‘Totally Inadequate’: CRE Tax Experts Say City Underestimating Extent Of Fallout
New York City slashed property values this year, drastically reducing tax obligations for many commercial landlords across the city.
But even with assessments down by more than 20% in some cases, some owners say the reductions are not nearly enough relief, given the circumstances, and are squaring up to fight the city with greater force than ever before.
“What most people feel is that, although there were decreases in the valuations, they really were not significant enough compared to the effect of Covid,” said Robert Gilman, the co-leader of the real estate group at accounting firm Anchin Block & Anchin. “I would say this will probably be the biggest year for contesting the taxes.”
In May, the Department of Finance released its final assessment roll for fiscal years 2021 and 2022. Market value for tax purposes for office dropped 16% across the city, Bloomberg reported, while reductions for retail and hotels were greater than 20%.
Usually, the city uses income and expense statements that commercial property owners are required to file, according to Independent Budget Office Deputy Director George Sweeting. However, there is a years-long lag in reporting times, and if the department had taken that approach, it would have been basing assessments on incomes from 2019, which would have no reflection on the current situation, he said.
“It's not clear exactly what they substituted. But there's talk in city council hearings and other settings about shifting to models that were more dependent on macroeconomic effects,” Sweeting said in an interview. “It will be interesting to see over the next year or two, as more information comes out about exactly how buildings operated in calendar 2020 and calendar 2021, to see how those estimates that finance made hold up.”
He noted it won’t be until next year, when the income statements for 2020 come through, that it will be clear if incomes really did fall to the degree the city's finance department predicted.
But Gilman said most owners are concerned the financial impacts of the crisis will drag on, with the threat of office rents going down, companies shrinking space and tenants who are significantly in arrears being unable to pay back money owed once eviction moratoriums are lifted. These owners are going to bat against tax bills with more vigor than before in order to shore up their finances, he said.
“I have a client that owns 42 different buildings. On an average year, they contest on 10 of the properties,” Gilman said. "But this year, there were 25 or 26 that they submitted for contesting."
Based on building sale prices decreasing alone, he is advocating for the valuation of buildings to fall closer to 30%.
“Speaking to some of these [tax] attorneys, they’ve said that they were going on a hiring spree because they knew the number of people that were going to be contesting is going to increase," he added.
The tax rate for commercial property kept basically steady this week when New York City adopted its budget, Citizens Budget Commission Director of City Studies Ana Champeny said, which means that if an assessed value went down 20%, the tax bill will be down the same amount.
Because bills are due July 1, the delinquency rate won’t be known for some time, she said. But this is new territory for the city to take such a hit on its property tax revenue; the reductions the city gave were higher than most expected, she said.
“The city hasn't seen a year-over-year decline in property tax revenue since, I think, 1998. There is all of this smoothing and stability that's built into the system [that] keeps the property tax steady, even during recessions,” she said. “So this is sort of an unprecedented situation here, where the finance estimates for market value showed such a dramatic decrease that we're seeing both a year-over-year decrease in market and in tax revenue.”
Even if large numbers of property owners are able to have their assessments reduced, Champeny said the city has already built that into its forecast.
“When the pandemic started, they increased their reserves for delinquency because they thought there would be higher and higher payments," she said. "They're trying, I think, to minimize the direct impact to the city's bottom line by being conservative about what revenue they assume they can collect.”
Property taxes are based on values as of Jan. 5 and paid half July 1 and again on Jan. 1. Each year, many owners petition to have their values lowered as the normal course of business.
But late last year, owners and their lawyers were already preparing to go to court if need be in order to get their assessments lowered and their tax bill reduced, said Joel Marcus, an attorney at Marcus & Pollack specializing in tax certiorari, a term that refers to the process in which owners appeal their property assessments.
He told Bisnow in November he was expecting a “battle” to materialize over property taxes in 2021.
“That battle is being fought right now,” he said in an interview this week. "If you own a hotel and your assessment went down 20% to 25%, you're dealing with a situation that is totally inadequate. You were totally closed for like a year, you didn’t earn enough to even pay the real estate tax or to pay your mortgage. You were unable to pay your employees. Twenty-five percent you would consider to be totally inadequate.”
The first step for fighting the tax bill is filing an administrative appeal with the tax commission, Marcus said, then taking the matter to the New York City Law Department and finally to court. The filing of court appeals begins in July, and Marcus said there are already around 25,000 cases to be heard from two or three years ago.
A ruling from just last month may provide some insight as to where things may be going. At the start of June, a state Supreme Court judge found that a Queens hotel had been overvalued by tax assessors for five years, per Bloomberg. The owners of the now-closed Courtyard by Marriott near LaGuardia Airport will now get $11M back from the city after the court found its market value assessment in its last year of operation in 2018 was less than $2M, rather than the city’s finding of more than $25M.
That was before the coronavirus pandemic. Now, hoteliers are in a dire state that is not properly reflected in assessments, said Marcus, who represented the owners of the Courtyard by Marriott.
“[The city’s] view is, ‘We gave you a reduction, so we’re not blind to the problem.’ But I think it is totally inadequate,” Marcus said.
The city and landlords are also at odds about how long-term the damage to property values may be.
Even though restrictions have been lifted and the rapid vaccine rollout has raised confidence about New York City’s recovery prospects, there are still significant anxieties about how much irreparable economic damage has been done to its commercial real estate.
Champeny said there is significant uncertainty around how much values will recover and how much the Department of Finance will reflect that, but the city is already expecting it to be on a long road to recovery.
“The city forecasts for property tax revenue, even in fiscal year 2025, is still below what they collected this year, or fiscal year 2021,” she said. “So they're basically saying for the next four years, we're going to be trying to get back to where we were.”
Manhattan’s office availability rate was at 18.4% in the second quarter, according to new data released by Savills Thursday, a leap from 11.8% over the prior year. Few office workers have returned to their desks, and many companies are looking at hybrid models that could move them to reduce space.
"We’re saying, 'You’re assuming you're going to snap your fingers and it's going to get back to the way it used to be,'" Marcus said. "But we don't believe so. And our clients don't believe so. Because why would they sign a lease with a new retail tenant for less than half the rent of the old tenant if they thought it was going to snap back? [Landlords] are not waiting because they don't think it's going to get better.”