Long Island Ask The Experts: The importance of market value and timing in commercial property tax cases - by Sean Cronin & Brad Cronin

Commercial real estate has changed dramatically over the past several years. Inflation, rising operating expenses, elevated borrowing costs, changing occupancy patterns and increased investment risk have altered the economics of owning commercial property.

Yet property assessments do not always change as quickly as the market they are intended to reflect. When assessments fail to account for these changing conditions, property owners may be paying taxes based on values that no longer reflect economic reality.

The New York State Department of Taxation and Finance’s most recent market value survey underscores the issue. Only 55.9% of assessing units statewide had assessment rolls meeting the State’s standards for uniformity, down considerably from a peak of more than 80% in 2004. For commercial property owners, that should be a reason to take a closer look at their assessments.

New York’s property tax system is highly decentralized. Municipalities employ different assessment practices, reassessment schedules and levels of assessment. On Long Island alone, Nassau County operates under its own classified assessment system, while Suffolk County contains ten separate town assessing jurisdictions.

At the same time, determining the market value of commercial real estate has become increasingly complicated.

Inflation has increased insurance, utilities, repairs, maintenance, construction and labor costs. Higher borrowing costs and tighter lending standards have increased the cost and risk associated with financing commercial real estate. These factors can reduce net operating income, increase investment risk and ultimately place downward pressure on property values.

Capitalization rates can compound that pressure. For income-producing property, net operating income is divided by an appropriate capitalization rate to arrive at an indication of value. As capitalization rates increase, indicated values decrease, assuming income remains constant.

Capitalization rates are influenced by interest rates, financing availability, inflation expectations, alternative investment returns and property-specific risk. As those factors change, the capitalization rate appropriate for a property may change as well. These distinctions matter for property tax purposes.

A property may maintain its rental income while experiencing substantial increases in insurance, utilities, payroll and maintenance costs. Its net operating income may decline as a result. If that decline occurs while investors are also demanding a higher capitalization rate because of increased risk, the effect on value can be magnified. An assessment based upon historical income, expenses or capitalization rates may therefore substantially overstate current value and the resulting tax burden.

As we approach 2027, property owners should also pay close attention to another potential source of excessive taxation: the taxable status date.

An assessment must reflect the condition and status of the property as of the applicable taxable status date. This is particularly important for vacant or underutilized properties and properties undergoing redevelopment.

Future development should not be taxed as though it already exists. A parcel seeking approvals for development remains undeveloped on taxable status date if construction has not commenced. Similarly, a partially completed project should be valued based upon its actual condition and not as though the completed building already exists and is generating stabilized income.

The applicable date varies by jurisdiction. On Long Island, Nassau County’s taxable status date is January 2, while Suffolk County generally uses March 1.

Owners contemplating construction, demolition, redevelopment or significant changes in occupancy should document the property’s condition as of the applicable date. Photographs, construction records, rent rolls, vacancy information and other contemporaneous records can provide important evidence supporting the proper assessment.

Commercial property owners should review their assessments against the actual economics, condition and risk profile of their properties. Vacancy, concessions, arrears, rising operating expenses, insurance costs, capital expenditures, tenant rollover and capitalization rates can all affect value. So can the precise condition and status of a property on the taxable status date.

When these realities are not adequately reflected, the result may be an overstated assessment and an unnecessarily high property tax burden.

In today’s changing commercial real estate market, reviewing an assessment is not simply about challenging a number. It is about ensuring that the value being taxed reflects the property that actually exists, the income it can actually generate and the risks investors actually face. When the assessment fails to reflect those realities, there may be a meaningful opportunity to reduce both the assessment and the property taxes that follow.

Brad Cronin, Esq., and Sean Cronin, Esq., are partners at Cronin & Cronin Law Firm, PLLC, Mineola, N.Y.