Question of the Month: What are the current development incentives, taxes and real estate values in New York State?

There was a recent newspaper headline which caught my eye which stated 3.4 million people left New York State during the period 2000-2010 for other states. Reportedly, much of the relocation had to do with high taxes. However, during this time there was a population increase in the state. A significant amount of this influx was due to births, low income new residents who will take advantage of the many New York State government handouts such as food stamps, subsidized rents, free medical, etc. Many of these individuals pay little or no income taxes and are an economic burden on the state. Connecticut and Massachusetts probably have a similar story. The reason I bring this issue up is that it directly and indirectly affects the real estate tax burden on commercial, industrial, multifamily, office and other properties in the northeast. I've written a number of articles about various tax abatement programs available for many types of income producing properties that are new or undergoing some type of rehabilitation. A number of these abatements are through industrial development agencies (IDA's) or other quasi governmental agencies. Ironically, there are many politicians who want to decrease or eliminate these development incentives. The IDA's and other entities give tax abatements of many types to new projects. If they didn't, it's likely many projects would not be possible because of high property taxes, sales taxes, demand weaknesses, oversupply and much red tape. The creation of a new project is a great multiplier on the economy. However, many existing competing projects get no abatements and are at a competitive disadvantage. I couldn't help but notice recently, that the historic Hotel Lafayette rehabilitation in Buffalo was just completed. This was reportedly a $42 million project with approximately 105,000 s/f which now consists of a high-end restaurant, luxury hotel rooms and apartments at a cost of $400 per s/f. It's likely there was substantial tax abatements, tax credits and grant money which made the rehabilitation project possible. The new Federal Office Building in Buffalo reportedly cost $137 million or $482.39 per s/f for 284,000 s/f. This reportedly was a "build to suit" and the developer was the GSA. On the other hand, there was the Olympic Towers which reportedly sold recently for $2.5 million. This 180,000 s/f office tower probably suffered because of high real estate taxes, depreciation/obsolescence and sold for a salvage value like price of $13.89 per s/f. The economic obsolescence partially comes from IDA properties and other subsidized property competition; and high real estate taxes. The Olympic Towers was a rehabilitated historic landmark along with a large annex added in 1986. Although the newly rehabilitated Hotel Lafayette is not really competitive with Olympic Towers, it shows that rehabilitated or new properties are feasible at a high cost if they are built by the government (value in use) or a private developer who gets substantial tax breaks and grants. How is an equitable assessed value estimated for similar buildings either at the beginning or at the end of their life cycle throughout the northeast. Having equitable real estate taxes can make or break the viability of a property. In order to estimate an equitable assessment a tax load factor is added to the unadjusted cap rate and the real estate taxes are taken out of the expenses. As an example, if an office building has a net operating income (NOI) of $1 million and the real estate taxes are $700,000, the adjusted NOI is $1.7 million ($1 million + $700,000). If the overall rate is 8.9% and the tax rate is $39 per $1,000 of assessed valuation, the tax load factor is $39/$1,000 is .039 or 3.9%. Thus, the adjusted overall rate is 12.8% or (8.9% + 3.9%). Thus, equitable assessed value is the $1.7 million (adjusted NOI) divided by 12.8% (adjusted overall rate) = $13,281,250 or $1.7 million/12.8%. This value would result in an equitable assessed value of $13,281,250 and an equitable tax burden of $517,968 ($13,281.250 x $39). This would result in an assessment reduction from $17,948,718 to $13,281,250. The reduction of real estate taxes would be from $700,000 to $517,968. Whether it's New York State or the New England region similar principles to estimate equitable real estate tax burdens apply. John Rynne, MAI, SRA is the president and owner of Rynne, Murphy & Associates, Inc., Rochester, N.Y.