitalization rates, are used to help assessors determine values for assessment purpose in particular neighborhoods for different kinds of buildings. Prior to O'Cleireacain taking office, the guidelines were kept a secret from the public, although they circulated unofficially to tax certiorari attorneys.

The assessors use these guidelines to set the tentative assessments for Fiscal Year 1992. The tentative roll will be released by Jan. 15, 1992 and property owners have until March 2, 1992, to protest Class II, III and IV assessments, while single-family homeowners in Class I have until March 16, 1992, to file these applications for correction.

REW has obtained a copy of the guidelines and queried certiorari experts and owner groups as to whether they will prove to be an accurate reflection of current market conditions.

The memorandum, written by Deputy Commissioner Kevin Koshar, states: "You are being asked to value the property, not to artificially raise or lower market values independent of the facts which are available to you."

The memorandum indicates Finance is aware of the drop in values, but warns the assessors to, "Always reflect the market value itself, not the direction of the market in relation to last year's valuation."

For buildings that are more vacant than the norm in their area, the difference is being split over 50 percent. An example is given of a building with a 40 percent vacancy rate in an area of 15 percent vacancy, which the memo says should be valued as if 72.5 percent leased.

Jeff Gural, president of Newmark & Co. and co-chair of the Property Tax Fairness Coalition, said, "I thought that notwithstanding the cap rates being used-which are all wrong - Koshar's instructions to the assessors represents a step in the right direction. If the assessors follow the memorandum we should be headed in the right direction."

Gural believes the cap rates should be higher, which would produce a lower assessment. "It appears that they are trying to evaluate the fact that rents are declining substantially as leases come due," he said.

If a property needs a lot of renovation work, Gural said, the area may not warrant the expense because the cost to renovate on 8th Avenue and 26th Street is the same as the cost to renovate on 50th Street and Madison. "It costs the same for a $15 rent as it does for a $30 rent," he said.

Hubert J. Brandt, a certiorari expert with Peter H. & Hubert J. Brandt, agreed that the cap rates are not as high as they should be, but said they will produce some declines in assessments. "They just don't go far enough," he said.

The assessors, Brandt said, are using a merger of the Elwood method - which looks at appreciation or depreciation over the long-term - together with income, and similar sales approaches.

One problem with today's market, Brandt noted, is that there are few sales on which the assessors can base changes, and the ones that have occurred on large buildings have been at very low prices.

If there is a decline in the billable assessment and a rate freeze, as proposed by the major, Brandt said, the two will act together with last year's declines in market value. "It might be enough to turn the trend around so that there is an actual dollar-for-dollar decrease for the tenants," he said. The mayor has proposed a freeze on the average rate, 10.591, for two years.

On a good building with good escalations on leases that were made three or four years ago, Brandt said, the taxes will probably go up. "The transitional went up, the income went up and it won't go down as much as it should."

Gural said the biggest problem is that the assessments are going to have to be dramatically reduced if the buildings are going to survive. "The typical Class B property is overassessed by 100 percent," he said.

Gural's problems, like that of so many other owners, is that the higher values and, therefore, assessments, which were common at the end of the 80's, are still being phased-in over five years through transitional assessments. While the actual assessments are beginning to drop, the transitionals are in most cases still rising. Even though the transitional assessment may come closer to the actual assessment, and in some cases drop below the actual, the property owner will probably not see a decrease in taxes. Some owners, as well as tenants with escalation clauses, will be paying higher taxes since the transitional assessment will be above last year's billable assessment.

John J. Gilbert III noted that the guidelines are acknowledging that the Net Operating Income (NOI) on apartment buildings has dropped. "It's one of the things we've known," he said. "Finance is finally acknowledging it but it underscores the problems that owners of rent-stabilized and rent-controlled buildings suffer."

Gilbert said the memo also contains the wrong rent guidelines increase. The increases for leases that went into effect on Oct. 15, 1990, or later are 4.5 for one year and 7 percent for a two-year lease plus a 5 percent vacancy factor. Leases signed beginning October of 1991 will receive increases of only 4 percent and 6.5 percent, with a 5 percent vacancy factor, said Gilbert, noting the guidelines "have not taken into consideration the dramatic increase in vacancy." Gilbert said the vacancy of city apartments went from 2.4 percent in 1989 to over 4.8 percent for 1990. "That's a 100 percent increase in vacancy rates," he said.

Referring to the possibility of large reductions on large buildings, particularly in the Downtown area, O'Cleireacain said, "It's our job to determine an accurate market value."

The Tax Commission - which hears assessment protests, she said, exists because people have debates over what an accurate market value is for any given building. Some buildings, she noted, contain asbestos, some are vacant or partially vacant - " and that's what makes a court."

In reality, Gural said, there are a lot of properties that do not have a lot of value. "What are they going to do? Assess them at zero?"

"We feel there is value there," O'Cleireacain said. "It's rare to find a property that disintegrates to zero, so the value is not zero. The question is what is it?"

The commissioner said she is impressed with the ability of her assessors to roam the building and check the leases. "They have a pretty good handle on the softness," she added. But, she observed, there are some Downtown buildings that are 100 percent occupied and are re-investing and doing well. "If you look in the aggregate, you will not see a picture that gives you very much," O'Cleireacain said. "So it's one of those markets in which you have to go case by case."

When the market was going up, the commissioner complained, the city could not capture the real values and obtain higher taxes. The five-year transitional came into play to help owners spread their tax liability over a longer period of time. "There is more stability in this tax than some taxpayers like to see," O'Cleireacain noted. "They appreciate it on the high end and now would like to see it fall."

The commissioner admits she is sympathetic to the building owners. "They are getting squeezed from several ends," she said. "It's bank credit crunch, it's a lessees market - they are caught between a rock and a hard place. [The real estate tax] has to be paid out of income and I understand what is going on.

"The owners are unable, in a market like this, to turn that value into income, "O'Cleireacain said. "I'm sympathetic. The only thing we know is that death and taxes are inevitable. The market will come back, but no one knows when."
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Title Annotation:New York City
Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Nov 20, 1991
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