Eric S. Weiss is a partner with Tuchman, Katz, Schwartz, Gelles, Korngold & Weiss. He is a vice president of the Real Estate Tax Review Bar Association, and a former chairman of the Condemnation and Tax Certiorari Committee of the Association of the Bar of the City of New York. He concentrates his law practice on tax certiorari matters.
Protesting your property tax assessment may seem cut-and-dry on paper, but New York City policy changes have littered the process with hurdles. These have made assessment challenges tricky, while making the outcomes uneven during a long, drawn-out process that can be unfairly stacked against taxpayers.
The city of New York evaluates real property every year, which means the assessed values can, and historically do, change annually. The city calculates the values of both the land and the buildings that have been erected on each tax lot and the sum becomes the total actual assessed value.
New York State’s Real Property Tax Law, Section 581, requires that real property held in a cooperative or condominium form of ownership must be valued as if it is an income-producing (i.e., rental) building. This means that values for co-ops and individual condo units are not based upon the sales prices but on a comparison to similar rental buildings.
Because cooperatives are corporations, the co-op generally receives one assessed value for the building that is totaled with its land value. In the case of co-ops, individual shareholders have their maintenance and property taxes divided up, typically based on the number of shares. However, the property division maintains records on each cooperative apartment as a way of tracking the co-op/condo abatement, STAR, and veteran and senior citizen exemptions. That would reduce the individual shareholder’s property tax liability with respect to the entire building’s tax burden.
Each residential condominium owner has a separate tax lot and receives his or her own individual assessments. The building is valued as a whole and the individual tax lots receive their assessed value, which is initially based upon their share of common area elements or based upon the relative purchase prices of the units as set forth in the offering plan. The retail space or parking garage in a condominium project will also have its own assessed value. In large mixed-use projects, such as the Time Warner Center in Columbus Circle in Manhattan, the office portion and hotel portion will also have individual assessments.
A retail space or a parking garage may be carved out as a separate condominium lot, while the balance of the building may be held in a cooperative form of ownership. This hybrid of a co-op and a condo is known as a “condop.” Such parcel segregation will not have any tax effect on the co-op corporation itself.
The tax year starts on or about January 15 when the commissioner of finance certifies the release of the tentative property tax assessment rolls. These rolls contain the tentative assessed evaluation of each and every parcel and building in the city based on the value of the property on the prior January 5. They are “tentative” until the city releases the so-called “final” roll on May 25. Taxpayers have the right to protest their assessed evaluations by filing an “Application for Correction” with the tax commission between January 15 and March 1. So long as the appropriate applications are filed on or before March 1 and a petition objecting to the assessment is filed with the court on or before October 24, a “final” assessment can be changed – even years later.
Once the assessment roll is released on January 15, your managing agent or board of directors or managers often hires a tax certiorari attorney to handle the protests. In the case of condominiums, there is frequently a bylaw authorizing the retention of attorneys who concentrate in handling real estate tax protests. In other cases, the board will obtain authorizations from the unit-owners and exercise this power through a “power of attorney” order.
The attorney will then prepare an application for correction to be filed with the tax commission, which, by law, is an independent agency charged with holding fair and impartial hearings.
The application must be filed on the appropriate form and must include an income and expense form specifically designed for co-ops and condos known as a TC203. Unlike rental buildings, which generally must file current income and expense statements, the tax commission allows co-ops and condos to file a two-year-old statement since the city recognizes that the annual statements are not considered final until after the March 1 filing deadline.
As part of the income and expense statements, co-ops and condos are required to disclose the rental information on sponsor/holder-of-unsold-shares units and co-op-owned units. The rental information is broken down between rent-regulated and unregulated units.
Property values can come in three flavors: they can be over-assessed, under-assessed, or properly assessed. Often, at the time an application must be filed, it is difficult to come to an opinion as to the above category of a subject property because during this six-week filing period there is no time to conduct an in-depth analysis.
If a proper application has been filed with the tax commission, then the commission has jurisdiction to review the current assessed value as well as the prior year’s assessment (provided that an application and a petition to review the prior year’s assessment have been served upon the city.)
The commission hearings begin in April. It is impossible to have every one of the 40,000 to 60,000 cases filed each year heard before the final roll is released in late May, so hearings are held into the fall. The commission starts to hear cases with a total assessed value over $11 million first, along with a smattering of other, smaller cases. Since these matters comprise a large share of the city’s tax levy, this creates more stability for the budget-making process. Cases not heard in the spring will nevertheless obtain hearings throughout the summer and into the fall.
To determine the assessed value of the property, both the Department of Finance (DOF) and the tax commission use the “capitalization of income method” of valuation. Under this approach, an appraiser determines the value by estimating the net operating income produced for that property. The appraiser would then apply a capitalization rate to this hypothetical income stream. The rate is determined based upon the age and location of the property. Therefore, an older building in the South Bronx would have a higher capitalization rate than a new building on Park Avenue in Manhattan since an investor would want a higher rate of return for the Bronx property. As the capitalization rate goes up, the value will correspondingly go down.
When the property is scheduled for a hearing, the representative must analyze the assessed value of the subject property by creating a fictitious rental building. For co-ops and condos where there are still sponsor/holder-of-unsold-share units, the rents of those units will be part of income equation and those rents will be used as some guidance as to the rental value of the building as a whole.
Income and expenses filed with the tax commission are matters of public record and that data can be obtained through a freedom of information request to the DOF. Property owners are often confused between the filing of an income and expense statement with the tax commission and the annual Real Property Income and Expense filing. The DOF’s property division requires annual filings of Real Property Income and Expense (RPIE) statements from all property owners whose tax lots have a total assessed valuation in excess of $40,000.
There are exceptions to this filing requirement, which include individual residential condominium units, and residential co-ops with less than 2,500 square feet of commercial space, not including garages. The RPIE filings are by law confidential and cannot be obtained by the general public. Consequently, the property division has an enormous amount of property rental data catalogued by neighborhood and applies this data to create income and expenses for a condominium or a co-op.
Most attorneys maintain huge data- bases of the tax commission income and expense filings along with other data available from the DOF as to building size, age, and class, the number of units, as well as residential, retail, garage, and office square footage. The attorneys will examine the property and the apartment sizes and then query their database for rental buildings in the area of similar age and type (walk-up and elevator), to be used as income comparables. This will help determine if the subject property is over-assessed or not.
Further, the co-op or condo’s expenses may often be adjusted to reflect the expenses of comparable rent-producing buildings. Typically, management fees and repair and maintenance expenses are lower in co-ops and condos than in rental buildings. Additionally, since the units are owned by individuals who are responsible for their own painting and appliances, adjustments are made to reflect those expenses as well.
With this income and expense model, the net operating income can then be capitalized, using a cap rate appropriate to the area and the income to derive an indicated assessed value. The DOF claims that all residential properties with more than ten units are assessed at 45 percent of value. Therefore, the indicated full market value is multiplied by 45 percent (the equalization rate) to come to a proposed assessed value.
At a typical tax commission hearing, the above analysis, along with a list of comparables, is presented to a tax commission hearing officer, tax commissioner, or DOF administrative law judge who has been deputized to hear tax commission cases.
One of the main reasons there have been substantial increases in the assessed values of co-ops and condos is due to rent deregulation and increasing neighborhood market rents as they might relate to the subject property. The DOF is now using much higher estimated rents than had been used in previous years to determine property values.
If there is shareholder-owned commercial space, market rents will also be applied as opposed to the actual maintenance collected, since maintenance is generally less than what would be collected if that space was rented in an arm’s length transaction.
Determinations by the commission are never made at the hearing. These determinations are generally available within two to six weeks after the hearing. In the event the tax commission makes an offer to reduce the assessment, that offer must be accepted within 45 days or it is automatically withdrawn. When an offer is made, the attorney will contact the managing agent or the board to discuss the pros and cons of the offered reduction.
If the offer is accepted before publication of the final assessment roll, the reduced assessment will be reflected on the July tax bill. If acceptance takes place after the roll is closed, the reduced assessment will generally be reflected before the payment due at the next tax period in October or in January and a credit for the overpayment of taxes will appear in the DOF’s records. A refund application must then be made to obtain that overpayment. The DOF has been able to process the refund within six to eight weeks, which is a vast improvement over the 1990s when refunds could take up to two years.
If no offer is made to reduce the assessed value, or an offer is not accepted, then the attorney must file a petition to review the assessment with the New York State Supreme Court by October 24 in order to allow a further review by the tax commission or the city’s corporation counsel.
Essentially, the majority of buildings must file all of these forms every year and it can take several years to obtain an acceptable reduction on one or more back years.
After two years of unsatisfactory results before the commission, an attorney may file a “Real Estate Tax Audit Report Form” with the Office of the Corporation Counsel (OCC). This allows the case to be discussed at a pre-trial conference or, theoretically, tried in court.
The audit report form requires much more detailed income and expense data than either the tax commission or RPIE forms, along with information relating to the mortgage, depreciation, insurance, and building employee wages. While this procedure can be initiated with a pending petition, attorneys generally will accumulate multiple petitions before initiating this process. Basically, the same analysis that is performed for the tax commission must be presented to the OCC, but in a more detailed manner.
As of early October, the OCC policies concerning reductions are such that they must be satisfied that a property is over-assessed by more than 10 percent of the assessed value before making an offer for reduction. Accordingly, if the OCC determines that the property is over-assessed only slightly, no reduction will be offered.
For example, take a property that is assessed at $5 million but which the OCC sees as overvalued only by $400,000. That would be eight percent of the assessment and would result in a refund of roughly $40,000, assuming a 10 percent tax rate. In such a situation, no offer would be made
If five years are under review, this would result in a refund to the taxpayers of approximately $200,000, and they are now out of luck and the overpaid taxes remain in the city’s treasury. This review is known as a pre-trial conference and is therefore not before a judge but is merely between the building’s attorney and the city’s legal assistant.
Again, the city lawyers operate on the legal assumption that the DOF has set an appropriate assessment. A case may be conferenced several times before an offer is made, and these conferences take three or more months to be rescheduled, thus adding another year or two to the process. An offer made by the city attorney is subject to review and may be withdrawn at any time while the offer wends its way through the OCC’s internal approval process, which can take more than a year.
If approved by the OCC, an order must be sent to the state Supreme Court judge in the county where the property is located. The judge will sign the order that directs the DOF to correct its records and adjust the assessment, which will create refunds for the overpayment of taxes over several years.
In the last analysis, obtaining a reduction in your assessment and an appropriate refund is not fast, easy, or a “sure thing.” But most buildings are willing to try. Good luck!