New York City Real Estate Taxes & Forecasting Cash Flow

By James R. MacCrate, MAI, CRE, ASA 

Introduction 

The local real property tax burden in New York City has been increasing constantly and represents a large percentage of the operating expenses associated with apartment buildings, office properties and other commercial properties.  Even though commercial real property values have fallen more than 20% or 30% from the peak in 2007, the real property tax on a given property may have increased more 30% because of the overall decline in city revenues to finance local government.  Real estate appraisers must use extreme caution in accurately forecasting real estate taxes because it has a direct impact on the future benefits derived from real property ownership which determines market value.

 

Real property taxes are intended to pay for desirable services that make ownership in a given locale more desirable.  When the real property tax burden becomes excessive it can have a detrimental impact on the demand for commercial buildings because the tenants cannot afford to pay the increased expense during a downturn in the economy because their revenues are falling.  Therefore, it is imperative for real property appraisers to analyze the changes in the actual real property assessment, the transitional assessment, the real estate tax rate, and the overall changes in real property taxes.  Two identical properties in New York City can have extremely different real estate taxes because of the procedures that have been followed in New York City over the years.

 

Recent Examples 

The following examples provide an indication of the changes that have actually occurred on three properties located in Manhattan.  They clearly indicate how volatile real estate taxes can be.  The first chart indicates the change in the actual real property assessment and the transitional assessment for a small elevator office property.

 

The next chart summarizes the changes in the real estate tax rates and taxes for the same office property.

Mixed-Use Property 

The following chart indicates the change in the actual real property assessment and the transitional assessment for a small mixed-use property.

The next chart summarizes the changes in the real estate tax rates and taxes for the same mixed-use property.

 Residential Property with Retail on the First Floor

Now moving on to a small walk-up, 14-unit multi-family dwelling with retail on the first floor, the following chart indicates the change in the actual real property assessment and the transitional assessment.

The next chart summarizes the changes in the real estate tax rates and taxes for the same 14 unit, multi-family dwelling with retail space on the first floor.

Overall, it is not a pretty picture when the incomes of the residents are stable or falling and the retail tenant has experienced difficulties since 2008.  Retail tenants are having difficulty paying the expense pass-throughs.  This is also not very good for the real property owner who cannot increase rents and the mortgage lender who hopes to get paid back.

 

Conclusion 

In summary, basing the real estate taxes on tax comparables will be difficult to apply because the transitional assessments, upon which the real property taxes are based, differ.  The real estate taxes as a percentage of gross or effective gross income will also differ.  The forecast of annual expenses is critical in the appraisal process and essential in the income approach.  Current and historical expenses must be analyzed carefully because they provide a guide to estimating future expenses, including real estate taxes. Comparative units and over-all percentage estimates for expenses are helpful, but beware of what has taken place in the past.

 

NOTE: THE TAX RATE FOR THE NEXT TAXABLE YEAR (2011-2012) HAS NOT BEEN ESTIMATED.  THE TAX RATE FOR THE PREVIOUS YEAR(2010-2011) WAS APPLIED.  DON’T BE SURPRISED TO SEE THE TAX RATE INCREASE.

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About Jim MacCrate

Real estate appraiser and valuation consultant for more than 30 years specializing in reviewing real estate appraisals, risk management and quality control.
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