Manhattan Gets Break:
Union: City Soaking Boroughs on Taxes

By REUVEN BLAU

The Finance Department has abruptly changed the method by which it evaluates residential rental properties for tax purposes, which resulted in shifting the tax burden from affluent areas in Manhattan to the outer boroughs, according to the city Assessors' union.

DAVID MOOG: Outer boroughs get trimmed.

Several days before the tentative tax roll was published in January, all the values estimated by the department's Assessors were switched by Commissioner Martha Stark to a broad Gross Rent Multiplier method, according to David Moog, the president of Assessors Local 1757 of District Council 37.

Bronx, Queens Socked

Mr. Moog and several experts in the hotel tax-assessment field slammed the new system, which initially resulted in the average rental building in The Bronx and Queens receiving increases three times higher than similar properties south of 96th St. in Manhattan, based on a union analysis.

Critics of the method called it overly simplistic and highly problematic because it doesn't take into account the age, location, or operating expenses of each building.

MARTHA STARK: A change in calculations.

"This is bizarre," said Paul J. Korngold, a veteran real-estate attorney. "Gross rent multipliers is a stick-your-finger-in-the-wind formula that brokers usually use for determining a sales price in the neighborhood."

A Finance Department spokesman defended the new evaluation system, calling it more effective.

"Finance values a million properties each year," said Owen Stone in a statement. "We're trying to find ways to value those properties consistently and transparently and fairly. The GIM approach is an income-based approach that produces accurate values and removes the inconsistency associated with varying expense ratios."

Jack I. Freund of the Rent Stabilization Association, which represents 25,000 landlords, said the new method would adversely affect affordable-housing buildings. "It really makes so little sense that I'm hard-pressed to figure out why they would do this," he remarked during a Feb. 20 phone interview.

Wrongly Penalized

He added, "Our concern is that just simply looking at Gross Rent Multiplier without looking at operating expenses is going to penalize low-income buildings that have high operating expenses and low profits."

For instance, two buildings that generated an identical $100,000 in rental income could have widely different operating expenses, with older properties in the outer boroughs likely having added costs. "But under this system, they get assessed the same," Mr. Freund noted. "That's certainly not an equitable way of valuing property."

The new method also created confusion when the Finance Department used two different Gross Rent Multiplier calculations for the tentative assessments for all apartments. The Law Department just ordered Finance to recalculate all the evaluations for rental apartments, co-ops and condos.

State law mandates that condominiums and co-ops be appreciated as if they are rental buildings. But Finance initially used two different methodologies to estimate both those types of properties.

'What's Their Formula?'

Finance has for years renounced determining tax evaluations based on sales prices. The multiplier system, however, is inherently a calculation derived from total rent-roll figures. "So where are they getting a formula?" Mr. Korngold asked.

There are no city or state laws that require the DOF to detail the exact multiplier formula that it is using to generate new assessments, despite the wild fluctuations in various tax obligations that have been generated by the new method.

Richard D. Williams, a managing director of Hospitality Valuation Services (HVS) Global Hospitality Services, also questioned the new system. "It's more like a down-and-dirty cocktail napkin calculation," said the Colorado-based member of the Appraisal Institute. "It's not as accurate as a true income approach where you take into consideration the true revenue and expense related to owning the property."

In the past, Finance utilized an income approach, a method widely accepted throughout the country. That system requires an analysis of each building's income and expenses. Assessors would then calculate a rate of return based on mortgage rates, equity returns and appreciation, as well as the tax rate.

'Ignores Key Facts'

Under that method, the building's location, age, condition, and other factors were also analyzed to adjust the overall rate of return. "Utilizing the Gross Rent Multiplier ignores all the basic facts that influence value," Mr. Moog contended.

Location is also a major factor in estimating a building's value, assessment experts said. "A building may be worth a million dollars, but if you move it to The Bronx, the building is only worth half as much," said Mr. Korngold. "This year the Department of Finance announced that they are not going to use that method, either. Based on what?"

The new method was put in place just before the assessment roll - which consists of all the properties within the five boroughs that are subject to real-estate taxes - was completed in January.

The multiplier system is not without its defenders in the real-estate industry. Steve Spinola, the president of the Real Estate Board of New York, has advocated basing assessments for residential properties on a percentage of the gross rent they produce.

'Cleaner But Wrong Nos.'

"We believe that it is cleaner, clearer and more transparent," he asserted during a Feb. 21 phone interview. "But we disagree with the [multiplier] numbers that they are using, because people are paying up to 30 percent of their gross income in real-estate taxes. We think the numbers are still too high."

He initially detailed that stance during a City Council hearing shortly after a 2002 scandal in which a former Assessor over more than three decades made payoffs to employees to gain reduced valuations for his clients' properties, thus saving them millions in real-estate taxes.

Mr. Spinola contended that the new method removed much of the discretion of the Assessors, and thus reduced the chance of corruption. "If it's a transparent system, then it becomes very difficult for anyone to manipulate that system," he said last week. "It also means that it's less likely that property owners will challenge the assessment."

Glenn Newman, President of the New York City Tax Commission, said that the panel will review appeals from building owners based on the prior assessment methodology, which would seemingly discount the new system. "If they want to make an argument based on a different methodology, we will consider that argument," he said.

'It's Not a Science'

The commission handled a total of 41,898 protests last year, up from the 39,783 in 2006. "We don't have a number on how many applications we have this year," he added.

Mr. Spinola maintained that the commission would "come up with its own complicated way" to evaluate what properties are worth. "It's not a very neat science," he added. "There's a lot of subjective."

Mr. Moog contended that staff cuts have compounded the problem. Personnel reductions made during the Dinkins administration left the Assessors stretched too thin to inspect all the properties they placed valuations on. That also made it difficult to detect any irregularities that were produced by payoffs to dishonest Assessors.

"We are the most underfunded assessment office in the entire country," Mr. Moog asserted last week. "We have fewer Assessors per dollar value in the entire country. We are down to 120. At one time before 2001 we had over 200 and in 1993 we had over 500 Assessors."

Way to Cut Payroll?

Some have suggested that the new method is a way for the Finance Department to further decrease staff. "They don't need Assessors if this is the approach they are going to take," said one source.

Local 1757 has been urging elected officials for the past several years to hold oversight hearings concerning the equity of the assessment process, to no avail. The issue has been compared by many to a political third rail, since any changes could lead to tax increases that would greatly anger the affected voters.

Mr. Spinola discounted the union's analysis that Manhattan rental buildings were getting a larger tax break based on the new system. "When you look at what different categories of properties are paying, there's no question that rental apartment buildings are ahead," he remarked. "Clearly single-family homes and older condos are paying way below what their true values are."

Office buildings and high-rise residential apartment buildings, he added, are clearly carrying the overwhelming majority of the city's real-estate tax burden. "Right now, as a result of the recent changes that Finance made, people are back to paying up to 30 percent of their gross income on taxes," he said.

Finance switched to the multiplier method to assess hotels in 2006, which resulted in multi-million-dollar reductions in tax obligations for multiple hotels. That move was also assailed by national tax valuation experts. A City Comptroller's investigation of the issue concluded, however, that the simplified approach was "appropriate."

Had Cited Doctoroff

City Assessors who were concerned by the drastic decreases at the time complained to former Assistant Finance Commissioner Dara Ottley-Brown, who reportedly responded during three separate meetings that Deputy Mayor Daniel L. Doctoroff had specifically requested that the department change the methodology used for assessing hotels.

The Finance Department has categorically denied that Mr. Doctoroff had anything to do with the decision to change the valuation methods. The department stressed that the overall hotel valuations that year were up 8.3 percent, and that only 10 percent of the hotels examined had their valuations decreased.

Ms. Ottley-Brown was later named as a Commissioner of the city Board of Standards and Appeals, leading some insiders to suggest she was transferred due to her comments, which Finance vehemently denied.

Mr. Korngold speculated that the Finance Department was attempting to devise a more uniform and straightforward system. "I think the goal of the Department of Finance is to try to make this as scientific as possible, but appraising property is an art, not a science; you just can't put a number on it," he said. "And a Gross Rent Multiplier is clearly not a proper way to assess properties."