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Challenging 1993-94 tentative assessments.


On Jan. 15, the Department of Finance will publish the City's tentative real property tax assessment roll for the 1993/94 tax year. Everyone expects the aggregate assessed value of New York City real estate to decrease, and the public, the press and City Hall will no doubt focus on the decline with much handwringing over the implications for next year's budget.

In this environment, even if a property's assessment has been lowered, it is unlikely that it has dropped as fast as the market price itself. This lag results primarily from the timing of the assessment process and from the fact that the assessor is working with income and expense data that are anywhere from 12 to 16 months old. In a declining market, those figures may nt reflect more recent tenant bankruptcies, renegotiated leases or other variables which may reduce a property's value.

A prudent owner can address this lag by working with tax reduction counsel to analyze the newly published tentative assessed values and to develop a plan to lower the assessment to reflect current values more accurately. In this market, the routine preparation of a tax protest application will not suffice to obtain a meaningful reduction in asessed value. An approach that stresses individualized analysis is needed to differentiate a property from the scores of others being heard on a busy day by a Tax Commission hearing officer. To inhance the likelihood of obtaining a favorable result, each protest application should be handcrafted to include the analysis and supplemental documentation discussed below.

As a start, one must understand the assessor's methodology for setting the 1993/94 assessments. In New York 2ity the practice of assessing real property has undergone a transformaion as a result of changes in the marzet and computerization of the assessor's Office and the Tax Commission. In the mid-1980's, the assessor was instructed to reassess properties on he basis of ever-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, he assessor now determines assessed value primarily through capitalization of the prior year's net operating income before debt service, depreciation, md real property taxes.

Last August the Department of Finance distributed the 1993/94 Assessment Guidelines (the "Guidelines") to the Assessor. Generally speaking, dthe Assessor was instructed to follow the income approach to value and to use a property's 1991 income and expense figures taken from the 1991 Real Property Income and Expense form ("1991 RPIE") adjusted in accordance with the following assumptions: (i) income will remain flat for 1992; (ii) expenses will increase 5% over reported 1991 levels; and (iii) rent concessions and similar expenses will be amortized 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 space.

For Class A high-rise office buildings in the Grand Central District, for example, the Guidelines instruct the Assessor to assume annual gross income of between $25 and $58.50 per square foot, a market asking rent of $36.00 per square foot, and annual operating expenses of between $8.50 and $14.20 per square foot (averaging $11.90 per square foot) exclusive of debt service, depreciation and real property taxes. A vacancy rate of 17.7 percent is assumed. The Assessor utilizes a building's gross square footage, its 1991 RPIE, and the above assumptions to create a pro forma analysis. To the extent that the pro forma analysis differs from the RPIE, the Assessor makes adjustments. For Class A buildings in this district, the Guidelines then recommend applying a cap rate of between 6.75 percent and 12.25 percent with the "market" cap rate set at 8.10 percent. The assessor selects a cap rate and values the property based on the 1991 RPIE as modified by his pro forma analysis.

Obviously, many variables may enter into this process, including judgments made by the assessor on the validity of the RPIE data and, in particular, the selection of a cap rate. Consequently, an understanding of the guidelines and of how the assessor has evaluated a property and its size, age, location, condition and position in the market is crucial to the development of a tax reduction strategy for this property. The guidelines are available to the public and should be carefully studied.

In addition, upon request, the Department of Finance will provide the assessor's work sheet for an individual property. This document, called the "Property Record Cardn, summarizes how the assessor has applied the Guidelines to the valuation of that particular property. These materials should be carefully reviewed by the owner so that an incorrect assumption about its property will not go unchallenged. Once the assessment process is understood, an owner will be better able to judge the fairness of the tentative assessed value.

With the above information, an analysis of the property's assessment should be done by evaluating the property's 1991 and 1992 operating results (the latter projected if necessary) and identifying extraordinary or nonrecurring factors. By adjusting for these "special" items, a "true" net operating income can be set. The property's cap rate should then be calculated and compared to the cap rate range set forth in the Guidelines as well as to the actual cap rate used by the Assessor on the Property Record Card. The owner's calculations should follow the assessor's methodology. The 1991-based calculation allows a direct comparison with the Assessor's work: the 1992-based calculation shows the direction of the property's value and will be useful in preparing for the owner's Tax Commission hearing.

Next, you should conduct an analysis of comparable properties. Tax reduction counsel programs that search city-created data bases rich with information about comparable properties, including (at least for properties that protested their tentative 1992 assessed valuation) information about 1991 operrating results. Information about 1992 operating results is not available to the public at this time. Working with 1991 operating results for the other properties, you can compare the cap rate for a property with the cap rates for the comparable properties. If significant disparities appear, various income/expense ratios can be evaluated to identify those properties with operational similarities that enjoy higher cap rates. Any current sales of comparable properties should also be analyzed.

Once the foregoing analyses are complete, it is crucial that tax reduction counsel write a specific and analytical argument for submission to the Tax Commission. A brief presentation to the Tax Commission hearing officer of the case for reducing the assessed value of a property will not put it in the best position for a reduction. The written argument should challenge the assessor's conclusion on grounds that distinguish the building in question from the guidelines and from the competition. The argument must be submitted well before the scheduled hearing to counteract the fact that otherwise the hearing officer has only the Assessor's work sheet, the guidelines and the commission's internal reference materials as he or she evaluates the property.

The written argument 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, may also document the decline in a property's market value and may be shared with the Tax Commission. 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 analyses of the property In question and of current City assessment policies. Looking to the 1993/94 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 and the Tax Commission are most likely to enjoy the best results. On the other hand, owners who merely complete the protest form and permit their properties to be evaluated by the Tax Commission without regard to their special characteristics risk a fight to reduce assessments put on their properties in the first place.

Kandel, a former commissioner of New York City's Office for Economic Development, is Of Counsel to Kaye, Scholer, Fierman, Hays & Handler, where he heads the firm's real estate tax reduction practice.
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Title Annotation:New York, New York Department of Finance to announce tentative real property tax assessment roll for 1993-94 tax year
Author:Kandel, Robert A.
Publication:Real Estate Weekly
Date:Jan 13, 1993
Previous Article:Austin Haldenstein joins Vandenberg Real Estate.
Next Article:Study: co-op housing suffers less in 1992.

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