The city’s recently published tax assessment roll shows that although fair market values dipped moderately last year, the assessed values of property in the city rose significantly.
Real estate attorney Donald Liebman says the city’s system for assessing real property overstates land values because it does not take into account the decline in prices that rocked the city in 2008. Liebman, senior counsel in the real estate department at law firm Proskauer Rose, spoke with The Real Deal (in a video to the right or a Q & A below) about the assessment process and how it might change following a recent court ruling in Brooklyn.
The city’s annual tentative assessment roll published January 15, 2009 showed that while fair market values declined by 1.2 percent citywide in all types of buildings, the assessed value of those properties rose by 7.9 percent. The city Department of Finance says it used 2007 data because that is the latest full year available for producing the 2009 assessment roll.
Why would assessments rise in a falling market?
Partly because the city is using old, historical operating information from the boom market, which is not reflective of the current market conditions that we are experiencing. In determining assessments for commercial properties for the tax year 2009 to 2010, the city relied on income and expense figures from 2007. But owners in today’s declining market are fighting higher vacancies and lower rents.
What impact do higher assessments have on commercial property?
Real estate taxes actually diminish the value of real estate and they are the single biggest line item of any operating expense in a real estate operation, sometimes as much as 25 percent here in New York City.
Your client Eastern Parkway Associates recently won a tax assessment case against the city in Brooklyn in which you argued that future conditions of a property needed to be included in the valuation process, not just historical data. What does this ruling mean for tax assessments?
It means that it is critical to take future expectations of the property’s performance into account because that is what investors and lenders and buyers in the real market do; they are buying a stream of income.
Do you think this ruling will force the city to take future conditions into account?
One would hope that it would cause the city to look more closely at all the factors that are present in the current market. Your easiest example is an office building with above-market leases that are about to expire. [Operators] would undoubtedly be looking at what kind of income stream they would be getting after these above-market leases expire.
Would it lead to chaos if everyone wanted to have assessments based on future conditions?
No, I think it would lead to a more appropriate tax burden and I think it would lead to an ability for property to maintain its value in a declining market.
Increases in property assessments are phased in over five years by state law. Why shouldn’t decreases in assessments also be phased in gradually?
Because the law says assessments have to be based on value, and value is what someone would pay on the statutory date of January 5, and that is what must be translated into the assessment.
Won’t the city just increase taxes to make up for lower assessments?
I can’t speculate on what the city will do but I can say all property has to be fairly and equitably assessed based upon its value.