Fuzzy Math: Property Taxes Haven’t Officially Risen in More Than a Decade. So Why Have Collections Doubled?

reprints


To calculate an assessment for an office building, the city first determines its income, which owners are required to report every September, then plugs that number into a rate of return for the property and deduces the value. Detaching the process from the value of a building as determined by its sale, or the sale of a comparable asset, is not a decision landlords argue with, even though a sale-price-based method would clearly have brought taxes down during the recession when landlords were looking for breaks. Property values during that period plummeted by 40 percent. The flip side of such a system, however, would mean that, as property sale prices have shot up during times of frenzied buying, landlords across the city would have had to suffer the consequences on their tax bills.

“You could have an owner coming in from some far-off place and he just wants to plant his money in a safe haven, and he’s willing to pay a very high price and accept a 2 percent cap rate, but that’s not the value I or another investor might pay,” landlord and developer Edward Minskoff said.

SEE ALSO: Sunday Summary: Save Us, Super Brokers!

While owners generally agree with the rationale of an income-based approach, many criticize certain assumptions the city makes in its process. For instance, city appraisers factor in both market vacancy rates and rents when determining the value of an owner’s empty space, assumptions that often sway value higher.

So if a Midtown building has, say, a 20 percent vacancy rate, the Department of Finance would blend that with the neighborhood’s overall vacancy, which is currently around 10 percent, and arrive at a 15 percent estimate.

Average rents would be used to then determine income from that phantom occupancy.

The valuation process gets more complicated in determining the cap rate for the property, the return a building earns. To calculate this figure, the city weighs a number of factors, including the debt a building may carry, which it constructs from prevailing market lending rates and leverage levels—debt that may or may not correlate with the actual financing on a property. Some landlords say the city has been quick to adopt lower cap rates, which inflate values, as the sales market in Manhattan swiftly recovered in the aftermath of the recession.

“The assessments are a snapshot of cash flow right now, but it often fails to weigh the real financial conditions of the building,” said Michael Lippman, an attorney with the firm Sherman & Gordon who represents major landlords in contesting their property values with the city.

“I think the city makes an effort to get it right,” he added. “It’s a complex process.”

The result has been that property taxes for commercial buildings have risen steadily. Data released by the city and an individual analysis of the tax bills for several major office buildings show that assessments have grown since at least the mid 1990s. During the last 10 years, total collections for commercial properties in the city doubled from $3.87 billion in 2001 to $7.67 billion this year, even though the period includes two recessions.