Three-year moratorium on tax complaints and the law of unintended penalties

Unintended consequences arise under most laws. A growing cobra population in India prompted lawmakers to impose a bounty on poisonous snakes. The bounty was generous and resulted in an increase in cobra hunters, which resulted in a decrease in the cobra population. Problem solved? Barely. Entrepreneurs began growing cobras that could be converted into cash rewards. The authorities canceled the bounty and caused the breeders to release their worthless snakes. In the end, there were more cobras on the streets of New Delhi than before the program began.

For commercial owners with real estate outside of New York City, one (among many) of the most egregious acts by state lawmakers was the introduction of what is known as a “three-year freeze” on property tax assessments after a tax certification process was passed. The law puts no end of consternation to owners who are wrongly oversteered and ultimately decimates the commercial sector of many suburban communities, resulting in property deterioration and a higher tax burden for voters (local homeowners) who should be protected by the law . Over time, the far-reaching harmful effects of the law have only worsened.

The law states that if a decision is made on a tax certification procedure – through settlement or legal process – the final assessment must remain unchanged for the next three years. The law applies in New York state communities that do not regularly conduct community reassessments or updates to the values ​​of all parcels (one might wonder why the owner is the one being penalized for poor judicial valuation practices). In fact, this makes up around two-thirds of New York State and affects many thousands of commercial properties.

The aim of the law was to improve communities by stabilizing the tax base and reducing the volume of tax complaints. In practice, however, it has been used to increase the cost of owning real estate and to flee real estate investments to other states, leading to a decimation of the local tax base. The law also does not recognize any major changes in ownership and is, in the opinion of many, unconstitutional regardless of its continued existence.

The devil in the law resides in many of its exceptions, as well as what is omitted from the law, and these are the areas this author is focusing on.

For example, an exception only allows the assessment to be challenged within the freeze period if the utilization has changed by 25% or more. The law doesn’t define “occupancy” but rather raises a challenging issue where an owner’s rental collections have plummeted (as many experienced during the 2020 COVID-19 market crash) but tenants persist. Occupancy with no collections means a massive drop in property value in all respects, but owners who have resolved their tax complaint before the collections fall may be faced with excessive taxation and no remedy.

Another exception allows the tax officer to increase the tax bill despite the moratorium once an owner has started building existing improvements. Whether the construction actually adds value is often irrelevant and leaves the owners in a position to sue for exactly what the freezing law was supposed to bring to a standstill. While owners are largely prohibited from providing evidence that the property has gone down in value, appraisers are free to determine whether the property has gone up.

In some cases, owners are left in the unenviable position of sacrificing viable tax certification procedures for fear that, even if they hit the tax cut they are due, they will lose the opportunity to get a bigger cut in the year they are in too. In a recent example, a large mall was brought to justice, which found that significant tax cuts were warranted by 2019. However, since the owner had already continued to decline from 2020 due to COVID-19, the shopping center owner tried to uphold a right to question the 2020 rating and beyond. Due to the three year moratorium and the arbitrariness of a court calendar, the owner is in a situation where the practical outcome of trying to get a fair tax for pending appeal years may be the acceptance of an unfairly high tax in the future despite a dramatically worse retail market.

Most amazingly, the law has been skewed by court rulings to act as a barrier to owners who have not consented to the benchmarks at all. For example, suppose a buyer purchases a property knowing that tax complaints are awaiting court decision at the time of purchase. Knowing that the property is overvalued, the buyer continues to appeal the tax assessments, but later learns that the seller has settled his tax complaint with the municipality without consulting the buyer on a value well above the sale price (a buyer and a seller can have different interests in solving a tax remedy). The three year freeze was used to dismiss the buyer’s tax complaints and any opportunity to receive a fair tax.

While the Moratorium Act refers to a “disaster”, lawmakers could clarify the law to specifically address dramatic value effects, commonly referred to as “force majeure”, which may include the market impact of the coronavirus pandemic. The Freezing Act also appears to be blatantly contradicting the New York State Constitution, which states that “no ratings may exceed full value.” Although the issue has been moderately negotiated and the freeze has been maintained, the underlying reasoning is unsatisfactory and often leaves owners with ratings in excess of full value with no appeal.

Ultimately, a law that aims to tax and hold excessive commercial property unfairly penalizes owners and does not adversely affect capital improvements, tax breaks for the local businesses to which excessive taxes are passed, and does not take into account the realities of the real estate industry. leads to a dysfunctional economic sector that depreciates the value of surrounding home ownership and communities. When the law of unintended consequences applies, corrective action is required.

David Wilkes, FRICS, is a partner in the law firm Herman Katz Cangemi Wilkes & Clyne, LLP, New York, NY