Real estate tax challenges: More about value, less about taxes - by Robert Renda and Christopher Terrell

 

 

In New York state, especially on Long Island, real estate taxes are often among the largest costs associated with owning commercial real estate. Consequently, it is common for commercial property owners to file “real estate tax challenges” to reduce their taxes. However, the phrase “real estate tax challenge” can confuse property owners as to what is being challenged: not the tax itself, but the property’s value for real estate tax purposes.

Each property in New York State has an assessed value set by the local assessor’s office.  The assessed value reflects a percentage of the property’s fair market value. Real estate taxes are directly tied to the assessed value: the higher the assessed value, the higher the taxes. Accordingly, the goal of a real estate tax challenge is to reduce the property’s assessed value, thereby lowering the real estate taxes.

As the value of the property is the main issue in a real estate tax challenge, it is important to understand how commercial properties are valued in this context. There are generally three ways to value property in a real estate tax challenge: the sales comparison approach, the income capitalization approach, and the cost approach. For commercial properties, the commonly used valuation approach is the income capitalization approach. Under this approach, the property’s value is largely determined by the income the property produces or can produce.

The first step in the income capitalization approach is to determine the property’s potential gross income. This is typically accomplished by analyzing market rents of comparable properties. If the subject property is leased to a tenant or multiple tenants, the rent being received is relevant. After determining the potential gross income, the next step is to deduct expected vacancy and collection losses to arrive at effective gross income. The analysis then shifts to deducting operating expenses.  These expenses can include items such as maintenance, repairs, reserves for replacements, landscaping, security, management fees, snow removal, and utilities.  Commercial property owners are often surprised that real estate taxes are not treated as an operating expense. Instead, real estate taxes are reflected by adding a tax factor to the capitalization rate, often called an equalized tax rate or tax load factor. The same equalized tax rate is generally applied to all properties within the same taxing jurisdiction. 

After deducting operating expenses from effective gross income, the result is the net operating income (NOI). The NOI is then capitalized using the loaded, tax-adjusted capitalization rate to determine the property’s value. Ideally, that value is lower than the property’s assessed value, resulting in reduced real estate taxes.

The above is a basic explanation of one valuation approach used in a real estate tax challenge. The process can be complex: the rules are technical, the valuation approaches are nuanced, and the stakes are high. Commercial property owners should consult a knowledgeable tax certiorari attorney to help maximize real estate tax refunds and savings.

Robert Renda is a partner and a member of the Forchelli Deegan Terrana LLP’s tax certiorari practice group, and Christopher Terrell is a student at Touro Law Center, Central Islip, N.Y. and a 2026 summer law clerk at Forchelli Deegan Terrana LLP, Uniondale, N.Y.