Landlords Say $48M Court Victory Over Property Assessments Isn't About The Money
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When the city of Philadelphia lost a $48M property assessment lawsuit involving the largest buildings in the city, the dollar figure wasn't of much concern to at least one plaintiff.
The Court of Common Pleas ruled July 17 that the city's Office of Property Assessment had violated the uniformity clause of the Pennsylvania State Constitution by raising commercial property owners' assessments for 2018 without doing the same for residential owners, the Philadelphia Inquirer reports.
The court ordered that the plaintiffs — a group that included Post Brothers, Bart Blatstein, Centre Square owner Nightingale Properties and One Liberty Place owner Metropolis Investment Holdings — were due a refund equal to the difference between their 2017 and 2018 assessments. Between all the properties, the court estimated that the city owes a total of $48M spread out over roughly 700 properties.
In ruling against the city, Judge Gene Cohen cited a 2016 email from Councilman Allan Domb to the city's finance director, Rub DuBow, saying that commercial property values specifically "need to be adjusted," PlanPhilly reports.
Domb's email, Cohen ruled, proved that the 2018 assessments targeted a specific class of property owner because of undue "political pressure" from Mayor Jim Kenney's office and Domb, who objected to the court's characterization of his email.
“I can’t bring up commercial properties that sold for $7 or $8M and were assessed for $1 or $2M?” Domb said to PlanPhilly. “Are you saying it's undue political pressure when we are asking the executive branch to do their job accurately? Does that mean I can't say the prison budget is too high? Or that there are other inefficiencies?”
In a statement in response to the decision, the mayor's office said that the accuracy of the 2018 assessments wasn't at issue, and that the OPA's assessments for 2019 and 2020 were found in compliance with the uniformity clause.
"[The] plaintiffs are essentially trying to leverage the Pennsylvania constitution to claw back their fair share of 2018 taxes that they have long since paid," the statement read.
It may be somewhat counterintuitive that both sides of a tax assessment lawsuit agree that the higher assessment was fair, but the lawsuit is one of many that the OPA has and continues to contend with. It all stems from what Pestronk and OCF Realty President Ori Feibush call an incoherent system for assessing property in the first place.
“You’d do better [at assessing property values] by throwing mud against the wall and seeing what sticks,” Feibush said.
Both Feibush and Pestronk cite a lack of uniformity as the heart of the OPA's issues. Rather than take neighborhoods or areas to assign one overarching dollar-per-SF value to the land, the city goes plot by plot using an internal rubric that it doesn't publicize, Feibush said.
Though Feibush was not one of the plaintiffs in the $48M case, he told Bisnow that he has multiple outstanding lawsuits against the OPA because of its inconsistent assessments — one of which involves the Royal Theatre on South Street.
OCF purchased the long-vacant building in 2016 for $3.7M, and Feibush said its 2017 assessment was for $62K. In 2018, the property was valued at $0, but for 2019 and 2020 that number spiked to $20M. The parcel at 512-520 South Broad St., 300 feet away from the theater, was assessed at $6.3M, and the building that stands on it is more than twice the size, Feibush said.
“It’s probably worth $35-$40M at least,” Feibush said."We’ll win [the lawsuit], but there’s no consistency, awareness or basis to any of these assessments. They’re starting out where they’d like [the assessment] to be and then figuring out how they’d like to get there.”
Kenney's office and the OPA declined to comment beyond their statement.
Because property taxes make up a large portion of how the city funds its schools, any issue on the subject — whether it be the tax rate itself, assessments or the 10-year abatement — takes on added meaning for politicians and the citizens whose votes they covet.
Adding to the tension is that many residential property owners in the city are low-income families that have owned their homes for years, making them vulnerable to sudden tax increases.
The city has a number of programs, like the Longtime Owner Occupants Program or the Homestead tax exemption, to ease the burden on its poorest homeowners, but they don't apply to everyone. Some will inevitably remain unaware of potential benefits the city offers, multiple city officials have told Bisnow in the past.
"Obviously, [the city] can’t reassess commercial and not residential properties, but I understand why the city did what it did, which was to get revenue for the schools,” Pestronk said. “If there’s no revenue for the schools, then we’ll continue to have stopgap solutions for property taxes and land use.”
The deadline for repayment is in July 2021, and Dunn said the city will most likely appeal the decision, so Kenney's administration is a long way away from writing a check.
But not every owner of a commercial property affected by the 2018 assessment filed suit, and the difference between years for those that haven't totals about $70M, the Inquirer reports.
“I don’t think it’s out of the question that we could see another large group of property owners come forward and try to get some of that $70M back,” KE Andrews tax consultant Tony Trahan, who consults for several of the plaintiffs, told Bisnow.
Though the $48M verdict would get split up roughly 700 ways, a small sum is enough to motivate a commercial landlord to go to court. Though their wealth means they are seen as easier political targets than a working-class homeowner, their margins are thinner than ever.
“We see this in multiple states, where a property owner that a municipality thinks is full of cash flow, so they look at them and think, ‘They wouldn’t feel the tax rise as much as a 60-year-old homeowner who’s been in place for years,’" Trahan said. "And that leads to unfair treatment.”
Pending the appeal, the court's decision leads to a clear precedent, Trahan said. The 2018 taxes have already been paid to the city, and $34M of what would be refunded is already earmarked to the school district. That would crack $50M if a major portion of the remaining reassessed properties are also appealed — a potentially disastrous amount for a chronically underfunded district.
Without an overhaul of the city's tax structure, covering that gap would likely mean that property owners of all sizes and incomes will feel a greater burden to fund the schools. For critics of the OPA's methods, the burden feels avoidable.
“We’re leaving a ton of money on the table," Feibush said. "If half the owners in the city are under-assessed and half are over-assessed, then the under-assessed owners are going to stay quiet and the over-assessed owners are going to complain.”