I came across a list of so called “myths” of the property tax on a page of New York State’s Office of Real Property Tax Services (ORPTS) this morning.  Myth number three is entitled, “NY State collects too much money through property taxes.”  The myth is then debunked by the state, which, accurately, writes that the state government does not receive any money from the real property tax, and that, rather, the revenues are collected by local governments and school districts.  The explanation goes on to say that this is the reason tax assessments are administered locally and not by the state government.

All true, but if we as citizens of the state are principally concerned with good governance and appropriate levels of taxation, then conceptually we should not forget that what is causing New York State to be the leader in population loss is the overall tax burden levied between the state and local governments and schools.  And while the state may not administer or collect the property tax directly, it wields unconscionable power to push its own unfunded mandates onto local governments and school districts, which have no choice but to add what should properly be state tax items to the local property tax, causing it to rise without an equivalent increase in the level of local services.

So, in effect, through poor state fiscal control and a lack of responsibility at the state level, New York State government does raise funds to pay for its costs through the property tax.  Local governments and school districts are left with little choice but to levy and collect these amounts, and pay them on through.  Worse yet, while the advantage of local property taxes is that citizens can directly challenge an assessment through a legal process, there is virtually nothing an individual can do to challenge a tax rate that is artificially inflated, for political reasons, by the state government.

A myth?  Perhaps not, depending on how you look at it. 

Like nearly every property tax debate, opinions have already divided sharply between the business community and the voters who own homes and send their children to our schools.  In an odd and unfortunate twist of the norm (or perhaps just reality politics), big business supports Cuomo, the Democrat, while the opposition is backed by a host of middle- and low-income groups as well as a range of education-focused associations. 

Though I have fought in Albany repeatedly on behalf of the business community to protect and grow New York’s commercial sector, in this case the local govs and schools have it right.  The proposed tax cap is an end without a means; all show and zero substance. 

The proposal should come as no surprise: it would allow the incoming Governor and Albany lawmakers to continue to spend and spend as irresponsibly as ever — funding much of their excess by a combination of inconspicuous income taxation and a heavier property tax burden that appears to emanate from local governments – while forcing the diminution of many local health and welfare services (police, fire, sanitation) and driving drastic cuts in a rapidly deteriorating public education system. 

There is little centralized state management or control over local spending in New York, except when it comes to the items Albany doesn’t want to pay for, such as pensions and healthcare (recent example: in September the Democratic state comptroller’s office announced it was requiring still greater pension contributions).  Oddly enough, local governments pay the state pension funds that administer the retirement accounts of many municipal employees; increases in the contributions to the retirement system are now among the highest in recent years, rising, for example, to 21.6% for police and firefighters. 

With greater centralized state control and leverage — read, backbone – these costs could be trimmed and also paid for by means more effective than the property tax.  Property taxes are also being driven upward as a result of sluggish sales-tax revenue and declining state aid, both of which stem from Albany’s embarrassing failures in the act of governance.  Point is, there is a broad array of identifiable culprits behind the state’s enormous property tax burden that require executive leadership and mettle to solve, yet Mr. Cuomo has chosen to sidestep them all in favor of an empty soundbite about capping taxes that has been attempted by two other recent governors without success.

Unconvinced?  School property taxes outside of New York City would need to increase, on average, 3.5% per year just in order to pay for the higher pension contributions required by the state comptroller, according to one think tank.  That alone far outstrips the 2% Cuomo cap on property taxes.

Worse yet, Mr. Cuomo has managed to fool even his own supporters by floating a plan that has so many exceptions and loopholes that there is virtually no case in which property taxes would actually remain capped at two percent. 

The tax cap fails to do the most important thing required to reduce our local tax burden: implement a coordinated statewide (or even countywide) local spending plan.  Rather than take the high road and implement real reform, Cuomo has decided to let each town, village and city continue to limp along as its own island without the coordination, consolidation and economies of scale an effective state government could design. 

The business community should rethink its support for the cap as well.  The measure will, through the back door, drive still more skilled workers out of the state by forcing towns to offer less while charging more, and in so doing put New York even further out ahead of the nation as the acknowledged leader in population loss.   Take just one look at the municipalities that are unable to offer quality public education and services to the community and you will find shuttered stores, high vacancy rates, and empty office buildings.  Cuomo’s pitiful pandering to his well-heeled financiers glosses over the inextricable nexus between a thriving commercial sector and strong local property values.

The Cuomo proposal for a tax cap is yet another tourniquet for a badly broken system and, ironically, despite strong support from the business community, one that will ultimately crush commercial interests even further.  A spokesman for Mr. Cuomo reportedly stated, “Gov.-elect Cuomo has proposed one of the most aggressive property-tax caps because he believes New Yorkers are overtaxed and deserve real tax relief.”  Unfortunately, there is nothing “real” about this proposal, and there is certainly no “relief” in sight.

There are many ways to structure a transaction in the U.S., but by and large, whatever the deal looks like, most would-be owners, even those with vast resources, are either compelled or find it far more prudent to obtain financing in the form of a traditional mortgage rather than plunk down hundreds of thousands or millions in cash in a lump sum.  As a practical matter, most Americans and their institutions have no choice but to obtain a loan, secured by the property.  We take all this for granted, but the oddity of this approach is that while the so-called “purchaser” obtains what we refer to as “record” title, the reality is that the property is actually being held in trust for the mortgagee (the lender) in the event payments are not made. 

So who really owns the property?  Does the entry on the record books in favor of the purchaser, even though many sticks in the bundle of rights are held by another party, make it so?

And what if you followed a religion that prohibited this common type of transaction because the payment of interest on money was not allowed?  Purchasing property, then, would likely require an alternate transaction in which you acquired the incidents of ownership but without the use of a mortgage and the payment of interest.  This is precisely what occurs when a Muslim purchases real estate: often a transaction that looks a lot like a “rent-to-own” approach is created, with the purchaser acquiring all of the benefits and burdens of true ownership, and recorded title passing after the payment of a set sum over time.  Hardly different in substance from a traditional mortgage arrangement, but without interest on the sum loaned.

Who could fault New York’s lawmakers for failing to consider all this when they drafted the State’s religious property tax exemption statute decades ago?  The code simply requires that if you are a religious entity you are exempt from the payment of real estate taxes — so long as you “own” the property. 

The statute makes no reference to record ownership nor does it define “own” at all.  The most common religious entity owners in New York — Christian and Judaic institutions — make liberal use of the common mortgage transaction, which provides the entity with record ownership and they receive their tax exemption without much fuss, even though a for-profit lender somewhere usually holds a substantial interest in the property; the exemption, particularly in some parts of the State, amounts to a substantial savings for a not-for-profit, particularly those that attempt to operate cost-intensive parochial schools. 

Not so for El-Ber, which has operated an Islamic school at 2542 49th Street in Astoria, Queens, New York for over a decade, struggling to break even as it suffers under a heavy commercial tax burden levied by City Hall.  El-Ber, as a small school with limited funds, and attempting to adhere to its own religious code in acquiring a facility, entered into a traditional and faith-based payments-to-own contract with a for-profit landowner by which the school would have all of the incidents of true ownership but without the use of an interest-bearing mortgage.  The school is fully responsible for the maintenance and upkeep of its property, and pays all of the costs of operating the school and its facilities, including, for now, the payment of real property taxes to New York City.

The school sought relief under the property tax statute, contending that for purposes of the law it is an “owner” and should be treated like every other religious school that has been granted the exemption.  The City summarily denied El-Ber’s application, contending that the school was not an owner because it had not recorded title.  Brought to court, a judge sided with the City, ignoring the testimony of New York’s leading real estate expert, who opined that the school was, in fact, an owner given its substantial rights in the property. 

The irony, of course, is that the Islamic school is effectively being denied its right to the free exercise of its religion as well as the right to be treated like every other school precisely because it has made the choice to carefully adhere to the requirements of its own religion.  It would be easy enough to suggest that if El-Ber would simply produce a lump sum of cash to purchase the property it too would be entitled to an exemption, but we all know that this is highly unrealistic.  We also recognize that to place an overwhelming financial burden on one entity that is not placed on another, solely because of its religious beliefs, is patently unconstitutional.

In one of the leading cases on point, Matter of Colleges of the Seneca v. City of Geneva, New York’s highest court granted the exemption despite ownership by a private for-profit entity because the nature of the transaction between the parties and the operation and control of the facilities demonstrated that the educational institution was properly considered the owner.  Other cases agree. 

Controversy swirls around a variety of the interactions between Muslims and the City of New York, with sharply divided opinions.  El-Ber presents a unique opportunity for the courts to reassure us that the free exercise of religion continues to be a respected and fundamental constitutional right that is not diluted when applied to the Islamic faith.  I will argue to the Appellate Division, on January 4, that New York’s religious tax exemption statute must apply a broader reading of the term “owner” if it is to remain constitutional.

Second, I am the Chairman of the Foundation, and am one of the people closest to the recent and unfortunately stormy relationship between the Institute and the Foundation. 

I was interviewed this week by Jonathan Miller at length about the nature of the relationship between the Foundation and the Institute, and the facts and actions that led to the recent dispute and the sanctions our Board imposed on the Institute.  I was also asked about the future relationship between the organizations and whether I thought that the Appraisal Institute could, and would, consider rejoining as a Foundation sponsor.  As many of you know, Jonathan Miller is CEO of Miller Samuel, Inc., the most well known real estate appraisal firm in New York City and he is frequently called upon for comment by the major news organizations.  New York Magazine wrote of Jonathan,

“Miller is the most accomplished real-estate appraiser in town [that town being New York!]. In most places, that’s like being the captain of the mathletes team. But in New York, it has the power to make him a near-celebrity. ‘He is the Encyclopedia Britannica, the Wikipedia of Manhattan real estate,’ says broker Suzanne Sealy. In the past year, 300,000 copies of his market surveys were downloaded. ‘He’s the only appraiser that has groupies!’”

You can listen to the podcast of our interview and learn more about the Appraisal Foundation, its mission, and its relationship with the Appraisal Institute by visiting this link:

http://thehousinghelix.blogs.millersamuel.com/2010/09/15/interview-david-c-wilkes-esq-cre-frics-huff-wilkes-cavallaro-llp-chairman-the-appraisal-foundation/

That’s the birds-eye view of managing property taxes nationally.  But then there is New York State.  The most fragmented of the fragmented.  Most practitioners who operate in New York will limit themselves to a fairly small geographic area within the state, perhaps just three or four of the sixty-two counties at most.  New York City practice is an entirely different animal than anything north of the City, with different forms, review procedures, and deadlines than the rest of the State.  Okay, so New York City is different: probably no great surprise.  But, then, Westchester County and some of the others in the Hudson Valley often operate differently than their fellow counties to the north and west.  Courts view the cases distinctly differently depending on what part of the state the property is located.  And, with only a few exceptions, every city, town, and village has its own assessor, its own assessment ratio, its own board of assessment review, its own tax rates, its own tax collector, its own property valuation date, and its own deadlines.  While it’s true there’s one state Real Property Tax Law, you’d better understand local interpretations of that law and local custom and procedure for moving a case through the courts.  The pronouncements of an upstate or western New York appellate court (even) are only “persuasive” to a court located elsewhere in New York unless there’s nothing else upon which to rely.  Only about a third of New York’s municipalities have conducted a fairly recent revaluation, with the decision being left up to the local town board or city council, and often viewed as an act of political suicide.  Very little that the State’s “Office of Real Property Services” has to say is taken as more than a suggestion, with most guidance coming in the form of “Opinions of Counsel” which are, as they state, merely opinions. 

Despite Albany’s annual rail against high property taxes while stuffing unfunded mandates down the throats of the local jurisdictions it criticizes, our state legislators are just as fearful of losing their jobs as their municipal counterparts.  Many bandaids are applied to the New York property tax system by the legislature, but virtually nothing has been done to streamline the administration and review of property taxes in New York.  Other states provide compelling examples of better and more centralized control and administration: Connecticut, Massachusetts, Oregon, to name a few.  New York State remains more fragmented, confusing, draconian, and inequitable than ever, so it should be no wonder that the property tax bill here is among the highest in the nation if not the world.

And so, for those property owners who may not have completed the largely confusing grievance application forms correctly, or may have omitted a requested but inconsequential document, or may have fallen short in their DIY valuation efforts and presentation, or may have simply failed to be well-liked by the local board, this is only the beginning. 

In the next 30 days, an application for appeal to the court must be filed, accompanied by a host of highly technical procedural requirements imposed by New York State law.  And the requirements will vary depending on whether the property is commercial, residential, condominium or coop, owner-occupied, located in a village, located in a particular school district, a particular county, a particular district, and so on.  Papers must be served in ways and in quantities and within time periods that make seasoned legal practitioners’ heads spin.  The list of technicalities, any one of which may be used to wipe out the appeal in its entirety, forever, is vast.  It is unfortunately said of New York that there is far more law on procedural gaffs than on substantive valuation methodology, and once you get past the procedural hurdles it can be anyone’s guess as to how to value the property under review. 

If only technicalities and methodology were all that an owner faced.  The larger problem is often time.  True, most residential cases make their way through the “Small Claims Assessment Review” part of the Supreme Court (assuming one is willing to limit the size of their tax reduction) within about a year from the original filing, but if you do not occupy the property, or it is considered commercial, you may be in for a decade or more of frustration.  Some courts upstate manage to push these cases along to a “quick” resolution in as little as three or four years, but downstate the norm is usually between seven to twelve years.  During that time, ownerships have often changed and the massive tax burden on a property may have killed off any potential profitability to the owners.  Obtaining refunds extending back to a point years in the past, long after tenancies may have been lost and opportunities to reinvest in the property have passed, is often small consolation.