NY Property Taxes in a COVID/Post-COVD Environment

All segments of the real estate industry in New York have been severely impacted by the COVID-19 pandemic. Whether commercial or residential, there is no segment of the industry that has been spared from the economic downturn due to vacancies, eviction moratoriums, consumer habits or, simply, the new normal of working remotely.

Property owners throughout the state are keenly aware of the hardships experienced since the beginning of the pandemic back in March 2020. While many have had to bear the brunt of financial losses from government-ordered shutdowns, business closures and changed tenant behavior, there is little help in the pipeline in the form of legislation from Albany or local governments as we begin 2021. The harsh reality is that property owners will need to rely on self-help along with the administrative and judicial appeal process through litigation to address the myriad of problems confronting the real estate industry, including excessive property taxes.

A Sector in Distress

Most deeply impacted are those commercial properties in the hospitality and tourism industries. Hotels, theaters, restaurants and those businesses supporting such properties are being shuttered by the hundreds, while issues facing retail have only become more exacerbated from the pre-COVID struggles due to e-commerce and changing consumer habits and attitudes. Current office occupancy is now at an all-time low, and with most employees working remotely, it is unlikely that there will be a return to normalcy for quite some time. Many employers have set June 2021 as the earliest possible return date for their personnel, and many lease renewals are now in question. On the residential side, while certain neighborhoods and parts of the state have been less impacted by the pandemic, some zip codes in New York City have seen a mass exodus. Incomes and collections are down universally, asking rents are down, and the market has changed considerably from where it was a year ago. Co-ops that have historically relied upon their commercial tenancies are now in the position of having to increase maintenance charges to keep pace with rising costs and taxes.

In addition to the burden of the new normal, efforts to achieve meaningful property tax reforms have been derailed by the pandemic due to disappearing municipal revenue streams. To close budget deficits, officials in Albany are currently in deliberations to enact a “pied-a-terre tax” on non-primary residents in New York City who own residential condominiums assessed at $300,000 or more, as well as non-resident co-op shareholders with allocable interests assessed at $300,000 or more. With some estimating an additional $390 million in revenues annually, enactment of the pied-a-terre tax could not come at a worse time for the real estate industry.

Property Tax Appeals

Based upon the challenges expected in the coming year, property owners are advised to grieve their property taxes by filing administrative appeals with the New York City Tax Commission or the county boards in their respective geographical areas. In New York, municipalities with populations of one million or more are considered “special assessing districts” with strict compliance requirements to be eligible for tax review. Administrative review of the facts and circumstances of an individual property owner’s situation is the most important first step in having property taxes reflect the realities of the current market. As we turn the page on 2020, the uncertainty in the market, diminished income, reduced collections and continuing vacancies will be reflected in 2020 year-end financial statements. These facts and circumstances will need to be properly presented to and corroborated before the reviewing agencies to maximize the possibility of property tax relief in the 2021.

Assessing agencies in New York City and throughout the state are simply incapable of reflecting current market conditions due to COVID-19; a lack of manpower, resources and training; and archaic law (Real Property Tax Law) pursuant to which properties are assessed. In New York City, for example, the undertaking of assessing in excess of 1.1 million parcels is something that is not done satisfactorily even under non-pandemic circumstances. New assessments for 2021/22 will be made public on January 15, 2021, and appeals must be filed by March 1, 2021. Assessments will continue to lag behind the realities of the current market because of current assessment practices. Further, it is rare that assessors actually inspect the properties they are assessing, blindly following the workpapers and property cards of the prior year. Municipalities are also under tremendous pressure to maintain the strongest remaining revenue stream and collection mechanisms under their control. Interestingly, in New York City, the mandatory online compliance required Real Property Income and Expense (“RPIE”) forms reflecting 2020 performance will not even be filed until June 2021, so assessments as of the taxable status date of January 5, 2021, will continue to be based upon pre-COVID income and values from calendar year 2019, unless property owners take the necessary steps to bring more current information and corroborating documentation to the attention of those charged with a review of assessed values.

Property Valuation

The primary methodology for valuing property, other than one to three family homes, is the income approach. In cases where property owners can demonstrate substantial diminution in value and diminution in income and income potential, property owners will be able to establish a strong prima facie case for assessment reduction and tax relief. Administrative review at the New York City Tax Commission or at county boards of review throughout the state will be the quickest and surest way to achieve immediate property tax relief. Tax commission settlements can result in adjusted tax bills by as early as the second quarter of the fiscal year, with quarterly or semi-annual payments reduced prospectively. The burden of proof, however, is on the taxpayer to demonstrate a substantive and economic analysis supporting basis reduction in assessment.

It is the stated policy of the New York City Department of Finance to utilize the income approach primarily for valuing properties other than one to three family homes. The formula to establish an economic analysis supporting reduction will involve presenting gross income less expenses capitalized at guideline ratios, based upon the type of property. In 2020 and 2021, and as of the respective taxable status dates for valuation in January, values and incomes will unquestionably be down, expenses will be the same or higher, and capitalization ratios to derive value should be relaxed (i.e., they should be higher), which will result in lower assessments and property taxes. The combination of these three factors will likely sustain the requisite burden of proof for property tax reduction for properties impacted by the pandemic, government shutdowns, and the market generally.

While property owners are hoping for local municipalities and state government to enact temporary relief measures, including grace periods, relaxed interest rates on delinquent payments, pre-payment discounts, relaxed capitalization ratios in valuation and reduced tax rates, it is unlikely that such relief can be anticipated in the coming year. To that end, appearing pro se or retaining tax certiorari counsel for the commencement of administrative and judicial appeals will be the best hope for property owners in New York City and throughout the state of New York, until such time as legislative relief is enacted to address the realities of the current market in the real estate industry.