How the Tax Appeal Process Affects the Real Estate Deal

 

Because of the incredible increase in tax rates throughout New York State, the real property tax burden has become one of the major expense items for any commercial property. The economic truth is that an asset with less taxes is more valuable than an asset with more taxes.

 

As brokers, you have seen that in respect to many deals, the property taxes will actually exceed the amount of mortgage carrying charges. In virtually every deal, one of the primary concerns of a potential buyer are the real estate taxes. How much are they? Can they be reduced? If so, when and how? Unless these questions are satisfactorily answered, frequently the deal will disappear. 

We believe that a broker who understands the tax appeal process has a competitive advantage in closing deals. Since assessments relate directly to value, the fairness of an assessment becomes clear as a transaction takes place. Understanding the appeal process allows both buyer and seller to intelligently consider the real property taxes in structuring a deal and also will give the buyer an idea of what to expect.

In New York it is rare that a property is assessed at 100% of market value. Every taxing jurisdiction assesses a property at a percentage of full market value. This percentage is called "ratio". The Nassau County reassessment for example, intends to sets this percentage at 1% of market value. Suffice to say that the simplest and easiest way to establish ratio and the way most jurisdictions review assessments is by the use of ratio established by The Office of Real Property Services www.orprs.gov

 

The New York courts have, in a series of decisions over the last 30 years, established certain standards for the valuation of office and industrial type properties. The cost approach is rarely, if ever, condoned by the courts. Where the property is owner-occupied, the courts will arrive at an "economic rental" based on expert evidence and apply an income approach capitalized into fair market value.

Use of the market approach (i.e. whole to whole comparable) is permissible and, in fact, has been utilized by some courts in large industrials, but is rarely adopted. The courts have generally adopted the use of the income approach, even when a property is owner occupied. However, if the subject property was recently purchased in an arms-length transaction, such purchase is substantial evidence of full market value.

 

Listing prices and contract prices are useful especially when the property listed is not in distress or if there is no pre-existing relationship between prospective buyer and seller. The fair market value arrived at is when multiplied by the ratio to reach an indicated assessment. Where the indicated assessment is less than the actual assessment, a refund is directed. Interest will run at the rate of 9% per annunm, although in most jurisdictions, the issuance of rate of interest is negotiable.

The Appeal Process

The appeal process in New York is strict and unforgiving! Each jurisdiction has established a very limited filing period every year in which to file an administrative grievance to review the assessment set by the local assessor in each jurisdiction.

 

Simply stated, the filing period is everything. Further complicating the situation is that many properties are inside two assessing jurisdictions. You will find this especially so on Long Island and in Westchester County where there are both towns (or counties) and villages (or cities) simultaneously assessing the same property on different assessment rolls. Each one of these jurisdictions will have a different filing period and it is essential that an administrative grievance be filed in respect to each of the assessment rolls. Although this may look complicated, to the experienced tax professional this is proforma since we are geared to handle the filing in each one of the jurisdictions for each of the innumerable different filing periods.