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Volume 11 - Opinions of Counsel SBRPS No. 115

Opinions of Counsel index

Business investment exemption (generally) (completion of construction) - Real Property Tax Law, § 485-b:

The issue of “completion” for purposes of determining eligibility for the business investment exemption is not free from doubt, especially where certificates of occupancy are issued to portions of buildings such as strip malls as those portions are finalized for use by tenants. However, it does seem clear that a certificate of compliance does not indicate completion of a building for purposes of section 485 b. A certificate of occupancy or other documentation of completion does signify completion.

We have received an inquiry concerning the business investment exemption (Real Property Tax Law, §485-b). The assessor states that a company is applying for the exemption on a building it leases to several different businesses. An original “certificate of compliance” was issued to the owner on October 11, 2005, the individual tenants being responsible to obtain separate certificates of occupancy on their rental spaces. Since several years may elapse before the last tenant finishes interior work and obtains a certificate of occupancy, the assessor asks when completion of construction occurs: when the building itself is finished or when the certificate of occupancy is issued for the last rented space.

The question is critical, of course, because the law requires that applications for the exemption be filed with the assessor “within one year from the date of completion of such construction, alteration, installation or improvement” (RPTL, § 485-b(3)). The law also provides that no exemption may be granted unless “such construction, alteration, installation or improvement is completed as may be evidenced by a certificate of occupancy or other appropriate documentation as provided by the owner” (§ 485 b(2)(b)(3)).

These provisions (and others) were added as part of a significant revision to section 485 b made by chapter 512 of the Laws of 1985. That chapter also introduced the concept of determining the value of the improvement in what is now (after subsequent amendments) referred to in the law as the “exemption base.” {1}  The Senate sponsor of the bill enacted as chapter 512 wrote:

Providing that the computation of the exemption for each of the ten years authorized by the statute be based on the increase in assessed valuation determined in the first year the exemption was allowed appears to be desirable from both a business and administrative standpoint. The property owner would know in advance the amount of assessed valuation that would be exempt from taxation for the next nine years. The assessor would not be required to recompute the exemption for the nine succeeding years (Memorandum of Sen. Charles D. Cook at 1985 NYS Legislative Annual, p.204).

Consequently, there are really two issues presented when the exemption is sought on a structure such as the one in issue: when is it deemed to be completed and what is its value.

From the assessor’s description, we assume that the structure in question might be referred to as a “shell building.” In a technical bulletin (dated January 1, 2003), the New York State Department of State states:

Developers often seek to construct spec buildings without knowing the exact needs of future potential tenants. A typical example may be a strip mall where the developer may know the building will be marketed to a combination of M (mercantile), B (business), or A (assembly) occupancies but may not know the size, location, configuration, or other specific demands of the yet to be determined tenant(s). Therefore a large enclosed building may be constructed without interior tenant partitions, toilet rooms, plumbing fixtures, HVAC, and other elements necessary in a completed building. The building or portions thereof are completed after tenants and their needs are identified.

The bulletin further distinguishes between certificates of compliance and certificates of occupancy:

The proposed occupancy classification(s) and/or uses of a spec building should be identified before the first permit is issued so that construction type, structural importance factors, and design live loads can be established. *** After all work identified in the building permit is completed, a certificate of compliance may be issued to close out this part of the project. Since the building is not complete, a certificate of occupancy should not be issued until the building or the portion intended to be occupied conforms to all requirements of the Uniform [Building] Code.

Completion of construction within the meaning of section 485-b has been addressed in several judicial decisions.

In Pyramid Co. of Watertown v. Tibbetts, 139 Misc.2d 132, 526 N.Y.S.2d 715 (Sup.Ct., Jefferson Co., 1988), aff’d, 152 A.D.2d 938, 544 N.Y.S.2d 744 (4th Dept., 1989), aff’d, 76 N.Y.2d 148, 556 N.E.2d 419, 556 N.Y.S.2d 980 (1990), the central issue was exemption eligibility of a mall which had received other tax benefits. In finding for the mall’s owners, the Supreme Court Justice wrote:

Section 485-b(2)(b)(3) of the RPTL provides that an exemption may be granted only if construction is completed, “as may be evidenced by a certificate of occupancy or other appropriate documentation as provided by the owner”. This provision does not mandate that a certificate of occupancy accompany the application. It merely indicates that this is one form of evidence that may be submitted to prove that construction has been completed. In the present case, the respondents were well aware that the petitioner's project had been completed. Besides the publicity which permeated the town regarding the mall's opening . . . the respondent town’s tax assessor, visited the mall in February of 1987 and personally saw that it was completed. This, coupled with the petitioner's certified application as to the mall’s completion, is sufficient evidence to satisfy the requirements of section 485-b(2)(b)(3). (It should be also be mentioned that a mall, itself, does not receive a certificate of occupancy. Such certificates are granted on a store-by-store basis.) (139 Misc.2d at 135, 526 N.Y.S.2d 717-18).

In 10-20 Glenwood Assocs. v. Assessor of City of Binghamton, 142 Misc.2d 636, 538 N.Y.S.2d 139 (Sup.Ct., Broome Co., 1988), the exemption eligibility of another mall was in issue. The applicant filed for exemption, but the assessor denied it on the ground that the project was incomplete. The court found for the applicant, stating:

[T]his court concludes that “completed” must mean that the structure in question is finished to the extent that it is available for occupancy and meets the specifications contained in the site plans. In the case of buildings designed to be rented out to a variety of tenants, such as the mall in this action, alterations to accommodate specific tenants need not be completed before the property is eligible for the exemption.

Given this interpretation of the term “completed”, it is evident that the amount of the exemption could vary on any given property depending upon the percentage of occupancy of the total area. This result, however, was apparently the one contemplated by the Legislature when the statute was amended in 1985. The burden on the assessor of reevaluating on a yearly basis the commercial properties entitled to the exemption was removed by setting a fixed point in time when the total value would be ascertained and the exemption calculated. To a certain degree, a loss may result where, as in the instant case, the value of the property is somewhat diminished by the fact it is not fully occupied at the time the initial appraisal is made (142 Misc.2d at 640, 538 N.Y.S.2d 141-42).

The Second Department of the Appellate Division cited 10-20 Glenwood favorably and referred to that court’s test of completion as “provid[ing] a reasonable standard” in Ambald Realty v. Board of Assessors, 224 A.D.2d 412, 413, 638 N.Y.S.2d 97, 98 (2d Dept., 1996). In that case, a building containing space for four stores was in issue. A certificate of occupancy was issued in March 1991, the first tenant moved in about December of that year, but, as late as April 1994, the building still was partially vacant. In April 1993, the owner applied for the exemption and the assessors granted an exemption for the improvements made subsequent to April 1992, that is, one year prior to the application. The applicant sued to receive exemption on the entire structure, arguing that because vacancies existed, the building was incomplete. The court held that the initial certificate of occupancy having been issued in March 1991, the April 1993 application was untimely, and sustained the assessors. {2}

The same court denied exemption when a petitioner received its certificate of occupancy in April 1996, but continued to work on site improvements and grading until spring 1997; its February 1998 application was held to be untimely (Metroplex Harriman Corp. v. Ruscher, 264 A.D.2d 396, 694 N.Y.S.2d 687 (2d Dept., 1999)).

The Fourth Department then cited Ambald favorably, but said that “the issuance of a temporary certificate of occupancy to petitioner did not establish ‘the date of completion’ of construction within the meaning of RPTL 485-b(3)” (Braunview Assocs. v. Unmack, 227 A.D.2d 937, 938, 643 N.Y.S.2d 253, 255 (4th Dept., 1996)). It then held an application filed within one year of the issuance of the permanent certificate of occupancy to be timely filed.

It appears from the foregoing that the issue of “completion” is not entirely free from doubt, especially where certificates of occupancy are issued to portions of buildings such as strip malls as those portions are finalized for use by tenants. However, it does seem clear that a certificate of compliance does not indicate completion of a building for purposes of section 485 b. Indeed, the Department of State technical bulletin quoted above states that a compliance certificate signifies the “close out” of part of a project, not its completion. A certificate of occupancy or other documentation of completion does signify completion.

The law appears to place applicants of shell buildings in a bit of a quandary. Assuming timely application within one year of completion, the exemption amount will then be based upon the value of the improvement (the exemption base) as it then exists. The base will change thereafter only if there is an overall change in level of assessment (RPTL, §§ 1228, 485 b(2)(a)(ii)).

December 14, 2007

{1}  That is, section 485-b(2)(a)(i) provides: “Such real property shall be exempt for a period of one year to the extent of fifty per centum of the increase in assessed value thereof attributable to such construction, alteration, installation or improvement and for an additional period of nine years provided, however, that the extent of such exemption shall be decreased by five per centum each year during such additional period of nine years and such exemption shall be computed with respect to the ‘exemption base.’ The exemption base shall be the increase in assessed value as determined in the initial year of such ten year period following the filing of an original application, except as provided in subparagraph (ii) of this paragraph [providing for computation of the base following changes in level of assessment].”

{2}  Arguably, given the 1991 issuance of the certificate of occupancy, an April 1993 application was too late for any exemption to have been granted, but this is not discussed in the opinion.