Property tax bills significantly affect property owners and landlords and often represent one of the largest expenses for commercial real estate owners. Furthermore, real estate taxes may be a major factor in leasing negotiations since they can be passed to commercial tenants as part of escalation calculations. Therefore, it is essential to consider potential ways to reduce real estate taxes and seek advice regarding available tax exemption programs.
States vary in how they levy property taxes and different taxing jurisdictions across the country have their own rules for commercial property tax appeals. It is important to become familiar with the appraisal methodology affecting property taxes, valuation criteria, and the property tax appeal process. It is also beneficial to identify other tax saving opportunities including available discounts offered by some jurisdictions as incentive for early payments.
Under state and local law, property owners and other parties with legal standing have the right to seek a reduction in the amount of a property’s assessed value which can lead to lower real estate taxes. Other common challenges are based on eligibility for a full or partial exemption of taxes.
Since the appeal process may be complex and often may have strict deadlines, it can be beneficial to partner with an accountant or other property tax expert to obtain a favorable outcome and successful tax savings. In some cases, financial statements for income-producing properties must be, by law, accompanied by an accountant’s certification.
New York City is one of the places in the United States with the highest real estate taxes. For taxation purposes, all real estate parcels in NYC are divided into four classes. Class one consists of primarily one, two, and three family homes and certain condominiums of up to three stories. All other residential properties with more than three units are placed in class two. Utility properties are in class three and all other nonresidential properties are in class four. For the class one properties and certain small class two properties having ten or fewer units, annual assessment increases are limited by law. For other properties, the amount of a property’s assessed value is a percentage, known as the assessment ratio, of the property’s market value.
For every parcel of property, each year the New York City Department of Finance calculates an assessed value which is a function of that property’s tax class designation, assessment ratio, market value, and eligibility for exemption. The tentative assessment roll is published in January for the fiscal year beginning the following July 1st and these tentative assessed values are subject to modification until the final assessment roll is determined by the Department of Finance around May 25th. New York City’s Tax Commission is an independent forum for administrative review of real property tax assessments set by the Department of Finance.
Owners of real property in New York City may contest the assessed value by filing appropriate applications with the Tax Commission. The tax appeal, known as a “Certiorari” or “Tax Cert”, usually involves consulting with an accountant or legal counsel. One of the most common forms in Certiorari filings is form TC201 used to report income and expenses from the operation of rental property such as a multi-tenant commercial building or an apartment building. If the tentative actual assessment is above $999,999 and income exceeds $100,000, the TC201 must be accompanied by form TC309, which is signed by an independent certified public accountant who conducts an audit of the applicant’s records.
Form TC201 is prepared in conformity with the requirements of the Tax Commission of New York City and reports only income and actual expenses related to the operation and maintenance of the property, omitting certain items such as interest, capital costs, and uncollectible accounts receivable originating in a previous year. Income and expenses must be properly itemized and rents should be identified by type. Rental income cannot be reported on the straight-line basis over the terms of the leases as under Accounting Standards Codification 840, but on the basis of actual lease payments. Failure to correctly present all items disqualifies the application from review.
Specific circumstances, such as an operating loss, more than 15% increase in vacancy, change in operating expenses of 15% or above, decrease in gross income exceeding 10%, and continued vacancy exceeding 15% or more, require substantiation by providing additional details. Even when substantiation is not mandatory, applicants should strengthen their applications by attaching supplemental information. All related party expenses must be disclosed stating the nature, category, and amounts of the expenses. However, services or goods provided by related parties for which no charge was made may be disclosed and a fair market value estimated. For example, an owner of a property may report a related party management fee representing 5% of rents collected during the year.
While generally amortization and depreciation of fixed assets is not allowed, amortization of common area improvements is permitted when accompanied by the appropriate detailed amortization schedule. Some examples of common area improvements involve replacements of existing building components such as boilers, roofs, elevators, residential kitchen appliances and cabinets and installation of safety and health systems such as brick pointing, fire safety systems, and environmental remediation.
Other allowed amortization includes amortization of broker commissions and legal fees incurred to lease space to tenants over the term of their leases, amortization of tenant improvements, and certain lease buyout costs.
Some non-recurring items, such as fees paid to tenants to terminate their leases before the expiration date, should be specified and reflected separately.
Given the complexity of the Certiorari filings, deadlines, reporting differences between requirements of the Tax Commission and income tax basis or GAAP recording, it is important to consult your Withum professional to assist in the process.
Author:Alicia Mynarska, CPA, Senior Manager, Real Estate Services Team Member | [email protected]
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