Fixing the Assessment Roll: Revised
The recent Ground Report article on fixing the assessment roll in Dobbs Ferry got a lot of attention and comment. Paul Feiner took up the offer to form a task force to look into the issue and report its finding and recommendations to the Town of Greenburgh. Some of the commentators pointed out inaccuracies in the body of the article, though the major themes stood the test of ‘peer review’. The following article corrects those inaccuracies and adds some new detail that was offered by the professionals who reviewed the article. Special thanks to Edye McCarthy, Assessor, Town of Greenburgh.
Dobbs Ferry, New York. Anthony Giaccio has released the Budget Officer’s request for the 2008-2009 operating budget to the Mayor Scott Seskin and the Board of Trustees. The budget request called for a 4.92% increase in the tax rate.
But the more disturbing aspect of the Budget Officer’s request was one over which Mr. Giaccio has no control — the Assessment Roll. It declined from 2007 to 2008.
The Assessment Roll is a proxy for the value of taxable real estate in Dobbs Ferry and it dropped to $53,253,020 or (0.737%) since last year. [Adjusted by the most recent 3.07% Uniform Percentage of Value or UPV, also called the Equalization Rate or ER, the Assessment Roll translates into real taxable property in the Village with a ‘market value’ of one billion seven hundred and thirty-four million dollars ($1,734,626) or an average of about $434,000 per property. Wow!]
On the face of it, the decline in the Assessment Roll is not surprising in that real estate values are also declining. As shown in the graph labeled New York City Metropolitan Area House Price Versus Assessment Roll, values peaked in 2006 and started to decline in 2007. The chart has to be read based on two different axes. The left axis shows the house prices and the right axis the Dobbs Ferry Assessment Roll in millions of dollars. (See http://mysite.verizon.net/vodkajim/housingbubble/ for more information.
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What is curious is that during the period of the real estate price bubble from 2000 to 2008 whereas housing prices increased 70% in the New York Metropolitan area, the Assessment Roll in Dobbs Ferry increased only 5%. A 6,500 basis point difference between the increase in real market values and the Assessment Roll indicates that something in wrong with the way that real estate values are assessed in New York State.
Under New York State law, every property in the Village should be re-assessed every year and marked to market. However, due to cost and political inertia, most of Westchester County has not been re-assessed since the 1950’s. The Village of Bronxville did conduct its own re-assessment two years ago, but that process resulted in unexpected consequences as discussed in a previous article on Ground Report entitled, Reassessment and Rezoning. To get a feel for how long it has been since Dobbs Ferry has been re-assessed consider that at re-assessment the Valuation accorded a property is set at 100% of market; right now the Valuations in the Assessment Roll are set at 3.07% of market value!
Under the assessment rules, each property is accorded a Valuation at assessment and that Valuation does not change until the next re-assessment — unless an owner renovates the property and requires a Building Permit. Note that re-assessment starts at the issuance of a Building Permit, not at the granting of a Certificate of Occupancy. Another curious fact is that re-assessment does not occur when the property is sold in the open market. In fact, reassessment at the time of sale, called the Acquisition Method, only occurs in two states, California and Michigan.
Instead, each year, the State of New York through the five-member State Board of Real Property Services appointed by the Governor for rotating eight year terms (currently there is a vacancy) produces various value deflators or assessment inflators called the ‘Uniform Percent of Value. (“UPV”) or Equalization Rate (“ER”) and the Residential Assessment Rate (RAR).
The State Board members are currently:
John M. Bacheller, a resident of Latham (Albany County), and former Senior Vice President at Empire State Development Corporation.
George E. Herren, a resident of Canandaigua (Ontario County), and former Director of Real Property Tax Services in Ontario County.
Michael Joseph, Jr., a resident of Marathon (Cortland County), and former Executive Director of the Rural Schools Program, Cornell University. Mr. Joseph is also a member of the State Commission on Education Reform.
Edgar A. King, a resident of Schuylerville (Saratoga County), and senior partner of Kings-Ransom Farm, LLC in Saratoga County. [One member o f the Board has to be employed in agriculture.]
The Secretary of the Board of Real Property Board is also the Executive Director of the Office of the Real Property Services — http://www.orps.state.ny.us/index.cfm — which does the actual work of calculating the RAR and ER for all assessment jurisdictions within New York State. The Village of Dobbs Ferry is 1 of 1,100 such jurisdictions.
The current Executive Director of the Office of Real Property Services is Lee Kyriacou. He has posted an interesting overview of the dismal state of the real estate assessment process in the State of New York that can be downloaded at http://www.orps.state.ny.us/powerpoint/ReformPresentation021308.pdf
Squatocracy versus Certiorari
The RAR and ER are based on the MEDIAN differential between the price at which properties sold in a jurisdiction and the assessment values carried on the Assessment Roll for those same properties. The RAR differs from the ER in that it only pertains to single family homes , while the ER is a composite of residential, commercial, vacant land and utility transactions. The RAR for the Village of Dobbs Ferry can be found at http://www.orps.state.ny.us/cfapps/MuniPro/rar/rarhistory.cfm?swis=552603 and the Equalization Rate at http://www.orps.state.ny.us/cfapps/MuniPro/muni_theme/muni/ratehistory.cfm?swis=552603&dom_sw=552603 Note that the RAR at 2.60% for 2008 is lower than the ER for 2007 (the most recent year available) at 3.07%, because single family homes have appreciated more than commercial real estate in the Greenspan real estate bubble.
The problem with any mathematical system that relies on a MEDIAN is that 50% of the sample is, by definition, above the average and 50% is below, as shown conceptually in the chart on the next page. That means that 50% of the population is being assessed at a discount to the true value of their property, while the other half is assessed at a premium. Those property owners that benefit from the discount have no incentive to raise their Valuation and pay their fair share and are characterized humorously in the chart as the ‘squatocracy’. They are the squatocracy because the longer they stay in their un-renovated homes, the larger their tax preference becomes. The other property owners in the less desirable properties, on the other hand, are incentivized to seek a downward adjustment of their Valuation called a Certiorari – from the Latin ‘to review’. These Certioraris tend to systematically decrease the Assessment Roll over time.
We have all received a solicitation from a real estate lawyer stating the ‘estimated market value’ of our home and asking us to call if the value on the postcard is above the real market value of our property. Over time, 50% of the landowners of Dobbs Ferry will fall below the ‘estimated market value’ on the postcard, call the real estate lawyers and re-adjust their Valuations downward pursuant to New York State Real Property Tax Law, Section 524.
So there is a systemic downward bias in the Assessment Roll.
From a fairness standpoint, the Equalization Rate is not a bad concept. If residential properties are appreciating faster than commercial property, they should bear more and more of the real estate tax burden. So the Equalization Rate is a way for residential assessments and commercial assessments to stay aligned to changes in underlying values. The problem is that the combination of using the MEDIAN to calculate the RAR and the composite value to calculate the ER results in an amplification of the downward systematic bias in the Assessment Roll. The people who end up suffering are those property owners who are foolish enough to renovate their property and get a Building Permit – which triggers a re-assessment to market value . If you stand back and think about it, the current system is a disincentive to invest in fixing up or improving the real properties in the Village.
Market Value versus Income Method
There is another powerful force at work pushing down the Assessment Roll. Apartments, condominiums and cooperatives ("ACC’s") are granted more favorable real estate tax treatment than single family homes. Bronxville learned this the hard way when it did its re-assessment two years ago; single family home assessments increased 9% on average, while ACC’s DECREASED 60%.
ACC’s qualify for the Income Method of calculating their Valuation. The Income Method helps them to avoid their fair share of local taxes by the way it is calculated.
First, the income method is not based on market value, but on a formula, the Rent Roll of a property multiplied by a Return on Investment Factor. Rents have increased far less during the real estate bubble than house prices. According to HUD data, average rents increased 22% from 2000 to 2006 (the last data available); during the same period housing prices increased close to 80%.
Second, the Return on Investment factor is well below the actual internal rate of return patterns observed in the rental property market. Rental properties in the New York Metropolitan area typically sell for 10x Rent Roll which translates into a pre-tax return of 10% per annum, not the 6.25x in the Cost Method that translates to 16% per annum.
Third, since the Uniform Percentage of Value is based on overall market price movements, including single family houses, the UPV is overstated for rental properties and sets them up for much richer Certiorari abatements. As the difference between rents and house price expands, the ACC’s look more and more overvalued and qualify for bigger and bigger Certioraris. See the chart below labeled Condo Assessment Preference Keeps Growing.
As a real world example (based on a real house currently offered both for sale and as a rental on the Internet) , assume that a town house is worth $795,000 as a single family home based on market values. That town house would be accorded a Valuation of $20,670 in the Assessment Roll ($795,000 times 2.60%). As a condominium, the exact same town house would have a ‘Rent Roll’ of $5,000 per month or $60,000 per year. The rent roll times the return on investment factor of 6.25 results in an estimated market value of $375,000. Multiplied by the UPV of 2.60%, the condominium would have a Valuation of $9,750 or about 47% less than the town house. The condominium owner would pay 47% less real estate tax than his neighbor for the exact same property. Why?
Because at one time in the early 1980’s, Manhattan needed renovation and these tax breaks where granted to jump start its gentrification.
But in Dobbs Ferry, these tax laws are just plain unfair. Why should the residents of Washington Manor, who won a huge Certiorari two years ago, pay lower taxes per unit of real estate value than the residents of The Landing that own their homes outright. After all, condominium owners have all the benefits of the single family homeowners: they get to deduct their mortgage interest and real estate taxes and they get a one-time capital gain holiday on the sale of their property when they turn 55 years of age.
Tax Exemptions
First time I wrote this article, I decided to skip the issue of Tax Exemptions. But the criticism that I got from friends and family for dodging the issue has forced me to face it and try to make sense of it. Tax exemptions are more complex that I would have expected,
So far, I have come across five types of partial tax exemptions.
Senior Citizen
Veterans
Disabled
Volunteers
Non-profit
STAR Program
Senior Citizen: Senior citizens get addiitional tax relief through Enhanced STAR if their income is less than $70,600 per year. Figuring out the value of Enhanced STAR is better left to the alchemists in Albany. Senior citizens must apply for this tax preference with the Town of Greenburgh.
The Dobbs Ferry Union Free School District regularly approves a partial exemption for senior citizens. This year’s amount is as much as 50% of assessed value for tax-paying households with income of less than $27,000. The partial exemption phases out at an income level of $35,400. Seniors need to apply for the partial exemption through the Town of Greenburgh. Last year, 54 residents of Dobbs Ferry qualified for this partial exemption.
Veterans: The calculation of the partial exemption for Veterans requires a PhD in applied mathematics. Veterans get to reduce their Assessment by 15% for serving in the military, an extra 10% for serving in a combat zone or receiving a commendation, and an additional 50% if disabled under the definitions of the Department of Defense. However, such a simple system would be too good to be true in New York State so these simple amounts are capped using a complicated formula that changes every year based on the Equalization Rate or ER. The net effect is that the benefit to Veterans is cut in half from the ‘promise’ of the simple exemption rate.
|
Average Assessment in Dobbs Ferry of about $16,000 |
||||
|
Type of Service |
Simple Exemption Rate |
Simple Exemption Rate times Average Assessment |
Maximum Exemption times ER |
Maximum as % of Simple Rate |
|
Service |
15% |
$ 2,400 |
$ 1,105 |
46% |
|
Combat |
10% |
1,600 |
737 |
46% |
|
Disability |
50% |
8,000 |
3,684 |
46% |
|
Total |
75% |
$ 12,000 |
$ 5,526 |
46% |
There is no ‘means test’ for the Veterans partial exemption so every veteran is eligible to apply.
Disabled: This exemption waives re-assessment to market value if a Building Permit is obtained to renovate a property for the purpose of accommodating a disabled person(s).
The Dobbs Ferry Union Free School District regularly approves a partial exemption to the School tax to the disabled.
Volunteers:
The Village of Dobbs Ferry regularly grants a partial exemption of the Village tax to its volunteer firemen and the ambulance corps.
Non-Profit:
Non-profit exemptions elicit the most controversy and passion. Tax payers regularly complain about subsidizing the services consumed by non-profit entities.
Non-profit status is very well entrenched in the tax code. It starts at the Federal level where the IRS certifies corporate entities as non-profit for income tax purposes. Non-profit status is governed by IRS 501(c)(3) tax exempt status (IRS Form 1023). The non-profit entity must receive IRS Determination Letter or advanced ruling.
At the State level, non-profit property tax exemptions are governed by Sections 420-a, 420-b, 446, and 462 of the NYS Real Property Tax Law. Full and partial tax exemptions are granted to the following categories organized by the relevant section of the law:
- 420(a)
Charitable
Educational
Hospital
Moral or mental health of men, women or children
Religious - 420(b)
Bar Association
Benevolent
Bible
Enforcement of Law relating to children or animals
Historical
Infirmary
Library
Medical Society
Missionary
Patriotic
Public Playground
Scientific
Supervised Youth Sportsmanship or Tract - 446
Cemetery - 462
Parsonage
Manse
After much thought, I can think of only two ways to reform the inequities afforded Non-Profit entities. For County, Town, and Village, one solution would be to institute a ‘means test’. Any Non-Profit with a Total Income (Part IX, Line 13 of IRS Form 1023) of less than $1 million would be exempt from local real estate taxes. For each addition$100,000 of Total Income, the Non-Profit would lose 1 point of exemption until at $10 million, all exemption from local tax would cease. The means test would have the effect of having those ‘rich’ Non-Profits pay into the local tax base while protecting the ‘poor’ Non-Profits. To be fair, Non-Profit property could be assessed as ‘vacant land’ so that the tax burden would not be unduly burdensome – and also because a part of the electorate will want to promote open space through Non-Profit entities.
The second reform would be to define all Non-Profits as excluded from the local school district. This would have the effect that students residing at the Non-Profits’ facility would have to pay out-of-district fee to attend a local school. This would eliminate current subsidies of private schools who send some of the children of their faculty – typically those with special needs – who reside on campus to the local public school system. Out-of-district fees are set by New York State and are generally only 60% of the actual cost of a student and therefore still represent a ‘good’ deal for the residents of a Non-Profit facility.
How to Fix the System
Two simple changes could be implemented to fix the current system.
First, repeal the Income Method for condominiums and cooperatives — there is, at least, some argument to keep it in place for actual rental apartments. Put condos and cooperatives on equal tax footing with single family homes.
Second, at the time a property is sold and its market value is objectively established, it should be re-assessed. To keep the mathematical system as simple as possible, the ‘market value’ can then be reduced by the UPV so the Assessor’s Office would only have to maintain a single UPV and Valuation Roll. Last year in Dobbs Ferry, 100 properties were sold or about 2.5% of the housing stock. That means that within one decade one-quarter of the houses in the Village would be re-assessed in a fair , objective and documented process, with no ambiguity or subjectivity. Adding the properties that are renovated each year, almost 40% of the housing stock would be re-assessed each decade.
The changes suggested in the body of this article to reform the abuses of the current Non-Profit entity tax exemptions are less likely to garner the support of our elected officials.
If anyone reading this article notices a point of fact that needs correcting, please post on Groundreport or send an email to info@groundreport.com.