The city of Philadelphia's new property tax program is coming and your assessment is likely going up, but it is not all bad news. Still, commercial property owners and residential property owners alike need to understand the basics of the city's new Actual Value Initiative (AVI) and be prepared to take steps to ensure that they are assessed fairly. In particular, commercial properties often have unique or complex valuation issues, which are frequently overlooked by taxing authorities. Moreover, according to the City Controller's Office, the AVI is expected to increase property taxes for many small businesses, including 73 percent of the 5,148 commercial properties that have between 1,000 and 10,000 square feet of space. In light of the city's AVI program, it is particularly vital to analyze the new assessment information and take appropriate steps to manage your real estate taxes.
Philadelphia's Office of Property Assessment (OPA) recently took a major step in connection with its historic effort to simultaneously reassess the property values for the city's almost 600,000 residential, commercial and industrial properties. It mailed out its first set of notices to property owners, advising of new property assessments established through the AVI. The AVI aims to reassess each property's value to reflect the actual market value of the property, i.e., the price the property would sell for in an open-market transaction.
Philadelphia's property tax assessment system has long been criticized as inefficient and unfair. Oftentimes, similar properties in the same neighborhood were assessed at significantly different values. This inequity helped lead to the AVI. Proponents argue that the AVI has transformed an inequitable tax-assessment system into a process that is fair, accurate and understandable. However, skeptics are taking a wait-and-see approach.
To increase transparency for how the new assessments were calculated, the OPA has disclosed the factors that it considered when reassessing Philadelphia properties. Among the primary factors included in the AVI calculation are the size and age of the property, a property's location and condition and whether the property is commercial or residential. For residential properties, the OPA factored in recent sales of comparable properties. For commercial and large multifamily properties, the OPA also analyzed the property's cost of operation, income-generation and the cost of the land.
It is instructive to consider how Philadelphia reached the point where it had to undergo such a significant retooling of its tax assessment system. State and local factors both played a role in this process. Unlike most states, Pennsylvania does not have any state law or state-level administrative regulations governing the mechanics or frequency of local property taxation. Instead, each county determines its own reassessment timetable and assessment method. Thus, some Pennsylvania counties may go decades between reassessments, which often led to great disparities between assessed values and market values. As a result, courts have ordered several counties, including Allegheny and Chester, to undertake reassessments.
Local factors also have affected Philadelphia's hesitance to update property tax assessments. First, Philadelphia receives a relatively small percentage of its revenues from property taxes. Instead, Philadelphia taxes wages more heavily and imposes use and occupancy taxes on businesses, among other taxes, to generate the required revenue for the city. Because property taxes amount to a relatively small proportion of the city's revenue, city officials may have felt little need to undergo a significant overhaul of the assessment system.
Additionally, the city failed to regularly adjust the assessed value of properties as market values increased over the past decade. The OPA generally aimed to set its ratio of assessed value to market value at 32 percent; however, one study by the Pew Charitable Trusts' Philadelphia Research Initiative found that the actual ratio of assessed to market value was closer to one-half of that benchmark. This failure to update the assessed values as property values increased effectively further decreased the tax bill for each property owner.
The AVI reform is expected to revalue all of the property in the city to $96.5 billion, according to a report by CBS. Prior to the AVI, the assessed value of all property was approximately $38 billion. City officials believe that the higher aggregate taxable value of all properties will result in lower tax rates and higher property values for property owners.
Recently, the OPA released the estimated AVI reassessment figures. The final assessment figures will not be released until May, but the reassessment figures provide property owners with an initial estimate of how the AVI will affect the owner's property taxes. The city also has created an AVI calculator to help property owners estimate their anticipated property tax burden. The AVI calculator can be found at avicalculator.phila.gov. At the website, an individual may enter a property's address, and the website will provide the user with the property's previous assessed value, along with the estimated AVI assessed value. The user then may estimate the property's taxes by selecting a homestead exemption amount and the estimated property-tax rate. The website predicts that a $30,000 homestead exemption will require a 1.34 percent tax rate to generate the revenue required by the city.
Philadelphia City Controller Alan Butkovitz has released a study with the AVI's estimated impact and found that approximately 75 percent of all single-family households will experience a tax increase if the tax rate is set at 1.25 percent. According to Butkovitz's study, several neighborhoods—including the Graduate Hospital neighborhood, Point Breeze and East Passyunk—will experience local property tax increases of more than 100 percent. While AVI is expected to increase the local property tax burden for many residential owners and small businesses, the tax rate for many commercial properties, especially large commercial properties, is expected to decrease, according to a Philadelphia Daily News report by Jan Ransom.
One study estimated that the AVI would result in about a $90 million aggregate tax decrease for commercial and industrial properties.
Because the AVI is expected to result in an increased tax burden for many homeowners, Philadelphia is considering several initiatives to partially offset the consequences of the AVI. First, the city is analyzing how to reconfigure its homestead exemption in light of the AVI. The homestead exemption allows owner-occupied homes used as a primary residence to reduce the amount of the property's assessed value by a certain number. Current law establishes the homestead at $30,000; however, the city may adjust this exemption amount.
In addition, the city offers several programs for low-income and senior home owners, including a low-income senior citizen real estate tax freeze, a low-income and low-income senior citizen installment plan and a hardship payment agreement. All of these programs aim to provide individuals with reduced means the opportunity to mitigate some of the effects of the AVI.
The city also has created a two-tiered appeal process for the estimated assessed value of a property. First is an informal review process. Any property owner who disagrees with his or her new assessment value may speak directly with an OPA assessor. This informal review would be in lieu of requesting a formal review before the Board of Revision of Taxes (BRT). At the informal review, a property owner would be able to provide an OPA assessor with additional information that the OPA may not have considered during the initial assessment. The deadline to request an informal review is Sunday. Any informal review should be based on quantifiable data, not emotion. Ability to pay is not a ground to reduce an assessment. It is important to remember that an informal review carries some risk. The OPA has reserved the right to increase a property's assessment if, during the informal review, the OPA finds that the property's assessed value is too low. Thus, a property owner should request an informal review only where there is quantifiable evidence supporting the position that the OPA's initial assessment was too high or to correct a technical error in the assessment. Examples of correcting technical errors would include fixing the square footage of a property or structure and the property's classification.
Alternatively, there is a formal review mechanism available before the BRT. The deadline to file for a formal review is October 7. The BRT's review will consider whether the characteristics of a property that affect its value are substantially incorrect, whether the estimated market value is incorrect and whether the estimated market value of the property is inequitable. If a property owner can demonstrate any one of these three factors, the BRT is empowered to revise the property's assessed value. A property owner dissatisfied with the BRT's decision may then appeal to the Philadelphia Court of Common Pleas.
Philadelphia's AVI initiative is the result of a multiyear project to reassess all residential, commercial and industrial properties in the city. Its goal is to make the property assessment process fairer and more transparent while raising additional revenues for the city. The AVI is expected to result in local property-tax increases for many residential owners while reducing the property-tax burden for many large commercial properties. Small commercial properties are expected to see a tax increase. The OPA has offered to provide an informal review for property owners; however, a property owner should only take advantage of this opportunity if prepared. The informal appeal process likely is best-suited to fix technical errors appearing on a property owner's assessment. A more beneficial strategy may be to wait until the property owner has quantifiable data to prove one of the three factors that the BRT will consider in evaluating the assessment appeal. If so, the property owner could reduce the assessed value of the property. If a property owner does not have all of the necessary supporting documentation, he or she ultimately may be faced with an even higher assessed value.
George J. Kroculick is co-chair of the real estate law practice group of Duane Morris. He practices with a focus on eminent domain, including just compensation, right to take, relocation assistance and highway access management, as well as land use and land use litigation, and real estate tax relief matters.
Michael J. McCalley is an associate in the real estate law practice group of the firm. His practice focuses on eminent domain/condemnation, redevelopment, highway access management and control, and relocation assistance.
Reprinted with permission from The Legal Intelligencer, © ALM Media Properties LLC. All rights reserved.