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More owners go to court with property tax disputes.

More owners go to court with property tax disputes

Real estate tax attorneys agree that more assessment disputes are heading for the court calendar and can no longer be settled at the Tax Commission or Corporation Counsel level.

The attorneys, who primarily practice in the specialty known as tax certiorari law, said decreasing market values are not being fully addressed in the regular grievance process while the city guidelines do not go far enough to fairly assess their clients' properties.

Even so, the only building owners who will be able to look for relief from the courts are those who can afford to pay the price. Court fees can run into thousands of dollars for expert witnesses and appraisals. In addition, owners would have to wait for the judicial process to run its course until finally, after many years, they obtain a refund from overpayments.

"It's a sign of the times," said Leonard Boxer, a partner at Stroock Stroock and Lavan, who observed there is now a trend towards trials. "Where meager offers had been accepted in the past, today, meager offers don't satisfy the owners. You are dealing with owners and mortgagees and the city is going to have to be more realistic in how they are going to settle or you will find the calendar inundated with cases."

Indeed, the New York City Tax Commission reported an 8 percent increase in the number of properties filing petitions for a court review after last year's Tax Commission offers were rejected by the owners.

After the Department of Finance sets the tentative assessment roll, which this year will be released by Jan. 15, property owners have until March 2 for Class II, III and IV and until March 16 for Class 1, to file an application for review of this tentative assessment with the Tax Commission. Hearings held throughout the year could result in an offer from the Tax Commission and a change in the assessment. Should the owner be unhappy with the offer, a petition for judicial review must be filed by Oct. 26 of this year.

"The Tax Commission can take care of all of this litigation," said one attorney who asked not to be identified. "But if they're in a fishbowl with the Comptroller's offices looking at every settlement, they can't function properly."

Last year, both the State and City Comptroller's offices targeted the Tax Commission and issued reports that were critical of the hearing process and the amounts of the reductions offered to taxpayers.

"We'll have to push for more litigation at the court level," said the attorney, "which will result in bigger refunds to the individual taxpayers but will also cost the city as a whole more money. The Tax Commission has to make the watchdogs understand that they are supposed to be settling cases for the city."

Jeffrey Golkin, chairman of the Bar Association of the City of New York Committee on Condemnation and Certiorari and a partner with Herzfeld & Rubin P. C., said trials "are the wave of the 90's." The city's fiscal climate, he said, "is going to make the city a tougher adversary in dealing with these cases.

"They are going to think long and hard about these offers of reduction and giving the max," Golkin said. Golkin noted that there are a "multitude" of opinions on evaluations and in "tough times it's going to be difficult for the city to be generous and we'll have to prove our case on an escalated level."

The first case to have gone through a trial in the last 10 years, Bass vs. Tax Commission, was decided by the lower court in January of 1991, with "cuts" in assessment that could lead to more than a $20 million refund for the former owner of One New York Plaza.

In last year's decision, New York State Supreme Court Justice Stanley Parness ordered six years of property taxes, from 83/84 through 88/89, lowered by $360.3 million. The case, tried by Joel R. Marcus, now a partner at Pottish & Freyberg, and Adam R. Gilbert, a litigation partner at Shea & Gould, hinged on the presence of asbestos in the building, and its subsequent loss of market value together with the declining Downtown commercial rental market. The building is now owned by Chase Manhattan Bank, which is the primary tenant.

The city appealed, the petitioner cross-appealed and the case came up for oral arguments before the three-judge New York Appellate Division, First Department in late December. Edith I. Spivack, executive assistant corporation counsel, argued the case for the city before the panel while Martin Shelton, a Shea & Gould litigation partner, handled the cross-appeal for the plaintiffs.

Spivack said a decision is not expected for four to six weeks, which will mean the end of January or beginning of February. Most owners cannot afford to pay all the taxes for all the years and wait indefinitely for the appeal's process to be exhausted, attorneys say.

Marcus said, "One New Plaza is an important case because it shows the city authorities that an inadequate settlement is not the last word. That the court has the final say. In these troubled times the city may want to offer less than a fair settlement, and fortunately for property owners, they won't have to accept that."

There are two parts to a certiorari case - value and ratio, which in the past have been adjudicated in separate trials. For One New York Plaza, the city stipulated to a ratio and only a valuation trial was held. In three recent cases, however, the city has not yet stipulated to a ratio but the trials on the valuation issues have gone forward.

Stroock Stroock & Lavan tried a case in December involving the Hudson Theater, and, Boxer, said they have not addressed the issue of ratio yet. "Obviously they don't want to try a ratio," he said. Should a ratio be set through a court trial, other buildings with the same "open" years could use this ratio, too.

William E. Banfield, a partner with Podell Rothman Schechter & Banfield, said his firm has just tried two certiorari cases in New York County, also before Judge Parness. "The city did not stipulate in either of the two cases to a ratio," he said. One case involved Fulton Church, the other a property owned by the late Sol Goldman on the Upper East Side.

Banfield said his firm presented reports to the city that determined a Class IV ratio lower than what was promulgated by the State Board of Equalization - used by the city - which bases its ratio on sales data that are frequently up to three years behind. "We didn't want to stipulate because we have an expert who determined it is lower," he said.

The Podell firm has a number of trials scheduled but Banfield could not predict whether or not they will go forward. "Trial dates have been set for a number of cases and for others, appraisal reports have been filed," he said. "It's up to the city how they handle the ratio."

Boxer said the years under review for his case involving the Hudson Theatre, 84/85 through 88/89, preceded the construction of the Macklowe Hotel next door, also owned by his client. Boxer said the city based the "unique" theater's assessment on purchase price and its location next to the hotel. "If you look at the analysis based on other operating theaters, it is grossly over assessed, even where other theaters had sold off the development rights," he said.

Stroock partner Joseph Forstadt, who tried the case together with special counsel Donald Liebman, said the case is different because the theater is a historical landmark that is restricted in its usage. "We computed that the value of the theater should be measured on a per seat basis of the value of the air rights. Our position is that air rights are an investment value and not a market value." The building was assessed at $4.5 million and went up through the years in question. Forstadt said they believe the value to be 100 percent over stated. Once the valuation is settled by the court, Forstadt believes, the ratio question will be negotiated. While the city's "unofficial" Class IV ratio for that time was 45 percent of sales price, Forstadt said, theaters were being valued using a ratio half of that.

Boxer said the city did try to settle the case. "They made a meager offer of settlement that was not acceptable," he added.

Although the amount of money involved in the Hudson's disputed assessments do not compare with the 10's of millions fought over by the Bass family for One New York Plaza, Boxer said, "very often you get an owner who realizes that in order to get a shot he will finance the cases."

During the last decade, Boxer said, the Tax Commission would make an offer, but because of the rising market and the economics of the property, the owner was able to absorb any increase. "Now the owner can't afford to accept (the offer) and must go for the absolute," Boxer said.

"It all goes part and parcel about how the (certiorari) practice is changing," Boxer observed. "More owners are getting the attorney to reject offers and put it on the calendar and get a reduction."

It is not cost-effective, however, to try just one or two years, Boxer said. "There is not much of a difference in the cost of the appraisals for four or five years than for six or seven years," he said.

Additionally, Boxer said, the appraisers will have to be more competitive. "Today, appraisers are feeling the pinch," he said. Appraisers who use to be busy with other real estate deals, such as prospective purchases and refinancings, are today focusing on doing trial work. "Normally, when you ordered," Boxer said, "you weren't sure you'd get it in time. Now, many are tripping over each other to provide the appraisal on a more expeditious basis."

Boxer also predicts cases will be put on the court calendar more rapidly. "We have been gearing up to place cases on the calendars," he said.

The movement towards court trials will not change in the coming tax protest season in New York City, unless, Boxer said, there is a "breakthrough" at the Tax Commission level as well as in the outcome of "the supposed moratorium" on tax increases.

"Many of these increases are already in motion because of the phase-in," Boxer said, "and notwithstanding holding the line, many owners cannot handle this." Property tax increases are phased-in over five years and many properties are stilling feeling a rise in assessment from the late 80's booming marketplace.

In the interim, Boxer said, "The bottom line on many properties have eroded, and you can't just give them enough tax relief in settlement. You look around town, and unfortunately for the City of New York, the tax base is going to be hurt because property values have really, really, declined."

While the Tax Commission examines the property's income and expenses on a "free-and-clear basis," Boxer said, they now cannot overlook the fact that the properties were financed at high interest rates and the owners cannot carry the properties. "The owner can't meet the debt service payments," he said.

Stroock is putting many cases on the calendar because, Boxer said, many of their clients are now receptive to the idea of going the trial route. "Many of them cannot pay the taxes," Boxer said. "More and more, taxes have to be tried to get the appropriate result. You can't do it at Tax Commission."
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Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Jan 8, 1992
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