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Commercial owners' property-tax appeals create headache in Philadelphia

Hundreds of Philadelphia's biggest commercial property owners have appealed their current property taxes, creating painful financial uncertainty for a city and school district already battered by budget cuts.

Hundreds of Philadelphia's biggest commercial property owners have appealed their current property taxes, creating painful financial uncertainty for a city and school district already battered by budget cuts.

The owners, including the landlords of nine of the city's 10 most valuable properties, are trying to benefit from a ruling last summer by an obscure state board that could trim property-tax collections this year, possibly by as much as $80 million, based on pending appeals on nonresidential tax bills.

Still unclear is the actual financial impact on the city and the school district, which will receive 56 percent of the property taxes this year. But a decision due Thursday from the Bureau of Revision of Taxes could clarify the situation.

The seven-member panel is expected to decide whether it should simply apply to property values a ratio that could automatically cut property taxes 44 percent, or whether the School District of Philadelphia should have a chance to cut its losses by cross-appealing assessments to push them higher.

City finance director Rob Dubow has not released an estimate of revenue loss from the appeals, which cover 60 percent of Philadelphia's nonresidential tax base by value and just a sliver of residential property value.

Dubow said the $80 million worst-case estimate does not have much relevance and "substantially overstates the city's risk" because he expected the ratio, a key factor in that calculation, to change.

Uri Monson, executive director of the Pennsylvania Intergovernmental Cooperation Authority, a state body that keeps tabs on Philadelphia's finances, said he had been unable to get a sense of how big the revenue loss would be.

"We kept trying to come up with numbers on this, but every time we did it, there were so many unknowns," said Monson, who is leaving his post in Philadelphia to become Montgomery County's chief financial officer.

An attorney for one of the property owners with pending appeals described the school district's cross-appeals as retaliatory because they applied only to owners who filed appeals.

"We just want to pay our fair share of tax, and if that means the city will lose some amount of money, then it's money that the city should not have anyway," said Carl S. Primavera, who is handling an appeal for the owner of the former DisneyQuest site in the 800 block of Market Street.

The spark for the current real estate tax drama was a finding in July by the State Tax Equalization Board, an agency charged with monitoring the accuracy of assessments. Counties are required to send monthly records of property sales to the board, coding some sales as valid and rejecting others, such as family sales for $1 and sheriff's sales, that do not reflect true market values.

Using the counties' data, the board calculates the ratio of assessed values to actual sale prices each year, creating something called the common level ratio, which is then compared with each county's predetermined ratio.

Philadelphia's predetermined ratio is 32 percent, which means that the tax rate is applied to 32 percent of a property's certified market value to determine the real estate tax. For example, the owner of a building with a $1 million market value pays tax on $320,000.

If the common level ratio calculated by the tax board differs by more than 15 percent from a county's predetermined ratio, then the board's ratio must be used when a taxpayer appeals an assessment.

The tax board delivered a shocker in July when it said Philadelphia's common level ratio was 18.1 percent, far below the city's predetermined ratio of 32 percent. That opened the door for appeals from the owners of Franklin Mills Mall, One Liberty Place, and many others.

The former Bell Atlantic Tower at 1717 Arch St., purchased in 2010 by Brandywine Realty Trust for $129 million and renamed Three Logan Square, provides a clear example of the savings. The building's value is set at $127 million by the city's Office of Property Assessment, close to Brandywine's price.

The current assessment on the building, based on the 32 percent predetermined ratio, is $40.64 million, resulting in a tax bill of $3.83 million.

Applying the tax board's 18.1 percent ratio would result in an assessment of $23 million and a tax bill of $2.17 million, a savings of $1.66 million for the property owner.

Brandywine's chief executive, Jerry Sweeney, said real estate taxes are a small part of the equation when it evaluates its Philadelphia holdings. Several other large property owners did not respond to requests for comment.

For months the city has been going back and forth with the state tax board to get a higher common level ratio.

Dubow expressed confidence Tuesday that the city would succeed. "I do not believe the number will stay at 18.1 percent," he said.

The number needs to be at least 27.2 percent to eliminate appeals based solely on the ratio. It's not clear how the city will achieve that, beyond additional data manipulation.

Reaves C. "Trip" Lukens III, a private real estate appraiser in Philadelphia, estimated the city's actual ratio of assessments to market value at 14.5 percent.

The set of 2010 sales that resulted in the 18.1 ratio had 28,030 transactions, including 15,443 considered valid sales.

A second set included 32,274 sales, with just 9,527 deemed valid, a shockingly low number, according to local real estate attorneys.

The valid sales were trimmed in the second set by eliminating more than 1,000 sheriff's sales that were mistakenly left in the first set. Between the first and second sets, more than 4,500 additional transactions were eliminated because the assessments were reportedly on the lots only, not on the buildings, throwing off the ratio.

But it's often not clear why sales were eliminated.

Dropping thousands of transactions helped boost the common level ratio to 25.5 percent, but city officials did not accept that ratio, Renee Reynolds, executive director of the tax board, said Jan. 4.

A 25.5 percent ratio would reduce the worst-case loss for the city and school district to $45.8 million.

"I just can't imagine what their thinking is at this point," Reynolds said, referring to city officials. "We've done everything we can here," she said.

Mayor Nutter's spokesman, Mark McDonald, said Wednesday that The Inquirer would have to file a Right-to-Know request to get more information on the city's dealings with the tax board.

Reynolds has not responded to requests for more information since Jan. 5, when she said a resolution was expected in two to three weeks.

If Dubow is right and the city somehow gets a favorable ratio from the tax board, especially if a new ratio comes close enough to 32 percent, the Bureau of Revision of Taxes' decision Thursday would likely be moot. Property owners would withdraw appeals that were based solely on the common level ratio.

Even so, the episode again puts Philadelphia's long-term failure to establish accurate assessments on display.

Said Committee of Seventy president Zack Stalberg: "It certainly seems to me that the city is boxed in and trying hard to come into figures that won't cost the city too much revenue."

Five Properties in Dispute

Following are market values for the five most valuable properties under appeal. The owners' potential savings this year would come from having 18.1 percent of the market value taxed instead of the current 32 percent.

Property                  Market value   Potential savings

Franklin Mills Mall      $180 million   $2.4 million

One Liberty Place      $170   million    $2.2 million

Mellon Bank Center      $169 million   $2.2 million

Centre Square            $137   million   $1.8 million

Three Logan Square    $127 million   $1.7 million

SOURCES: Bureau of Revision of Taxes and Inquirer calculations.