Northeast Real Estate Business magazine covers the multifamily, retail, office, healthcare, industrial and hospitality sectors in the Northeast United States.
Issue link: https://northeastrealestatebusiness.epubxp.com/i/756270
62 • November/December 2016 • Northeast Real Estate Business www.REBusinessOnline.com SUPERSTORM SANDY'S IMPACT ON PROPERTY TAXES Mistaking rehabilitation for new construction, assessors inflate post-superstorm tax assessments. By Jason M. Penighetti, Esq. and Ryan C. Hild, Esq. F our years have passed since Su- perstorm Sandy slammed the East Coast and crippled the Northeast. The overwhelming major- ity of media coverage centered on the devastation suffered by residential properties, paying little attention to the tens of thousands of commercial property owners who suffered equally historic destruction. The rebuilding process has been a feast for local tax assessors, who have increased property assessments throughout these Sandy-stricken areas based on the misguided opinion that rehabilitated commercial properties should be valued as newly construct- ed buildings, ignoring the financial re- alities and stigma attached to "Sandy properties." The post-Sandy rebuilding process has taken years, requiring commercial property owners to overcome insur- ance claim nightmares, bureaucratic red tape, and the massive exodus of tenants who either lost their business- es or relocated as a result of the storm. Too often, local tax assessors ignored the hardships suffered by these prop- erty owners, taking advantage of the reconstruction by increasing assess- ments well above pre-Sandy values to increase their tax base. Fortunately, the laws of each state allow landlords or property owners to reduce unfairly increased property tax assessments by filing a commercial tax appeal. These appeals offer the owner or the own- er's representative the opportunity to prove that the property is worth less than its current taxable value. Whether that tax-reduc- tion opportunity occurs at an admin- istrative hearing, through negotiations or in the courtroom, taxpayers are best served by seeking the expertise of an attorney experienced in navigating the appeals process and the valuation of commercial properties. Proper Valuation vs. Unfair Increases Traditional methods to valuing commercial real estate for property taxation include the sales-comparison, cost, and income capitalization ap- proaches. Sales comparison typically relies upon arms-length sales data. Unfortunately, there is very little arms- length transaction data in Sandy-rav- aged areas because the market has been flooded with sales of distressed prop- erties. The cost ap- proach should only be applied when valuing new con- struction or special- ty properties. When tax asses- sors value commercial buildings as in- come-producing properties, they capi- talize the subject's net income stream, or if owner-occupied, the income it would generate if leased. Appraisal professionals and the courts agree that this income-capitalization approach is the preferred method of valuation at a commercial tax appeal. Nevertheless, local tax assessors have been leaning on the cost ap- proach when valuing post-Sandy re- habilitated retail properties. These as- sessors mistakenly perceive a property owner's rehabilitation or reconstruc- tion work as equivalent to a capital improvement or new construction, at the same time ignoring the economic realities that these property owners faced as a result of the storm. More specifically, the cost approach ignores increased expenses, extended periods of vacancy and the difficulty that land- lords continue to face in luring ten- ants back to properties destroyed by the storm. This unfortunate valuation practice has inflated tax assessments and created unfair tax burdens. Hidden Costs Linger Sandy's impact runs deeper than brick and mortar reconstruction. Cleanup, rehabilitation and linger- ing stigma have forced landlords to contend with increased expenses and lengthy vacancies. The stigma that fol- lows a "Sandy property" is similar to that attached to cars sold in New Or- leans after Hurricane Katrina, engen- dering the burdensome label of "Ka- trina cars." Like suspicious car buyers in Ka- trina's wake, prospective tenants ei- ther ran for the hills or demanded low rents with short-term leases after learning that a property was ravaged by Sandy. The fear of the unknown resulted in tenants searching for what they perceived as less risky locations further inland. In addition to disproportionately high vacancies, Sandy-stricken prop- erty owners have had to contend with significantly increased expenses. In- surance is one example. Not only have premiums skyrocketed due to the per- ceived risk of owning property near Sandy's point of impact, but the Fed- eral Emergency Management Agency has issued new flood zone maps that expand many flood zones inland. Flood zone boundaries have com- pelled landlords to purchase flood in- surance in areas that are relatively far from the shore, regardless of whether their property incurred damage from the storm. Property owners typically bore the costs to rehabilitate flooded and de- stroyed properties, because many insurance companies exclude wind or hurricane damage from coverage. Other properties sustained damages in excess of policy limits. Unfortunate- ly, many owners lacked the necessary funds to rehabilitate, leaving entire shopping centers abandoned. Property owners who were lucky enough to have full coverage still had to deal with empty buildings and high carrying costs for many months dur- ing ongoing construction. Taxpayers Fight Back The key to a successful property tax appeal is to arrive armed with data supporting the argument that the sub- ject property is worth less than its as- sessed, taxable value. For commercial property, the owner or their repre- sentative should analyze the subject's income and expense history, together with market data of similar proper- ties in the area. For a Sandy property, this analysis should concentrate on the actual economic harm suffered as a re- sult of Sandy and its aftermath. In order to do this, prior to filing a property tax challenge, the taxpayer's representative should review copies of the leases, rent rolls and income and ex- pense data of the subject from the last five years. Assuming the asset suffered major vacancies, the property owner's representative must be prepared to discuss and produce documentation or an affidavit attesting to the hard- ships faced in trying to rent the prop- erty and overcome the stigma associ- ated with marketing Sandy-stricken space. In addition, the owner must be prepared to produce and discuss all in- surance claims, including awards and denials, and provide an accounting of all out-of-pocket costs associated with the property's rehabilitation. A carefully prepared and document- ed presentation of the facts offers the owner a real possibility to avoid un- fairly high property tax assessments on these Sandy-impaired properties. Jason Penighetti and Ryan Hild are attorneys at the Mineola, N.Y., law firm of Koeppel Martone & Leistman LLP, the New York State member (excluding New York City) of American Property Tax Counsel (APTC). 405 E. Marsh Lane, Suite 1 Newport, DE 19804 Phone: (302) 323-9300 www.Har veyHanna.com DISTRIBUTION FACILITY AVAILABLE Twin Spans Business Park 9,651 sq. ft. of Office Space 62 Overhead Doors Available for Lease Facility offers immediate access to 1-95, 1-295, 1-495, and The DE Memorial Bridge. 350 Anchor Mill Rd, New Castle, DE 421,291 sq. ft. Centrally located within the mid-Atlantic corridor. Within 127 miles of NYC, Philadelphia, Baltimore, and Washington, D.C. ✓ ✓ ✓ Jason Penighetti Koeppel Martone & Leistman LLP Ryan Hild Koeppel Martone & Leistman LLP