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Assessment Basics – Part II

This article is the continuation of Assessment Basics – Part I.

 

Assessed Value

 

Using one of the several appraisal methods allowed by state law, the City estimates the market value of each property. Once the market value is determined, the assessment ratio is applied in order to establish the portion of this value subject to taxation.

 

The assessment ratio is 45% for Tax Class 2, 3 and 4 properties, and 6% for Tax Class 1 properties. Application of the assessment ratio produces Actual Assessed Value. Unless the assessment caps apply, the actual assessed value always changes in the exact proportion as the market value. For example, if the market value of a Tax Class 4 property increases by $100,000, the actual assessed value will increase by $45,000 (an application of the 45% assessment ratio at work).

 

The Mysteries of Transitional Value

 

A state statute requires that the increases and decreases in actual assessed value for Class 2 and 4 properties be phased in over a five-year period. As a result of this requirement, Transitional Assessed Value is created. Mathematically, the transitional assessed value represents a five-year average (including the current year) of actual assessed values. It is important to remember that only market changes (normal appreciation and depreciation due to fluctuations in income stream, land use and other non-physical changes) are subject to a phase-in. These economic variations are dubbed “equalization changes” and are phased in (i.e., added to the transitional value) at the rate of 20% per year. In contrast, any changes in value resulting from physical alterations or improvements of a parcel must be added in full as soon as they are recorded by Finance, and such increases become taxable immediately (i.e., added to the transitional value in full).

In any given year, Finance takes the lower between the actual and transitional values to establish taxable value.

To illustrate how transitional assessment works, let’s consider several examples based on the following general fact pattern:

Parcel A is an office building in Brooklyn having a market value of $2,500,000 in the 2015/2016 tax year. Because the property is in Tax Class 4, it is not subject to the assessment caps, but it is subject to transitional assessment. In the 2015/16 tax year, the actual assessed value of Parcel A is $1,125,000 (45% of $2.5mln). Assume that the transitional assessed value in 2015/16 is $800,000 and the aggregate phase-ins in transitional value equal $150,000. These phase-ins are yet to be added to the taxable value because of the requirement that any equalization changes in actual assessed value can only be added at 20% per year.

Example 1: No change in market value.

Imagine a scenario in which Finance decides that there is absolutely no change in market value of Parcel A in 2016/17. In this instance, there will be no changes in actual assessed value. Yet the phase-ins from previous years will be added to the transitional value and cause it to increase to $950,000 ($800,000 + $150,000). Therefore, the tax liability will go up even though there is no change in market value or in actual assessed value. This is the effect of delaying market increases.

 

EXAMPLE 1: No change in market value between 2015/16 and 2016/17
2015/16 2016/17 Change
Market Value $2,500,000 $2,500,000 $0
Actual Assessed Value $1,125,000 $1,125,000 $0
Transitional Assessed Value $800,000* $950,000* $150,000
* = Taxable ACCUMULATED TRANSITIONAL PHASE-INS = $150,000

 

Note that the above scenario is unlikely to occur in practice because Finance typically implements one of the two types of assessment changes – either equalization (market appreciation/depreciation) or physical (structural alterations).

Example 2: Equalization Change

Building upon the previous fact pattern, let’s assume that Finance increased the market value of Parcel A by $500,000 in 2016/17 tax year. This increase was triggered by a substantial increase in the net operating income of Parcel A as well as the fact that the neighborhood in which Parcel A is located has become more desirable. The actual assessed value in this scenario will increase by $225,000 (or 45% of market value in increase). Exactly one-fifth, or $45,000, of this increase will be added to the transitional assessed value in 2016/17. The remaining four-fifths will be equally distributed over the next four years – between 2017/18 and 2020/21. Just like the current year’s actual assessment increase is spread over a five-year period (at the rate of 20% per year), the prior years’ equalization changes result in accumulated phase-ins that affect the current year. Therefore, the total increase in the transitional assessed value is $195,000 ($150,000 + $45,000). Observe that the transitional value makes the taxable increase milder ($195,000 vs. $225,000)

 

EXAMPLE 2: Equalization change in market value between 2015/16 and 2016/17
2015/16 2016/17 Change
Market Value $2,500,000 $3,000,000 $500,000
Actual Assessed Value $1,125,000 $1,350,000 $225,000
Transitional Assessed Value $800,000* $995,000* $195,000
* = Taxable ACCUMULATED TRANSITIONAL PHASE-INS = $150,000 + $45,000

 

Example 3: Physical Change

Here, we will assume that the owner of Parcel A, which is a four-story office building, has completed a vertical extension by constructing an additional floor. Finance picked up on this major improvement and issued a physical increase of $500,000 in market value, resulting in a corresponding increase of $225,000 in assessed value. This type of increase will not be phased in over time, but rather will be added in full to both the actual and the transitional values. Further, the previously accumulated phase-ins of $150,000 would be added to the transitional value, causing the total transitional to increase by $375,000 ($225,000 physical + $150,000 prior phase-ins). Here, even though the increase in transitional value is greater than the increase in actual value, the transitional still remains taxable because the total transitional value is still lower than the total actual. Compared to the previous example, it is easy to see how a physical change has a greater immediate impact on taxes because it is not subject to a phase-in ($375,000 increase in taxable versus $195,000). It is therefore very important to make sure that DOF does not mislabel the adjustments in value.

 

EXAMPLE 3: Physical change in market value
2015/16 2016/17 Change
Market Value $2,500,000 $3,000,000 $500,000
Actual Assessed Value $1,125,000 $1,350,000 $225,000
Transitional Assessed Value $800,000* $1,175,000* $375,000
* = Taxable ACCUMULATED TRANSITIONAL PHASE-INS = $150,000

 

Example 4: Equalization and Physical Change

Finally, let’s assume that Parcel A was subject to both equalization and physical changes in the same year. Due to the alteration work described in Example 3 above, the building had experienced a prolonged vacancy on the fourth floor. This is because the fourth floor was affected by the construction activities on the top floor. The prolonged vacancy caused the operating income to drop by 25%, which in turn triggered a $300,000 decrease in market value (equalization decrease). At the same time, the physical increase of $500,000 in market value was still added because the construction resulted in additional floor area. The net effect on market value is an addition of $200,000 ($500,000 physical increase counteracted by a $300,000 equalization decrease).

As discussed earlier, Parcel A’s actual assessed value will simply be proportional to the market value. Hence, the actual assessed value would rise by $90,000 to $1,215,000. The transitional assessed value would be affected as follows:

⅕ of the $300,000 decrease (2016/17)………………………………………  -$60,000

Accumulated phase-ins (2011/12 – 2015/16)……………………………….. +$150,000

Physical increase (2016/17)..………………………………………………..…. +$225,000

TOTAL Change in Transitional……………………………………………..…… +$315,000

 

EXAMPLE 4: Physical AND equalization change in market value
2015/16 2016/17 Change
Market Value $2,500,000 $2,700,000 $200,000
Actual Assessed Value $1,125,000 $1,215,000 $90,000
Transitional Assessed Value $800,000* $1,115,000* $315,000
TAXABLE ASSESSED VALUE $800,000 $1,115,000 $315,000
* = Taxable ACCUMULATED TRANSITIONAL PHASE-INS = $150,000

 

Understanding all of the above calculations is not an easy task. Finance could and should do a better job explaining the terms and providing a step-by-step analysis of these calculations so that taxpayers are not left in the dark.

Exemptions

After the taxable assessed value is determined using the assessment caps and transitional assessed value, the next step is to apply any relevant tax exemptions.

There are numerous exemptions in effect in New York City. Building-wide exemptions can be broadly divided into two categories – full and partial. Full exemptions generally apply to buildings owned and operated by nonprofit or government agencies. Partial exemptions are granted to developers of commercial and residential buildings eligible for programs such as 421a, 421g, ICIP, J-51 and others.

There are also a number of individual exemptions. The eligibility criteria are often based on the status of an individual unit within a building or that of the unit owners or occupants. For example, there is New York State School Tax Relief Program (STAR). Homeowners are eligible if they meet certain income requirements. There are also special exemptions for individuals with disabilities and for veterans. After the exemption amount is applied, the City finally arrives at the value termed “taxable billable assessed value,” which is used for calculating the tax levy.

 Tax Rates

The tax rates for each tax class are determined by the City Council. The process of establishing tax rates is quite complex and requires the City legislators to figure out the appropriate portion of the total levy borne by each of the four classes. Still, the fluctuations in tax rates for individual classes are often capped. As a result, taxpayers in their respective tax rates can generally expect very gradual adjustments from year to year. It is important to note that the adjustments occur in the middle of the tax year before the third quarter. This mid-year change results in underpayments if the tax rate goes up and overpayments if the tax rate goes down.

Tax rate fluctuations in the past four years have hovered around 1%:

 

YEAR CLASS 1 CLASS 2 CLASS 3 CLASS 4
15/16 19.554% 12.883% 10.813% 10.656%
14/15 19.157% 12.855% 11.125% 10.684%
13/14 19.191% 13.145% 11.902% 10.323%
12/13 18.569% 13.181% 12.477% 10.288%

 

When the tax rate is established, the taxable billable assessed value is multiplied by the tax rate to produce the tax liability. In many cases, this is the final step. However, some properties in NYC are eligible to receive tax abatements (tax credits).

 

Abatements

Certain qualified properties may benefit from reduced tax liability by receiving tax abatements. In contrast to tax exemptions, abatements do not affect the assessed value. Rather, abatements are applied to taxpayers’ final bill as tax credits would. The similarity to the exemptions lies in categorizing the abatements types. There are both building-wide and individual abatements. Some examples of abatements for buildings include the Solar Electric Generating System (SEGS) Tax Abatement and the Industrial & Commercial Abatement Program (ICAP). Individuals can apply for co-op and condo abatements.

Agencies administering the abatements are charged with calculating the abatement amount. When abatements are applicable, part of the tax liability is removed from the tax bill.

Tax Bills

We explain how to read the tax bill and how the tax collection system works in Assessment Basics – Part III.

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