Commercial property owners in Riverhead have gotten their tax assessments reduced by tens of millions of dollars through litigation over the past five years.
As a result, Riverhead’s tab for tax-refund debt reached a total of nearly $8.5 million in that time. This year alone, Riverhead taxpayers are paying off $3.28 million in debt to cover court-ordered property tax refunds based on the reduced assessments.
Some lawsuits seeking multimillion reductions remain pending — such as one brought by Costco Wholesale alleging an over-valuation of $20.3 million and one brought by the owner of Riverhead Centre (the Home Depot shopping center) claiming the property was over-valued by almost $7.4million.
But you won’t find the refund expense in any town budget. It’s paid by taxpayers directly to Suffolk County, because the county borrows the money to cover tax refunds owed by the town as a result of tax grievance litigation.
It’s the end result of a complex, often years-long process of reviews, appeals, court filings, negotiations — and sometimes trials.
More than 300 tax grievance cases are filed against the Town of Riverhead every year, court records show. The actions challenge the assessed values established by the Riverhead Board of Assessors. The majority are brought by individual homeowners and usually result in comparatively small reductions in assessments — and comparatively small tax refunds for taxes paid on the overvalued assessments.
However, nearly every shopping center, golf course and condominium complex in Riverhead has filed a lawsuit in the past five years challenging their assessments.
Only a few have gone to trial. Traditional Links, owner of the exclusive Friar’s Head golf club in Baiting Hollow, had its tax bill slashed by the court after trial in 2019. The court ordered the golf club’s assessed valuation cut by more than $2.5 million per year — for a 10-year period — and required the town to refund $3 million for taxes paid on nearly $27 million of “erroneous” valuations, plus interest. The town has an appeal of the decision still pending.
Riverhead Town has entered into more than three dozen settlements with large commercial property owners over the past five years. Most of the lawsuits are settled after lengthy negotiations and a stipulation of settlement signed by the parties becomes an order of the court. These settlements have resulted in substantial reductions in assessed valuation, a RiverheadLOCAL analysis shows.
A settlement with the Maidstone Landing condominium complex resulted in a reduction in valuation of more than $2.5 million over a three-year period, for example. A settlement with Walmart reduced its assessed valuation by $950,000 over a five-year period. East End Commons — the BJ’s and Kmart shopping center — receivedgot a reduction in its assessed value of more than $1 million per year for five years.
Each settlement not only reduces the assessed value of a property for the current and future years, but also retroactively to the year the lawsuit was first filed. And each requires the town to refund over-payments of taxes based on the over-valued assessment, often with interest.
‘It’s a never-ending issue’
Commercial property assessments pose a unique challenge for calculating the assessed valuation, Riverhead Town Assessor Laverne Tennenberg said. It’s not based on fair market value established by recent sales of similar properties, the way a single-family home is assessed. Instead, the assessed value is determined by the income approach.
The income approach measures the value of the real estate according to its net income. And that’s a very complicated process with many variables that affect the valuation, including empty storefronts, rental values and operating expenses. Everything changes with the real estate market’s ups and downs — and with the economy overall.
The red-hot real estate market complicates things further. When residential market values increase 15% a year, as it has on the East End during the pandemic, it pushes down the town’s tax equalization rate — that’s the ratio of assessed value to market value, which in Riverhead this year is 11.8%. In other words, your home is assessed at 11.8% of its estimated fair market value. If it has a fair market value of $425,000, its assessed value is $50,000 — and that’s the number used to calculate taxes.
When real estate market values surge, the equalization rate plummets unless every parcel in the town is revalued — a massive undertaking that Riverhead Town has not conducted in decades.
A commercial landlord’s income is not going to keep up with that kind of market-value growth, Riverhead Town Assessor Laverne Tennenberg said. If a landlord has a rent escalation clause in its lease of 3% or 5% a year, which is typical, it’s not even close to keeping up with 15% annual increases in the market. That gives rise to a challenge.
And when the market tanks, the valuation drops due to vacancies and declining rents. Another cause for a challenge.
“It’s a never ending issue,” Tennenberg said. “It’s one thing after another.” Property owners can file another grievance three years after the valuation is reduced.
Tennenberg said she’s seen the number of tax grievances and lawsuits filed every year skyrocket since she first took office in 1990.
Riverhead is not alone
Riverhead is by no means alone in this predicament. Southold Town has a State Real Property Tax Law levy of more than $1.5 million this year. In Islip Town, that levy is more than $16.7 million for 2021-2022.
Southold Supervisor Scott Russell, who spent years as an assessor before his election as town supervisor, said large commercial properties are initially assessed on cost of construction, but after they are up and operating, the assessors have to switch to the income approach — and that will typically bring the assessed value down. If left as is, it will result in an over-valuation and a grievance.
But towns have no incentive to reduce the assessment and, in fact, have an incentive to keep it at the higher level. Keeping the town’s total assessed valuation up means lower tax rates overall. Even if the cost of government remains constant, a lower total assessed value in the town means taxpayers bear a higher property tax burden to cover the costs. Towns always want to raise or at least maintain their assessed valuation.
“It’s a way to artificially retain assessed value to protect stability in the tax rate,” Russell said.
Since towns generally can’t handle the cost of the court-ordered refunds — in many years, they would blow a giant hole in a town’s budget — the Suffolk County Tax Act requires the county to refund the tax overpayments. The county doesn’t have that kind of cash either, so it borrows the money to cover the refunds and then “bills” the towns for the debt service.
While the budgets of towns — and other taxing districts, such as the school, fire, ambulance, water and highway districts — benefit from this practice, the repayment to the county doesn’t come out of their budgets. Instead, the repayment comes directly from property taxpayers. The levy — the amount that needs to be raised through taxes to pay the obligation — and the tax rate are determined and the costs are in that way apportioned among all taxpayers.
If you own a home in Riverhead, you can find the tax levy for this debt in the bottom section of your tax bill where “other” taxes are listed. It’s listed as “NYS REAL PROP TX LAW” and for the 2021-2022 tax year, it’s $3,280,402. This year, Riverhead property owners are taxed at the rate of $3.943 per $1,000 of assessed value to cover this debt — including the property owners who received over-valuation refunds.
An “average” home in Riverhead with a market value of $425,000 and an assessed value of $50,000, would pay a tax of $197 ($3.943 multiplied by 50) to cover its share of the debt repayment.
The town’s total assessed valuation hasn’t gone down despite the court-ordered reductions, Tennenberg said, because other factors, like a rising market and new construction, bring the town’s total assessed value up.
Of course, all the legal maneuvering comes with other costs to taxpayers — government staff time, legal and appraisal fees.
Last night, the town board hired two new law firms and a new appraisal firm to represent Riverhead in tax certiorari cases.
It’s a highly specialized field, Tennenberg said.
The town’s longtime special counsel for this area of litigation, Scott De Simone, has informed the town he will no longer work for the town in this capacity.
Tennenberg said she thoroughly researched possible replacements and interviewed numerous law firms before choosing the two firms appointed last night: Lewis & Greer of Poughkeepsie and Keane & Beane, based in White Plains. Lewis & Greer will be paid $195 per hour and Keane & Beane $275 per hour. The town also hired Michael Haberman Associates of Mineola to provide a variety of certiorari consulting services in commercial proceedings, to be billed at $175 per hour, as well as preliminary and trial-ready appraisals for flat fees of between $1,500 and $6,500 apiece.
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