If you own commercial property impacted by COVID, now may be the time to challenge your property tax assessment.

If you own commercial property impacted by COVID, now may be the time to challenge your property tax assessment. - Jon Pierowicz - Business Law - Rupp Baase - People at Law

If you are an owner of a property which saw a significant decrease in net operating income in 2020 and didn’t see a commensurate decrease in your property’s assessed value, you may want to consider challenging your commercial property tax assessment. More specifically, if your property is a hotel, restaurant, or retail location, it’s even more likely that you could successfully challenge your assessment and lower your property taxes.

What business owners should know:

Municipalities in New York State are required to value a property for property tax purposes in one of three ways: Income Approach, Comparable Sales Approach or the Cost Approach

The Income Approach is the preferred method of valuation for income producing properties such as apartment buildings with four or more units, office buildings, or parcels containing restaurants or retail locations.

For those properties where the income approach is used, a parcel’s property taxes are based on the fair market value of a property, which is obtained by subtracting the expenses of a property from the income produced by that property, and dividing the resulting figure by an appropriate capitalization rate. Matter of Board of Mgrs. of French Oaks Condominium v Town of Amherst, 23 N.Y.3d 168,171-73 (2014).

Taxable Value = (Income Generated by Property – Expenses of Property[1]) / Cap Rate

Put simply, the higher a commercial property’s net operating income, the higher its assessed value, and the higher its property taxes. Conversely, if a commercial property, for example, a hotel, restaurant, or retail location, sees a decrease in operating revenue, this should, in theory, result in generally lower property taxes. There are other factors at play, but this is a good general conceptual framework.

Despite a COVID-related drop in a commercial property’s net operating income, it’s unlikely to see a significant drop in assessed value and lower property taxes unless an owner actively challenges the assessment to compel the municipality to value it accurately. The COVID-19 crisis has put municipalities under intense fiscal stress as sales tax receipts have cratered[2] and funding from New York State is reduced. To help plug this fiscal hole, cities and towns will rely even more heavily on property taxes to provide some semblance of stability to their budgets. Municipalities may keep assessments of commercial properties and apartment buildings level over the next three years in the hopes that busy owners don’t realize that a decrease in their net operating income should often result in a decrease in the assessed taxable value of the property. In our analysis of Buffalo’s 2021 assessment, this appears to be what the city government has done despite the impact of COVID on the bottom line of many businesses and properties.

For those property owners in the City of Buffalo, your assessment challenge will need to be submitted by December 31, 2020. For property in most other cities and towns, owners should plan on initiating a challenge in May, though always consult with an attorney or your local assessor’s office to confirm deadlines.

Rupp Pfalzgraf is dedicated to guiding New York State business owners through this process. If you are considering a commercial property tax assessment challenge and have questions you can email us with your property’s address to receive a quick evaluation of your chances of lowering your upcoming property taxes.

[1] Debt service and property taxes paid should not be included in the calculation of expenses.

[2] https://ibo.nyc.ny.us/iboreports/covid-19-toll-on-the-local-economy-a-preliminary-estimate-of-job-losses-and-tax-revenue-declines-april-2020.html

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