NASSAU COUNTY COMPTROLLER FINDS SERIOUS FLAWS IN REASSESSMENT PROCESS FOR COMMERCIAL PROPERTIES

Deficient Quality Control and Lack of Documentation
Leave County At Risk For Future Tax Challenges;
Problems Also Cited With Residential Reassessments

Mineola, New York--An audit by Nassau County Comptroller Howard S. Weitzman of Cole, Layer Trumble Co.'s (CLT) reassessment of residential and commercial properties found that the company's quality control process in reassessing commercial properties was deficient.

Comptroller Weitzman said, "These problems may make it more difficult for the county to defend the new valuations in response to taxpayer challenges, which could result in increased costs to the county." Valuations of a number of major commercial properties, including the Broadway Mall in Hicksville, Fortunoff's in Westbury, and Avalon Towers, an apartment complex in Long Beach (see attached table), were reduced sharply after being challenged by the taxpayers, indicating the use of questionable valuation practices and problems with the "mass appraisal" approach used by CLT in its initial analysis of the properties.

"Up to now, county residents have been understandably focused on the reassessment of their residences," Mr. Weitzman said. "But the importance to the county of the commercial property reassessment cannot be underestimated."

County taxes represent only about 25 percent of real estate taxes paid by county taxpayers. Yet, when over-assessments are successfully challenged, the county must pay not only county tax refunds but also school and town tax refunds, even though it never received those monies in the first place. "This has been a huge problem for Nassau County," Mr. Weitzman said. "The previous commercial re-valuation done in 1986 resulted in more than $1.6 billion in mostly avoidable costs, nearly bankrupting the county. Of that total, about 87 percent of the monies refunded by Nassau County have gone to owners of commercial, not residential property.

In fact, one of the most important assumptions of the updated 2003-2006 fiscal plan recently submitted by the County Executive to the Nassau Interim Finance Authority (NIFA) is that the annual cost of tax refunds to the county will be brought down from $125-150 million per year to no more than $57 million per year, as a result of more reliable and realistic property assessments.

"Unless the lapses uncovered in this audit are corrected," Mr. Weitzman said, "those savings are unlikely to materialize.

"The lapses were due to a lack of quality control by CLT, including a surprising lack of documentation," Comptroller Weitzman said. "In one instance after another, CLT relied on individual appraisers' undocumented professional judgment, rather than consistent and documented measures of valuation."

Noting that CLT's contract cost the county $34 million, Comptroller Weitzman said that the top 1,000 commercial properties in the county could be appraised for a cost of about $1,000 apiece, or $1 million. Such properties represent approximately 50 percent of the value of the county's taxable commercial property.

"Accurate, defensible assessments of these major properties would protect the county against refund claims that could cost far more than the $1 million cost of such appraisals," Mr. Weitzman said.

It is impossible to estimate the cost of the reassessment problems to the county, the Comptroller explained. Some assessments may have been too low, but some may also have been too high and, given the county's liability for town and school tax refunds, could result in disproportionate financial consequences to the county if successfully challenged.

"The bottom line on this audit is that county residents cannot be assured that the re-valuations of major commercial properties in Nassau County have been performed accurately.

"Let me be clear - the valuations determined by CLT may, in specific cases, be accurate or inaccurate. What is distressing -- and what must be corrected in future reassessments - is the lack of quality control and documentation of the assessment process, which could place great burdens on the county in trying to defend itself against challenges by taxpayers," the Comptroller said.

As an illustration, the Comptroller's review of CLT's adjustments to nine major commercial properties whose owners requested a hearing with the re-assessors found that CLT's initial values were overstated by 30-40 percent (see attachment). Had the property owners not taken advantage of the hearing process, the county may have faced millions of dollars of avoidable tax refunds in future years. As it is, the number and size of the adjustments to valuations made by CLT raises questions about the county's susceptibility to tax challenges by other commercial property owners.

According to the audit report, "Given the magnitude of the reductions granted by CLT after informal hearings, concerns were raised about the reliability of the valuations in general. Just as there were significant over-assessments, it is possible that there could have been significant under-assessments that were not detected by CLT. However, property owners who believe they were under-assessed would not have been likely to request a hearing with CLT, and these properties may remain under-assessed."

Among the audit report's other major findings:

• CLT made large but undocumented adjustments to major commercial properties in Nassau County. Upon reviewing a property's value, "if CLT believed the value should be higher, it would adjust the rentals upward or the expenses downward or decrease the capitalization rate until CLT achieved an "acceptable" value. Adjustments were made without any documented justification. Auditors from the Comptroller's Office consequently were unable to review the validity of such adjustments in the absence of documentation.
  
• The absence of documentation for valuation adjustments by CLT is in violation of the company's own procedures and the requirements of the Request for Proposals, which governed CLT's performance under the reassessment contract.
  
• CLT and the Department of Assessment did not identify contaminated properties (for example, hazardous waste sites) and factor their condition into reassessments of site value. This over-valuation may cause very significant costs to the county in the form of tax refunds and unnecessary payments to towns and school districts.
  
• CLT frequently underestimated tax rates in computing the value of properties, resulting in the overstatement of property values in many cases.
  
• CLT failed to conduct interior site inspections of commercial properties, even in the case of shopping malls such as Roosevelt Field or Sunrise Mall. Such inspection of properties open to the public could have provided vital information for the valuation of property.
  
• CLT and the Department of Assessment did not aggressively pursue income and expense information from commercial property owners, which is needed in order to properly value income producing properties.

Residential reassessments were also compromised. Despite the fact that perception of school district quality is a major factor in the value of residential sales, CLT commingled Nassau's 69 school districts, consolidating them into only 38 neighborhood models for the entire county. "Because of other factors within school districts, such as location, one could argue that CLT should have used more than 69 models, but certainly not less," Mr. Weitzman said.

Also, the county's waterfront properties were consistently undervalued by CLT in its initial assessment. It was only after media attention to the issue and a resulting public outcry that CLT deviated from its "mass appraisal" model and increased such values by an average of 12 percent. Similarly, undevelopable vacant land was overvalued. "Despite CLT's insistence on the sufficiency of the mass appraisal process, they showed they could deviate from it when pressure was brought to bear," Mr. Weitzman commented.

An executive summary of the report, as well as the full audit report, is available below.

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Cole•Layer•Trumble Company: Countywide Reassessment Project (.pdf file - 131 pages)