Treating Symptoms: How Property Tax Problems are Addressed in Albany

In the first part of this series we examined a single block in Albany and identified several problems created by the city's property tax system: assessments are difficult to get right and to reason about, perverse incentives exist that reduce development, and destructive speculative behavior is encouraged. In this article we'll examine the ways in which the government works to mitigate each of those problems in turn.

Assessments

In part one we saw how difficult it is to make sure that every property in the city is assessed correctly. There are an almost infinite amount of variables involved in determining how much a building and the land it sits on is worth. That complexity is compounded further by the degree to which those variables are constantly changing. The city (and state) government recognizes this problem and has several systems in place to try to address problems with assessments.

Here's the 2015 assessment map for our example block from part one again:

Let's look at the vacant lot at 78 Livingston Ave. It was assessed at $75,000 in 2015, while neighboring lots were assessed as low as $5,000. What steps could the owner have taken to have that assessment corrected?

The first way in which assessment problems are addressed is by allowing property owners to file a grievance. This happens at the municipal level and essentially involves filing a form with the city's assessor stating why you think your property is over-assessed. You'll include data that you think proves your case, like recent sales of the property or neighboring properties, assessments of neighboring properties, professional appraisals, etc. In this case, the owner of 78 Livingston would likely note the low assessments of most neighboring vacant lots. If the assessor agrees, the assessment will be reduced (although perhaps not to the amount requested).

If the assessor disagrees, or if the reduction isn't as great as hoped (let's say the assessment for 78 Livingston is reduced to $20,000, still well above some of its neighbors), the next step is essentially to take the city to court. Doing so likely involves a lot of time and costs (e.g. hiring a lawyer). Fortunately, NYS recognizes that this option isn't practical for many homeowners and provides an alternative called Small Claims Assessment Review (SCAR). After applying for a SCAR hearing, the owner will meet with a representive from the assessor's office and a state appointed officer. That officer will hear evidence from both sides and decide on a new assessment for the property. Often, the city will offer a lower settlement before the hearing even happens.

The processes described above are pretty effective for allowing a property owner to challenge an assessment that they feel is too high. What about assessments that are too low? Or properties where the owner isn't savvy enough or doesn't have the time needed to go through the grievance process?

The city periodically reassesses individual properties, neighborhoods, or the city as a whole (in 2016 Albany underwent a city-wide reassessment). This is the mechanism through which assessments are supposed to be reset and errors can be fixed. In part one, however, we saw reassessment take the building at 744 Broadway from being the most valuable on the block to being less valuable than a neighboring parking lot. Even the reassessment process can leave us with unanswered questions.

Incentives

The second problem we found with property taxes was that they create perverse incentives that discourage development / maintenance and encourage blight. The primary way the city tries to correct those incentives is through the Industrial Development Authority. The IDA is a public benefit corporation (read: weird legal construct) that is capable of granting tax exemptions for projects.

What happens is that a developer approaches the IDA with a proposal for a project. The proposal is accompanied by an assertion that the project can't happen without significant tax breaks - the result of the development will be an assessment that is too high and will destroy any hope of returning a profit. The IDA considers the application and possibly negotiates a Payment In Lieu Of Taxes agreement with the developer. That means that once the project is completed the developer will make PILOT payments instead of property tax payments for some period of time.

Let's go back to our example block and see how this works in practice. It just so happens that the IDA recently approved a PILOT agreement for a big new development on that block. The project would convert the parking lot at 776 Broadway into huge mixed use building with rental units, a parking garage, and retail space.

As we saw in part one, the current assessment for 776 Broadway is $572,200. The PILOT agreement estimates that the assessment would increase to $750,000 as a result of the sale of the land in advance of development. The agreement estimates that once the project is completed the assessment of the property would increase to $6,173,100 due to the new building. This would cause taxes for the property to increase to more than ten times their current level.

Instead of making the developer pay taxes based on the new $6MM assessment (which presumably would kill the project), the IDA negotiates a schedule of PILOT payments which offer an abatement of taxes on the improved assessment. It's summarized in the table below:

PILOT Year Base Assessment
(A)
Total Assessment
(B)
Improved Assessment
(C = B - A)
Abatement % on Improved Assessment
(D)
Effective Assessment
(B - C * D / 100)
1 750000 6173100 5423100 100 750000
2 750000 6173100 5423100 100 750000
3 750000 6173100 5423100 100 750000
4 750000 6173100 5423100 100 750000
5 750000 6173100 5423100 100 750000
6 750000 6173100 5423100 100 750000
7 750000 6173100 5423100 100 750000
8 750000 6173100 5423100 100 750000
9 750000 6173100 5423100 100 750000
10 750000 6173100 5423100 95 1021155
11 750000 6173100 5423100 95 1021155
12 750000 6173100 5423100 90 1292310
13 750000 6173100 5423100 65 2648085
14 750000 6173100 5423100 64 2702316
15 750000 6173100 5423100 63 2756547
16 750000 6173100 5423100 62 2810778
17 750000 6173100 5423100 61 2865009
18 750000 6173100 5423100 60 2919240
19 750000 6173100 5423100 59 2973471
20 750000 6173100 5423100 58 3027702

The effective assessment is what the developer will end up making PILOTs based on. It starts out being equal to the pre-development assessment, and slowly increases over the course of the agreement. Over the 20 years the average effective assessment for the property is $1,640,000. That's obviously much lower than the >$6MM estimated assessment without the PILOT agreement. But, assuming the development wouldn't happen without it, the PILOT agreement is a good deal for Albany. We get more in PILOT payments than we would in taxes if the project didn't happen.

So what's wrong with the IDA model? Some would argue that arrangements like the IDA are rife with potential for cronyism and backroom deals. That seems like a valid concern, but let's stick to concrete issues. The main problem is that the utility of the IDA is limited to big projects by savvy developers, like the one being planned for 776 Broadway. It does nothing to address the perverse incentives that also affect small and medium sized development and property maintenance.

There are, however, other programs in place to offer similar agreements on a smaller scale. For example, first time homebuyers can qualify for five year tax exemptions on new construction or newly improved homes if their household income is low enough. The restrictions and bureaucracy around these types of programs calls into question how useful they are in practice for encouraging new development.

Destructive Speculation and Zombie Properties

The last problem with our property tax structure is that it encourages destructive speculation. Since the taxes on vacant lots and abandoned / poorly maintained buildings are so low, property owners can afford to hold them for long periods of time without any intention of putting them to good use. These speculators wait for the rest of the community to put in hard work and development nearby, and then sell their unimproved properties for a profit. These types of properties are often referred to as Zombie Properties.

Zombie properties are a very difficult problem to address given our current tax structure, and the results are visible everywhere. Even in the middle of the most dense and high value neighborhoods in Albany we see empty lots and rotting buildings (the above image is a particularly sad example). We see "development" companies intentionally letting structures decay in order to reduce their holding costs for long-term speculation. Behavior like that is damaging to the fabric of the city and increases taxes for those who are acting responsibly.

One way the city attempts to treat the symptoms of extreme speculation is by maintaining a vacant building registry. Owners of vacant structures (which are, for the most part, zombie properties) are required to register those buildings and to pay a nominal yearly fee ($250) per building. That fee increases the holding cost of vacant buildings slightly, which is good, but the amount is so low that it comes nowhere near to making up for the incentive of lower taxes.

Another recent development to deter destructive speculation is the creation of the Albany County Land Bank. When properties are foreclosed upon due to tax delinquency they get auctioned off. Often the auction winners are speculators who hold those low value properties without improving them or returning them to use. The land bank acts as a buffer, acquiring those properties before they're auctioned. The land bank is then able to use discretion to sell them to well-intentioned buyers, or to put them to some other better use for the community.

The idea of the land bank is a good one, but it's another case of treating the symptoms. Rather than fix the incentives that make foreclosed properties attractive for holding as zombie properties, we add a new layer of government that tries to identify honest buyers. There's little recourse if it turns out later that the land bank misjudged a buyer.

What'd we miss?

There are likely other programs in place to address the problems of improper assessments, development incentives, and speculation. If you know of any that we missed or if we got anything wrong please use the link below to shoot us an email and we'll update this article.

Next time

In the next article we consider an alternative tax structure that greatly alleviates all of the problems above and removes the need for the complex structure of band-aids we've currently got in place.

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