Introduction

Every real estate professional has been confronted with one basic problem – the marketability (and mortgagability) of real estate. Real estate taxes do not represent “accounting money.” This is real money and it represents real cash flow.

Real estate taxes can be so high that they exceed even the carrying charges on the mortgage, especially in today’s current low interest rate conditions. What makes such taxes so troublesome to the real estate professional is that while they severely impair marketability, leasability and mortgagability, they add northing to the value of the property. Thus, even if mortgage and maintenance payments or environmental remediation costs are high, the incurring of these expenses add to the property or the owner’s equity in one fashion or the other. There is, however, no virtue in paying high real estate taxes. What, if anything, can the real estate professional do to deal with suffocatingly high taxes?

The answer is simple. Specific procedures can be followed to preserve the rights of the property owner (or whoever has an interest in the property) to reduce taxes and, in many instances, achieve a substantial refund for prior tax years. Reduction of real estate taxes can obviously make a property viable, but this article does not seek to either give legal advice or discuss the legalisms of each of the different procedures throughout the northeast region. Rather, its purpose is to stress the importance of making the real estate tax appeal an essential item in the professional’s arsenal.

Procedures are available in every state. Whatever state the property is located in, an appeal should not be attempted without the assistance of a professional who is fully familiar with the procedures involved. The procedures are time sensitive. Unless the appeal is filed within a specific period of time, rights are forfeited.

We cannot emphasize too strongly that a tax appeal is a matter which should not be “put off” to another day with the feeling that perhaps it can be filed at any time and the situation corrected. In most of the taxing jurisdictions throughout New York State, you typically have only a three or a four-week window in each and every year in which to file the necessary grievance and / or judicial proceeding. Failure to file will result in a complete loss of your rights for that tax year and there is no way that this error can be corrected.

In New York State, property is frequently not assessed at 100% of full value. Most jurisdictions assess at a fraction of full value, which is called “ratio.” In fact, in Nassau County, the “ratio” (depending on the type of property) is well below 1%. Although the determination of ratio is complicated, suffice to say that, as a practical matter, the applicable ratio for each taxing jurisdiction is determined by the New York State Office of Real Property Services (previously State Board of Equalization and Assessment).

Over the last 30 years, the courts have established certain standards for the valuation of office and industrial type properties. The cost approach is rarely, if ever, used, although construction costs of recently constructed properties are deemed good evidence of value. The income approach is generally adopted – even when the property is owner-occupied. In the latter instance, the courts will arrive at an “economic rental” based on expert evidence and apply an income approach capitalized into fair market value.

Use of the market approach (i.e., whole to whole comparables) is permissible and, in fact, has been utilized by some courts in cases involving large industrials; but is not often adopted. If, however, the subject property is purchased recently in an arms-length transaction, the courts will view the sales price as substantial evidence of full market value.

The procedural process in the State of New York is governed by the Real Property Tax Law (RPTL). There is a limited filing period in each and every year in which to file an administrative grievance to review the assessment set by the local assessor and then a specific period of time in which to file a judicial petition where (which is usually the case) the assessor does not satisfactorily reduce the assessment in response to the administrative grievance. The filing period is not uniform in New York and varies in each taxing jurisdiction. Failure to file on time is jurisdictional and the courts do not excuse late filing.

Any person who is a “taxpayer” has a right to file. This includes the owner even if all the taxes are being paid by a tenant. A tenant, who is responsible for the payment of taxes and has a specific right under the lease to do so, can file and pursue a tax appeal. This, however, is a broad statement. In some recent decisions, New York has limited the right of a tenant to bring these proceedings and recognized only the right of a tenant having a substantial portion of the tax liability. The first place to look is the lease. The lease will usually set out – especially for a large square footage tenant – the right of a tenant to bring a proceeding or challenge the assessment.

A mortgagee has a conditional right to file. Where the property is in distress (i.e., foreclosure), the mortgagee would have standing to bring tax review proceedings. Therefore, as a general rule, a mortgagee will be deemed to have standing where the mortgagee has taken possession or assumed management, of if taxes are unpaid by the owner and paid by the mortgagee. A judgment of foreclosure, the commencement of a foreclosure action, or where the mortgagor has assigned its right to file to the mortgagee will also confer standing.

Property in bankruptcy presents a special situation. Trustees in bankruptcy have the right to file proceedings. These proceedings can be heard either in Bankruptcy Court or the state court. Any settlement must be approved by the Bankruptcy Court, as well as retention of counsel and counsel’s fee.

The time involved to bring a matter to a successful conclusion varies in each jurisdiction.

Most cases will typically be settled before hearing and / or trial. In this respect, a tax appeal really differs very little from any legal action such as negligence or breach of contract action in which cases are frequently settled long before they reach the “courthouse steps,” and almost all cases are settled by the time they go up the “courthouse steps.”

Should the case proceed to trial, appraisals will be required and, perhaps, depending on the type of property, engineering reports and other types of expert reports as well (i.e., environmental, planning, etc.).

You have, of course, the typical appellate process, it is not unusual for a case after decision to be settled between the parties. Because of the enormous volume of appeals filed, only a small number ever reach trial and even fewer reach the appellate process.

New Jersey, Connecticut, Massachusetts and Pennsylvania also have substantial property taxes. Again, the systems are different; but one rule can be applied across all four states is that there is a specific filing period which must be followed strictly. Should you fail to file inside the filing periods for these various jurisdictions, you will lose your right of appeal for that tax year. As in New York, the filing periods actually vary in each taxing jurisdiction. This is in contrast to New Jersey where the filing period across the state is no later than April 1. Thus, anybody involved in real estate who is interested in bringing a real estate tax appeal must confer with a local expert in the tax appeal field. Because of the strict procedural requirements as well as the fact that many of the appeals will be heard in a court setting, it’s an invitation to disaster to engage in do-it-yourself appeals in any of these states.

Valuation principals – – income, market and cost approaches – – are different in each state. As with any jurisdiction, the tribunals hearing these appeals have certain tendencies and sympathies for one approach over another. You cannot know this unless you get a local professional – usually a lawyer – to guide you.