When Philadelphia reassessed commercial and industrial properties across the city for 2018, officials said the new values would raise $118 million in additional tax revenue.
About $63 million in taxes is now at stake as the city faces one of the largest assessment appeals in its history.
Owners of about 700 properties and some of Philadelphia’s largest and most valuable offices, hotels, and apartment buildings — including One Liberty Place and the Centre Square office complex — sued the city, alleging it illegally reassessed commercial and industrial properties in 2018 but not residential parcels.
A trial on their claims, which could affect Philadelphia’s valuation methods as well as the city and School District budgets, is scheduled to begin Monday in a City Hall courtroom.
Over about two weeks, Common Pleas Court Senior Judge Gene Cohen is expected to hear testimony from city officials, experts, and others about the 2018 reassessment and whether it violated the state constitution. In the end, he must decide: Did the reassessment unfairly target the owners of commercial properties? Or are they simply trying to get out of paying millions in tax hikes?
The trial will not have any impact on the thousands of other pending appeals filed after the city raised property assessments — and tax bills — for thousands of homeowners this year. But it is playing out as the Office of Property Assessment faces ongoing criticism in the wake of this year’s residential revaluation.
Thousands of tax bills are set to increase again next year under the 2020 values released in April. The Office of Property Assessment has also become the subject of a political fight between Mayor Jim Kenney and Council President Darrell L. Clarke. An independent audit commissioned by City Council found that the city’s assessing practices are flawed and Clarke has called for new leadership in the office; Kenney launched a search for a new chief assessor and the Office of Property Assessment disputed the audit’s findings but committed to some reforms.
Pennsylvania’s constitution requires that all properties are treated equally in assessments and that a county reassess all of its properties, residential and commercial, at the same time.
That requirement, enacted more than a century ago and known as the uniformity clause, is at the center of the property owners’ case. Their dispute is unique to Philadelphia because the city reassesses annually. Other counties in the state typically do so only once in a generation — Delaware County is currently undergoing a court-ordered countywide reassessment for the first time in 20 years — and spend a few years evaluating every property in their county, as is required by the uniformity clause.
Lawyers representing the appellants in Philadelphia say city assessors violated the uniformity requirement in 2018 by only targeting commercial properties. At a pretrial hearing Thursday, lawyer Laurence Shtasel of Blank Rome, which represents 300 property owners in the case, said news releases and officials’ testimony before City Council that year described the revaluation as only for industrial and commercial parcels.
“The remedy should be that the city retracts those assessments that were made in 2018 for the commercial properties and move ahead properly with annual reassessments,” said another Blank Rome lawyer, Peter Kelsen. “This is not brand-new law. It’s something that’s been out there since the 1800s.”
The city maintains that its assessments are constitutional.
Philadelphia, as the only city in the state that is also a county, has an exception that allows it to focus its revaluation efforts on one area or kind of property each year, rather than assessing each of the city’s 580,000 properties annually, city spokesperson Mike Dunn said in an emailed statement.
Deputy City Solicitor Benjamin Field argued in court Thursday that the Office of Property Assessment did review all values, but decided that commercial and industrial parcels were under-assessed and most in need of revision.
“We are allowed to revise a portion of the city in a given year,” Field said.
Each side could have a valid argument to sway the judge, outside experts told The Inquirer.
The property owners appear to have a strong case because the uniformity clause requires that reassessments include all types of property countywide, said Mike Suley, a former chief assessor in Allegheny County.
“If you’re going to call it reassessment countywide, you just can’t do it piecemeal,” he said. "It’s like painting a room when you’re only painting two walls.”
But Robert P. Strauss, a professor of economics and public policy at Carnegie Mellon University, said the city may prevail if it shows that it was correcting inequities. If the commercial values were so out of whack that they unfairly burdened other taxpayers, he said, the city may have the ability to fix them.
“If the judge rules that the city was incompetent and has the authority to address its incompetency, then the question becomes what are the plaintiffs going to do? Are they going to appeal [to a higher court]?” Strauss said.
The 700 properties that are referenced in the case saw their combined assessed value rise nearly 47 percent, or $2.7 billion, to a total of $8.45 billion after the 2018 revaluation.
The Centre Square office complex at 15th and Market streets is one of the highest-valued properties in the lawsuit. The property includes a 36-story east tower and a 43-story west tower, and increased in value from $247 million 2017 to $329 million in 2018; that 33 percent increase resulted in a new property tax bill of $4.6 million.
Such increases weren’t uncommon. Citywide, the approximately 60,000 nonresidential properties increased in taxable value by about 50 percent, or $14 billion between 2017 and 2018, according to the city.
Paying back the tax money if a judge rules in favor of the property owners, would be a great burden on the city, Field said.
“Plaintiffs are essentially trying to leverage the Pennsylvania Constitution to avoid paying their fair share of taxes,” said Dunn, the city spokesperson. “By seeking to lower those values to what are in many cases 2014 levels, the owners of high-end commercial properties are trying to disproportionately shift the tax burden to residential property owners.”
The School District of Philadelphia is watching the case closely, said spokesperson Lee Whack. The district receives 55 percent of real estate taxes collected citywide and also gets revenue from use and occupancy taxes, which are based on commercial property assessments.
“It’s important that we continue to have the resources to make important investments for children across the city,” Whack said.
In the hearing Thursday, the judge gave no indication of how he might rule.
“The question is, if we’re reassessing property, do we have to do it all at one time or can it be done differently and still stay within the uniformity clause?" Cohen said. “The answer is, I guess we’ll have to find out.”