NYREJ - Understanding property tax implications for 2024s market trends

Property taxes are a significant expense for property owners, and understanding how market shifts influence assessments is crucial. As we approach 2025, examining the changes and trends that took place this year can help owners understand how to optimize their property tax case.
 

Risk of Investment and Capitalization Rates Increased

In 2024, the real estate market experienced a notable increase in risk and capitalization (cap) rates. Over an extended period, the risk environment and the corresponding cap rates at which properties are trading have risen significantly. The factors driving this heightened risk are well known to commercial investors, including rising interest rates, persistent inflation, escalating labor costs, increased prices for goods and services, and challenges in material availability. These dynamics have collectively discouraged many investors from closing deals. Many property owners are not aware that the majority of property tax cases are resolved relying on the income approach where rising capitalization rates can result in significantly lower taxes.

Although cap rates are trending upward, specific circumstances surrounding certain transactions have artificially suppressed them. This supports the argument that the true cap rate environment is even higher than what raw data suggests. These elevated cap rates directly influence property valuations and, when properly analyzed, can significantly reduce an owner’s property tax burden. Rising Expenses Due to Inflation, Supply Chain and Repurposing Properties Became More.

Prevalent This Year

Repurposing commercial real estate is becoming increasingly popular on Long Island, driven by evolving market demands, economic pressures, and innovative development strategies. As
properties transition from traditional commercial uses to residential, mixed-use, or other formats, the implications for property taxes are both complex and significant.

The commercial real estate market has experienced profound shifts, particularly following the
COVID-19 pandemic. Remote work has reduced the demand for traditional office space,
encouraging property owners and developers to explore alternative uses for their buildings.
Conversions often include transforming office spaces into residential units, mixed-use projects,
self-storage facilities, or industrial spaces. These repurposing efforts not only breathe new life into underutilized properties but also help address housing shortages and foster more dynamic,
community-oriented neighborhoods.

However, this transition comes with its own set of challenges. Property owners often face significant renovation expenses and regulatory obstacles, including zoning modifications and adherence to building codes. On Long Island, the approval process for property conversions is notoriously lengthy, often taking years and involving substantial red tape and fees.

It is during this conversion process where the tax assessment must be watched closely. The key date for assessment purposes is “taxable status date” each year. This is the date by which the assessor must value the property. In Nassau County taxable status date is January 2nd each year and in Suffolk County it is March 1st. Even if a property is in contract to be converted to a much more valuable use, until that transition occurs, the property must be valued and taxed in its condition and use as of taxable status date which typically yields lower taxes.

The Office Market Continues to Face Challenges

In 2024, another wave of pre-COVID leases reached their expiration, further exposing the struggles of the office market. The true vacancy rate remains obscured, as many five to seven-year leases signed before 2020 still appear on rent rolls. However, lenders and appraisers recognize the ongoing downward trend in the office sector. Notably, most office property sales are tied to plans for conversion into alternative uses rather than traditional leasing.

The shift to remote work has fundamentally altered the demand for office space. While some
previously empty office parking lots have shown signs of renewed activity, usage levels remain far below pre-2020 norms. Many companies have embraced hybrid work models, balancing in-person attendance with remote flexibility. Although surveys indicate that most CEOs believe on-site work boosts productivity, office rent remains a significant expense for businesses. Reducing these costs has become a priority, leading many companies to downsize or seek sublease opportunities.

As a result, office landlords face intense competition — not only with each other but also with the growing inventory of sublease space. This pressure impacts their net operating income (NOI) and heightens their risk exposure. These factors collectively underscore the need for property tax assessments to reflect the reduced value and income potential of office properties in the current market.

As the full scope of 2024 comes into focus and owners prepare for the year ahead, it is essential to closely monitor these trends. If they are affecting a property’s net operating income (NOI), it is crucial to file a grievance in 2025 to ensure the tax burden is adjusted accordingly.

Brad Cronin, Esq., and Sean Cronin, Esq., are partners at Cronin & Cronin Law Firm, PLLC,
Mineola, N.Y.

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