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New tax reduction strategy required.

As property values in New York City have plummeted, assessed values remain at or near historic highs. In the face of the City's apparently insatiable need for revenue, the traditional brief appearance before the City's Tax Commission is unlikely to yield significant results. During this challenging time a new, more individualized and sophisticated approach to real estate tax reduction is required.

In the past, both the Department of Finance and the Tax Commission, like medieval sorcerers, kept their arcane practices shrouded from the taxpayers who rarely understood how their property was being assessed. That is changing. Under Carol O' Cleireacain, commissioner of the Department of Finance, and David Goldstein, president of the Tax Commission, both the Department and the Commission are becoming more generous with information as they professionalize, computerize and generally open their procedures to public review and comment.

Unfortunately, such generosity has not yet extended to their assessment policies.

With hearings on protest applications for the 1992-93 tax year coming to an end, now is the time to adopt and implement a strategy for achieving the lowest possible assessment for the 1993-94 tax year. The assessor is already hard at work poring over computerized financial data, visiting properties and making the judgments necessary to create next year's tax roll. In midJuly the Department of Finance published its "FY 93/94 Assessment Guidelines". These guidelines are used in the valuation phase of the assessor's field work, which began in August and which should be more than 50 percent complete by early October.

At this stage most owners have done little more than file their "1991 Real Property Income and Expense" ("RPIE") forms, due as of Sept. 1. Owners who limit themselves to this step are, in effect, authorizing the assessor to use 1991 operating results as the basis for determining the 1993/94 tentative assessment. In the face of a rapidly changing and weakening market, these results may not reflect a building's current decreased value. An alert owner has several options in dealing with this problem.

First, in order to develop a strategy for the 1993/94 tax year, the "Assessment Guidelines" must be understood and evaluated. As part of Commissioner O' Cleireacain's commitment to open the tax assessment process and make the procedures fairer and more comprehensive, these guidelines are now available for the asking.

For a Class A high-rise office building on the Upper East Side, 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 real property taxes and debt service) with an assumed vacancy rate of 17.7 percent. For assessment purposes, these guidelines yield a "cap" rate range of between 6.75 percent and 12.25 percent (with a market cap rate of 8.10 percent) with the assessor is to apply to an owner's "bottom line" before debt service, depreciation and real estate taxes as part of the valuation process. The assessor has been told not to adjust income upward from reported levels in leased space in the absence of specific information to the contrary and to reflect declining rental income if such is found to be the case. Expenses are assumed to have increased by 5 percent over reported 1991 levels. Recognizing that rent concessions are almost a given in today's market, the assessor has also been given a chart showing how to amortize the actual rent to be received over the lease term to determine current income.

The guidelines differ by building type and by location. Owners can obtain a copy of the guidelines either from the Department of Finance or their real estate tax counsel. Counsel should also be able to provide an explanation of what the guidelines mean for particular properties as well as insights as to how the assessors are likely to apply the guidelines.

Second, owners who know that operating numbers for their properties have changed for the worse since the close of the 1991 fiscal year should create projected 1992 pro formas based upon their operating results for the first six to eight months of the 1992 fiscal year. Although only a projection, if properly done, the 1992 pro forma should accurately anticipate the audited 1992 results that the Tax Commission will be reviewing at next spring's hearings. By providing the assessor with projections now, owners can have a real impact on their assessed values before such values are formally set.

Third, with the 1993-94 Assessment Guidelines in hand, an owner should know how the assessor evaluated his or her property last year. This information is now available from the assessor's "Property Record Card". Real estate tax counsel can readily obtain these cards from the Department of Finance. Although often cryptic, the cards do provide insight into how the assessor adjusted income and expenses and set the cap rate for the prior tax year. For the same reasons, the assessor's 1993-94 "Property Record Card" should be obtained as soon as it is available. Furthermore, these cards are used by the Tax Commission when it hears protests, and if the Tax Commission has them, so should owners.

Fourth, owners should compare the actual physical characteristics of their properties against the information contained in the Department of Finance's computerized data bank. Although assessments should be based upon a building's gross building area and actual configuration, mistakes are sometimes made. For example, building area figures may be based upon "gross rentable area" or other incorrect information that may be in the Department's files. If so, evidence of the correct information should be submitted to the assessor for review, and a correction should be requested.

With the foregoing information in hand, an owner can evaluate whether and how to provide supplemental information to the assessor and/or to the Tax Commission. Providing additional information to the assessor in the early stages before he or she completes the necessary field work and establishes the tentative assessment, may yield significant results.

In the booming 1980's, owners rarely if ever sought to be frank and forthcoming with the assessor and provide supplemental information about their properties' operating results. But in the weak market of the 1990's, much has happened that warrants a change in approach to challenging real property tax assessments: * The increasing use of computers and the publication of the "Assessor's Guidelines," coupled with increasing levels of professionalism both in the assessor's office and at the Tax Commission, are reducing the incidence of dramatic decreases (or increases) in the assessed value of major properties that cannot be supported readily by an analysis of a property's operating results and other data * The RPIE forms, now routinely submitted although originally so bitterly fought by the real estate industry, provide the assessors with a detailed snapshot of a property's operations. These are used by the assessor unless documentation to the contrary is provided * The Department of Finance has adopted a policy of openness unheard of in the history of real property tax assessment in New York City. In the "93/94 Assessment Guidelines," for example, Deputy Commissioner Kevin Koshar tells the assessors to "feel free to explain [the Department's] general approach to valuation" to taxpayers and urges his staff to be "as receptive and open as possible" in these discussions * The Commissioner and her deputies, as well as President Goldstein, have opened their respective doors. Owners who ignore this new attitude will lose out on opportunities to reduce their real property tax burden. Prudent owners will take the time to become knowledgeable about the procedures followed by the assessor and the Tax Commission, inform themselves about how their properties' current operations can affect next year's assessment and participate fully in the tax reduction process before both the assessor's office and the Tax Commission.

Mr. 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:real estate tax reduction necessary
Author:Kandel, Robert A.
Publication:Real Estate Weekly
Date:Sep 30, 1992
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