Real property tax reduction: Now is the time to consider challenging your assessment

While real estate taxes are inevitable, the amount of tax is not. A proactive and aggressive property tax relief program coupled with a data management program and a skilled real property tax attorney can lead to significant savings and increased profits, especially in the current economic climate. With property taxes often representing anywhere from 20% to 50% of a property's operating expense, commercial and industrial property owners, operators and brokers representing owners would be well served by having the property's real estate tax assessment reviewed on a yearly basis. Although the decrease in the value of certain types of commercial property has slowed, and while there are signs of improvement in the economy, it is unlikely that the job market will bounce back in such a way that commercial real estate fundamentals will quickly turn around. As a prominent analyst put it "the bottom may be coming into sight but there will be no quick return to glory days for the market." Typically, the commercial real estate sector lags behind the national economy by at least six to eight months. Accordingly, the continuing job losses, albeit at a slower rate, will mean further pressure on occupancy and rents. Unlike past downturns, the pressure on occupancy and rents is not driven by construction of new office product but by lack of demand. Office Market The job losses during the present markt are unlike those of the early 2000s when many dot-com companies went bust. This time many big, established companies have shed jobs, including financial institutions. A number of tenants giving up space would drive up vacancy rates while depressing rents. The additional space coming into the market could lengthen market recovery time, as excess space would have to be leased before there is any positive absorption. Apartment Complexes The employment situation may also be a set back for apartment owners and operators. As unemployment rises, including new college graduates who cannot find jobs and are compelled to move in with parents and/or relatives, occupancy and rental rates will be negatively affected. Industrial/Warehouse The employment situation also hurts the industrial factor because employment losses, or even the fear of losing a job, have a negative impact on consumer spending that can translate to industrial facilities being moth-balled or permanently closed. Retail Market Declining retail sales and rising vacancies have tenants scrambling to restructure their leases, often resulting in lower rents. Several major retail chains have closed hundreds of stores resulting in a surplus of available property. While many analysts are predicting that the economy will regain its footing by late 2010 or the first or second quarter of 2011, based on the current situation, many properties are likely over assessed. Since no two real estate markets are identical, a thorough analysis of the property and the local and regional real estate market is useful when determining whether a property is over assessed. There are two ways to value business property for tax assessment purposes: the sales comparison method and the capitalized income method. In accordance with the sales method, valuation is determined by looking to the market place and finding arm's length sales of properties that are similar to the property that is being valued. After making appropriate adjustments for differences in size, location, condition, and other relevant factors, the analysis will indicate an appropriate unit measure of comparison on a dollar per s/f basis. If a property is being offered for sale or purchased for an amount below the assessed value, the property is likely over-assessed. The income capitalization approach produces a value estimate that is based on the market's perception of the relationship between net operating income and value. It is based on the expectation of future benefits. An investor trades a sum of present dollars for the right to receive a stream of future dollars. For tax assessment purposes, the valuation is limited to the net operating income generated by the property, and not the value of any particular business located in the property. Once the net operating income is determined, an appropriate capitalization rate is calculated and the net income is capitalized to determine the present value. The income capitalization approach is often the preferred method of valuation, as it closely reflects the investment decision making process of an investor. Despite the trend in real estate values, tax assessments usually remain the same unless they are challenged in strict accordance with Real Property Tax Law. A challenge to real property assessment begins with filing a grievance. Grievance Day for most towns in NYS is the fourth Tuesday in May, with some notable exceptions such as the cities of Syracuse, Rochester, Yonkers, N.Y.C. and various other towns and municipalities. In these economic times, it would be prudent for commercial and industrial owners to have their assessments reviewed on an annual basis to ensure that the assessment accurately reflects the actual market value of the property. Jon Cooper, Esq., is a senior associate at Gilberti Stinziano Heintz & Smith, P.C., Syracuse, N.Y.