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Judge's Decision Details Analysis Required to Prevail in Property Tax Appeal.

Review by Caleb Whymark

Petitioner Alexandria House a cooperative building on the Upper West Side of Manhattan filed an action in New York State Supreme Court in New York County, (Manhattan), seeking reduction of the real property tax assessment for tax years 2006-2007 and 2007-2008.

The parties stipulated the size of the improvements and that the property valuation was governed by Section 581 of the Real Property Tax Law requiring that condominium and cooperative owned properties be valued as rental buildings and the level of assessment or equalization rate is 45%.

Each party submitted an appraisal as the direct testimony of an expert real estate appraiser. Each appraiser provided estimated income and expenses in order to arrive at a net income for capitalization. The band of investment technique was utilized by both appraisers to estimate a capitalization rate. Each appraiser used a loan to value ration of 75% .

Income Estimates

The petitioner's appraiser relied on eight rental properties to estimate a stabilized rental income. After rents were ascertained for petitioner's comparable properties, adjustments were made for average unit size, utility and property condition. A annual vacancy and collection loss was estimated and deducted from income for each year under review. The effective income per square foot is $15,75 for 2006-2007 and $17.60 for 2007-2008.

The respondents appraiser presented ten rental properties to support the estimated income used in his appraisal report. Individual adjustments were not made to the comparable properties. Instead the appraiser selected rental factors for each year under review based on an array of the results. Since the building was renovated in 1982, the appraiser selected a unit value factor in the higher end of the range. The unsupported estimated was moderated by the subjects small rooms. Actual collected comparable rents were used in this analysis consequently no deductions were made for vacancy and collection losses. The judge gave greater weight to the respondent's income estimate.

The respondents appraiser presented ten rental properties to support the estimated income used in his appraisal report. Individual adjustments were not made to the comparable properties. Instead the appraiser selected rental factors for each year under review based on an array of the results; i.e. median collected rents per square foot. Since the building was renovated in 1982, the appraiser selected a unit value factor in the higher end of the range. The unsupported estimated was moderated by the subjects small rooms. Actual collected comparable rents were used in this analysis consequently no deductions were made for vacancy and collection losses. The effective income per square foot is $16,73 for 2006-2007 and $17.15 for 2007-2008.

The judge gave greater weight to the respondent's estimated income factors and multiplied the values by the stipulated building area of 77,465 square feet to arrive at an effective gross income of $1,265,003.45 for 2006-2007 and $1,328,524.75 for 2007-2008.

Expense Estimates and Resulting Net Income

The appraisers estimated expenses within 1% for the 2006-07 tax year and differed by 5% for 2007-08. The justice found the expense estimates "equally credible" and "entitled to equal weight." The differences were averaged and deducted from the effective gross rents. The resulting net incomes before real estate taxes are $687,710.45 and $719,151.24.

Capitalization of Net Income

The petitioner's appraiser used capitalization rates of 8.0% and 8.2 % while the respondent's appraiser used 7.35% and 7.53%. Petitioner's support included many sources and "collective experience." Competitive investments including "tax sheltered and taxable competing investments". Corporate and municipal bonds, a liquidity influence, and the New York City Rent Guidelines Board of 2007 Mortgage Survey of Multifamily Rent Stabilized Properties in New York City. The justice found the respondent's support more focussed and from recognized sources. Cited in the decision are:

  • Real Estate Research Corporation (RERC)
  • American Council of Life Insurance (ACLI)
  • Korpacz Investor Survey
Finding the respondent's sources more reliable the respondent's capitalization rates were accepted.

Real estate taxes excluded from expenses are later expensed as part of the capitalization rate. The court added an effective tax rate to the base capitalization rate for each tax year to arrive at an overall capitalization rate. Breaking from tradition and long standing appraisal practice the court did not use the rates in effect on the valuation date. Instead the court retrospectively applied actual tax rates paid later in the year. The justice stated, "That the appraisers valued the property as of January 5 is irrelevant to the propriety of using the rate applied to the bill for the year at issue."

Valuation experts may disagree with the court on the application of a post valuation effective tax rate to value some properties and an effective rate available to assessors and the appraisers in January. Though I disagree with the court in regard to application of a post valuation tax rate in calculating the effective tax rate, the court has consistently relied on the most reliable evidence provided in the appraisal reports submitted. The court gave more weight to collected rents or "actual receipts" not requiring adjustments for vacancy and collection losses. Reliance on widely recognized capitalization rate studies to support selection of a rate is sound when no other evidence is available.

Who Prevailed?

So who prevailed? The Petitioner was granted an assessment reduction of $284,885.40 for 2006-07 and $339,443.88 for 2007.08. A copy of the decision in PDF format is available for download. See link below.


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