What It Takes to Reduce Your Real Estate Taxes in NYCBy Neil A. Sonenberg | January 21, 2021
Unoccupied buildings are causing that unfortunate empty feeling for many property owners operating within New York City’s commercial real estate market today. With virus immunizations becoming a reality, we can hope that it will not be much longer before the demand for commercial square footage undergoes a renaissance. In the meantime, one available short-term remedy for property owners suffering under the impact of the COVID-19 pandemic is obtaining a real estate tax certiorari—a reduction in the amount of real estate taxes remitted to their respective government agencies. Many property owners have just received their new property assessment values from the New York City Department of Finance and are surprised to find them increased from the year before. Although a certiorari filing can require a great deal of time and effort, it is the only path to possibly obtaining a reduction in real estate taxes, one of the largest expenses facing real estate owners in NYC today. Clients and property owners are often unaware of the lengthy and involved steps that go into obtaining a certiorari. Familiarity and understanding of the process can help it go more smoothly, from initial analysis to obtaining the sought-after reduction. If you are considering filing a certiorari, it is especially important to understand the key points of the process now, as the deadline for the required filings, audits and certificates to be completed for submission is March 24, 2021.
Initial Certiorari Filing
A certiorari professional will help you begin the filing process and see if a reduction in your real estate taxes can be achieved. This allows your real estate attorney to review data and make appropriate decisions as to whether the benefits outweigh the costs involved in proceeding with the certification ordeal. The forms and requirements of certiorari filing depend on the property class. There are two key forms that are required when obtaining a certiorari:
A. TC 201 Income and Expense Schedule for Rent Producing Properties
B. TC 309 Accountant’s Certification of the Income and Expense Report
It is important to note as part of the filing process that while it is necessary for the company books to agree to tax and financial statement filings, there are some differences between book and certiorari income. NYC certiorari forms require exclusion of large expenditures such as mortgage interest, depreciation on the building, amortization of mortgage costs, certiorari refunds and fees, interest income, as well as others. The determinable expenditures that can be included, such as wages, repair and maintenance, insurance, and general other operating expenses, along with rental income, are the items that are most impactful in rendering a favorable tax commission verdict. The greater the loss that is reflected, the better chance of a real estate tax reduction—though there are other benchmarks that are used by the NYC Department of Finance to grant real estate tax reductions.
NYC guidelines no longer require an audit for property values assessed under $5 million. If the property’s actual assessed value (not transitional) is under $5 million, only Form TC201 is required. If your property value is assessed at $5 million or more, in addition to Form TC201, Form TC309 will need to be completed by an independent certified public accountant who performs an audit of the information provided on Form TC201. In this case, once all the preliminary items on Form TC201 are analyzed and it is determined in agreement with counsel that it would be sensible to proceed in seeking a real estate tax reduction, the audit process for certification begins.
The Certiorari Audit
A certiorari audit is along the lines of any real estate building attest engagement, though the certiorari report does not require a balance sheet or cash flow report, or the detailed footnote disclosures that would normally be found in a financial statement. As in any audit, it is of tantamount importance to understand the entity’s organizational hierarchy and become comfortable that internal controls are working properly to safeguard the assets and reporting of data. Additionally, there is the time-consuming (but important, as it relates to revenue) sampling of leases and testing data from such leases to ascertain that rents, escalations and tenant reimbursements are being properly reported. These are just some of the significant areas in a real estate audit that require audit procedures to be performed; there can be more depending on the engagement. Fulfilling the above requirements results in the development of a hefty compliance package, generally 50 pages or so, which contains a plethora of compliance forms necessary to support the ultimate certification of data for finalization of the certiorari report.
Besides the myriad of compliance work that surrounds these certifications, it is important to conduct fraud interviews of key personnel, including upper management involved in company governance and/or general compliance. Additionally, in a certiorari audit, the auditor must understand the data generated, including seeking out answers to material variances within income or expense categories reflected on the certiorari forms. For example, if exterior repairs have increased dramatically, it must be questioned why such costs rose and supporting documents must be provided including contracts, invoices, as well as minutes of meetings (if available) authorizing such expenditures. The auditor also must determine whether such amount is appropriate to be expressed as a period expense or should such work be classified as a capital improvement. The difference in classification will determine how much of the item will impact profit and loss, either as an immediate deduction or a less impactful depreciation reduction over the useful life of the asset.
When Real Estate Tax Reduction Comes to Fruition
Once the audit process is complete, the accountant provides the appropriate audit certification package to the property owner’s attorney, arming them with everything required to challenge the city’s property tax assessment and ultimately obtain the desired reduction in real estate taxes. The attorney will use this information to present the property owner’s case in a hearing with the city. In the best-case scenario, the city will agree with the findings and issue a reduction in real estate taxes that eases the property owner’s burden. Understanding this lengthy process beforehand can help ensure it goes smoothly and ideally help yield the desired relief in today’s challenging real estate market. Marks Paneth’s certiorari professionals are always prepared to answer questions about the process and help clients try to save on these significant real estate costs.
About Neil A. Sonenberg
Neil A. Sonenberg, CPA, is the Co-Partner-in-Charge of Marks Paneth’s Real Estate Group. With almost 40 years in public accounting, Mr. Sonenberg excels in a wide range of tax and accounting disciplines. His “out of the box” thinking and passion provide clients with an array of planning opportunities to maximize both tax savings and profits. Mr. Sonenberg possesses expertise in all areas of real estate as well as wholesale and retail manufacturing and high-net-worth clients. He... READ MORE +