Tax Trends:Shift to GIM Should Make Owners Wary

The Tentative Assessment Roll for 2008/2009 demonstrates a significant shift in assessments for class 2 properties (rented apartment buildings, cooperatives and condominiums). This is due to the New York City Department of Finance abandoning the time-honored approach of net income capitalization in favor of the gross income multiplier (GIM) approach, which for the very first time ignores age, condition, location and expense factors. The key question for owners is: are these new assessments as accurate as those produced before the new GIM technique was employed?

First, what are the differences between past and present methodologies and where are the pitfalls in adopting one formula over another? Net income capitalization has been used by assessors and endorsed by New York State courts for more than a century. In 1962, the New York Appellate Division ruled that value arrived at by capitalization provides the surest ground for sound appraisal. In an earlier case, the New York Court of Appeals determined that “the net income of a property is more persuasive evidence of what a property is worth than using a sales price derived from a similar property. What an investor will pay for a property is measured in large part by the amount and certainty of the income that can be obtained from that property.”

The Finance Department provided two reasons for renouncing the capitalization approach: 1) expenses for some buildings were higher than others, leading to lower assessments, while in some cases the expenses may have been overstated by the owner; 2) using the GIM eliminated the need to study expenses or expense ratios and offered a simpler, more predictable one-step method.