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Property taxes 'unconstitutional.' (lawsuit contention)


Property taxes |unconstitutional'

The Taxpayers For An Affordable New York announced on the steps of City Hall last week it has filed a lawsuit against the State Board of Equalization and Assessment (SBEA), the State Division of Equalization and Assessment (SBEA), the State of New York and the City of New York for exceeding its statutory tax levying authority.

The state constitution imposed a limit on the operating property tax levy equal to 2.5 percent of the five-year average market value of taxable real property. The 2.5 taxing limitation applies to all jurisdiction in the State and is not just specific to New York City.

The grass-roots coalition, comprised of real estate, business and community groups, was instrumental earlier this year in convincing the City Council in approving only half of Mayor Dinkins' proposed $800 million in take hikes.

While the market value is set by the SBEA, the availability of the figures typically runs some years behind the market and are trended. Values going up from the early 80's, therefore, were continued upward past 1986. The lawsuit is based on calculating the value of real property in a more timely manner to accurately reflect the rect downtrend.

City Exceeded Taxing Authority

The coalition believes that if property values have really stayed where they were in the 1986 to 1987 range, then the city is about $200 million over its constitutional taxing authority.

Steven Spinola, president of the Real Estate Board of New York, referring to California's law that limits property taxes, said "There is a Proposition 13 for New York State."

Using a trending formula, Spinola explained, the SBEA is claiming real property has gone up since 1986 by 148 percent. "In the middle of a recession that formula is not accurately reflecting the market," he said. "If anybody believes it has doubled in the last five years they are totally misguided."

Groups Want Tax Freeze

John J. Gilbert, president of the Rent Stabilization Association said last week at City Hall, "The good news is we have a Proposition 13. The bad news is that the city has gone above its limits." The reality of the matter, Gilbert explained, is that owners are lucky enough to have held their property's value since 1986.

What is needed, Gilbert, said, is a freeze on tax as was done during the fiscal crises of the mid-70's. "Abe Beame knew that, as the mayor of the City of New York, in order to create certainty in the business and real state communities."

Gary M. Rosenberg, a partner at Rosenberg & Estis, P.C. which is representing the plaintiffs, explained the SBEA 12-A equalization ratio caused the five-year average full valuation to be $425 billion. In 1986, the SBEA determined value was $226 billion. Based on SBEA ratios, the city found the 1991 full assessment value to be $562.26 billion.

The city needs to be in excess of $250 billion for the five years for its taxing policy to be within constitutional limits.

"The true value of New York City real estate is below $250 billion," Rosenberg said. "Wherever you were in 1986, even if you nudged up in 1987, you've gone down more than that in the other years. So go up a little and then down, down, down -- the five-year average is lower than your starting point."

Spinola said while the decision is pending, "We hope that the Mayor and City Council will realize they have exceeded their legal limit and place a freeze on taxes as one safe way of proceeding while this is pursued." Spinola said they expect the court action will give the administration an additional reason to hold the line on property taxes.

"This is very important in light of the original financial plan which called for $500 million tax increases for next year and each year afterwards," Spinola said.

Rosenberg said it is "pretty clear" that 1992 is not going to be better than this year. "We want to stop that now and, since the city will be coming out with a plan, they should not be projecting unconstitutional increases."

"This is a watchdog lawsuit," Rosenberg noted. "it is not simply a one-shot deal." While Rosenberg said this is a campaign to give the Proposition 13 limit to New York State, he pointed out it is more flexible in that the taxable amount fluctuates with market value whereas Proposition 13 does not.

"We expect to win and have the court compute what the proper equalization amount is," Rosenberg added. "I don't think the court will make the finding of fact that it is over the limit."

Rosenberg said the coalition is not looking for refunds from the city should they prevail. "To go for the refund would cause more damage to the city and cause more confusion. Rosenberg added that this would be a complex legal question, particularly if property owners did not challenge their assessment. Because there is a four-month statute of limitations in challenging an administrative rate, the coalition had to file their papers a couple of weeks ago.

An attorney who asked not to be identified, reason the groups might not be seeking retroactivity is that the New York State Court of Appeals in a 1974 case, Hurd v. Buffalo, agreed with a lower court which ruled that the city was not liable to repay property tax amounts illegally collected on determination that a statute with regard to the calculation of the roll was unconstitutional. Rosenberg, when asked, said the issues were different.

Organizations participating in the lawsuit include the Real Estate Board of New York, the Rent Stabilization Association, Community Housing Improvement program, Associated Builders and Owners, the Hotel Association of the City of New York, The West Side Chamber of Commerce, Willets Point Business Association; Bronx Realty Advisory Board, the Council of New York Cooperatives, the Bensonhurst Board of Trade, the Chamber of Commerce of the Rockaways, the East of Laconia Community Association, the New York Association of Realty Managers the Staten Island Chamber of Commerce, and the Property Tax Fairness Coalition.

Robert L. Beebe, counsel to the SBEA said they are preparing to respond to the Article 78 proceeding. "We were served with the lawsuit and we are studying it and will have a response to it in court. We'll be prepared to submit the first necessary answer but I imagine it will be in court for a while."

Calculation of Property Taxes

To come up with the city's fiscal year 1991 budget, the assessed valuations for FY91 and each of the four previous years were computed and multiplied by a ratio of its value to determine full value. Of the five years which the city adopted this year to determine market value, none are based on actual market values.

The five years were added together and averaged, coming out to be $425 billion. The city's tax fixing resolution states that the amount of taxes on real estate to be levied and subject to the 2.5 percent tax limitation, including a provision to the 2.5 percent tax limitation, for FY 91. The constitutional amount that may be raised is $10.54 billion. So according to city figures, it is well below its taxing authority limits.

Allen J. Proctor, executive director of the Financial Control Board said the SBEA methods give the city "tremendous amounts" more in operational taxing authority. "billions more," he said.

Proctor said the Control Board evaluates whether the city is operating legally under SBEA instructions. "One may believe the SBEA instructions are not appropriate and the city certainly knows it, but it has no alternative," he said. "No one would disagree there is a lot left to be desired in the SBEA procedures, however, that is a far cry from saying the city has an illegal tax roll."

The SBEA is supposed to conduct a survey each year that primarily helps to determine the class ratios for property taxes but also measures the full market value for each jurisdiction. Beebe said the next statewide survey is the 1991 survey which is being worked on now and the completion date for that is the end of 1993.

The 1989 data is to be ready by the end of this year. According to Robert Kitchen, deputy director of the SBEA, when 12-A ratios are actually calculated for next year's budget, the 1989 survey will be one actual point on the trend line. "Nobody can tell you what the trend line difference will be yet," he said.

Edward English, an Equalization Rates Analyst with the SBEA, said the state equalization rate would be established tentatively for New York in November and that the city would be given an opportunity to an administrative review process before the data is made public. If New York City does not file a complaint, the data may be finalized by early January. If a complaint is filed, he said, the data may not be finalized until April or May.

"Our survey is based upon appraisals," English said. "We notify New York what properties we appraised and what our opinion is of it in 1989." If the city submits documentation, then it is reviewed. Once the data is finalized, the special 12-A ratios for New York will be made available in June. the surveys, which appraise 1,400 parcels, incorporate all types of properties throughout the city.

To collect data for comparison, Spinola said they researched every property other than condominiums sold in 1986 and 1987 that were also resold in 1991 and excluded any "unique" sales. Comparing the value of the remaining 27 properties, they found a 9 percent reduction in the same property. "If you add up the total sale price originally versus the '91 number, we saw a 9 percent drop," he said. "If that is accurate, then the city is exceeding its taxing authority." Spinola said the value of condominiums in the same period was down 1.6 percent.

"If you look at where office rents are going three may be a decline and occupancy rates are declining," Spinola observed. "All indicators are that real property has remained the same or gone down since 1986."

If the state entity was correct in 1986, Spinola said, the city has now exceeded its authority. "We are asking the courts to make a ruling that the way the state has calculated the market value is clearly wrong," he said. Spinola said the new survey will not alter the 1991 number as this is a survey for 1989.

Proctor said the law is written so that city's tax authority is based on the surveys that exist and admits the methodology used "clearly" has an upward bias.

The market value is determined by SBEA formulas. "The SBEA has a hard time keeping up with doing market values for all jurisdictions every year," Proctor noted, "so they have come up with how they want you to try to function in the absence of the market survey. The city certainly is in compliance with current SBEA practice, so that the lawsuit must be questioning the SBEA practice."

"The problems," Proctor explained, "is that the SBEA says you're to sue the five-years moving average. If they haven't done it, they say look at what we've done and keep it going."

Under the formula, Spinola believes the city is $4 billion to $5 billion off. "They also believe the formula is wrong," Spinola charged. "We can all say the formula is wrong but we need somebody to correct this. We believe the city is above or at its taxing limitation, but the city will never acknowledge it is exceeding its authority. If anybody believes the value went up 148 percent, I have a bridge to sell them."

Commissioner Carol O'Cleireacain of the Department of Finance said, "I don't think his (Spinola's) arithmetic is anywhere near correct. We've done calculations that show we have a substantial cushion even under the most recent data and up-to-date market values. We have at least a $1 billion cushion between where we are and the limit."

O'Cleireacain said the suit was politically motivated and without merit. "The Constitution is not the limit," O'Cleireacain noted, "it's the weakness in the economy."

Need For Fair Taxes

"What is important to us is fair, predictable, affordable taxes," said Mary Ann Rothman, executive director of the Council of New York Cooperatives at the press conference. Rothman said people cannot sell their apartments and are in trouble because taxes are so high.

Ruben Klein, president of the Bronx Realty Advisory Board, said the city has to "live within its limits" whether it be taxes or municipal employees.

Dan Margulies, executive director of the Community Housing Improvement Program (CHIP) said the city uses a double standard. "The equalization ratio that the city uses to determine its tax limits says that our property is worth six times its assessed value," he said. "But when we challenge our individual taxes, the regular ratio provided by the SBEA says our property is only worth twice the assessed value. What we're saying is the state and city can't have it both ways any more."

Debt Services Not Included

There is a provision in the Constitution, however, for no limit on the amount of property taxes that may be levied for redemption of, or interest on, long term debt. Last year's debt service amounted to $1.44 billion while this fiscal year it amounts to $1.934 billion. The Fiscal Control Board estimates that by FY 1996, the debt service will double to $3.4 billion, while operational expenses will jump to $6.7 billion. "As a result," a staff memo states, "there is a risk that by FY 1996, the city will have completely exhausted available taxing authority if it raises tax rates as proposed in the financial plan."

The Coalition believes that time has already come.

Reserves for uncollectible taxes, abatements, refunds and delinquencies accounted for $468 million in 1992 up from last year's $436 million.

PHOTO : On the steps of City Hall, leaders of Taxpayers for an Affordable New York announced a lawsuit against New York City and New York that charges they have exceeded their constitutional limit for property taxes. Front row (L to R); Gary Rosenberg, Rosenberg & Estis, P.C. council for the group; Steven Spinola, president, Real Estate Board of New York; John J. Gilbert, president, Rent Stabilization Association. Back row (L to R): Dan Margulies, executive director, Community Housing Improvement Program; Mary Anne Rothman, executive director, Council of New York Cooperatives; Ruben Klein, president, Bronx Realty Advisory Board.
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Author:Weiss, Lois
Publication:Real Estate Weekly
Date:Oct 30, 1991
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