In March 2018, Philadelphia Mayor Jim Kenney announced that he intended to request a 6 percent increase in the real estate tax rate. Later that same month, the mayor revised the request downward to 4.1 percent because the Philadelphia Office of Property Assessment (OPA) had reassessed all properties across the city for tax year 2019, and those revised values increased property values by 11 percent. However, while the “average” assessment increased by 11 percent, some individual property owners saw increases between 30 percent and 300 percent.
For commercial property owners, Philadelphia is taking a new approach to assessing commercial construction and reassessing such projects prior to completion. This practice creates a new tax source because midproject assessments are fully taxable, even if the developer has applied for an abatement. However, the city appears to be improperly calculating midconstruction assessments. Because ad valorem taxation valuation is not the same as valuation for financing, commercial property owners may want to challenge Philadelphia’s approach.
Many, if not most, other counties in Pennsylvania do not value major construction projects until a certificate of occupancy has been, or is close to being, issued. However, some do value projects midconstruction. Your developer clients should be advised of what to expect, considering they may be hit with a major bill midproject.
Residential and commercial owners in Philadelphia should be aware that some reassessments appear to be inaccurate. They may be challenged in several different ways. One argument, constitutional uniformity, looks at unexplained variations with surrounding properties that produce unfair outcomes. While this could be successful at the administrative level, it may not be successful if it goes to the Court of Common Pleas, where taxpayers may be obligated to take into account properties across Philadelphia, not just in their specific neighborhood.
Pennsylvania counties deal with uniformity issues by applying the “common level ratio.” However, this ratio is not applied automatically by the taxing authority to all properties. Where a countywide reassessment has not been undertaken in years, assessments remain stagnant and are, generally, dramatically undervalued. The common level ratio tends not to remain stagnant, but to decrease over time. Thus, even if a property’s market value would be increased if appealed, the common level ratio may have decreased so much that it is actually advantageous to appeal the property’s value. This will be a property-specific analysis.
All property owners whose properties are newly constructed or renovated in Philadelphia should pay attention to the city’s allocation of value between the building and the land, particularly if such properties have an active tax abatement. Philadelphia has been taking the position that improvements to a property increase the value of the underlying land. It now appears that the city has pegged the value of the land as a fixed percentage of the value of the improvements. This not only reduces the value of any tax abatement on that property, but also can have a nonuniform effect that can be legally challenged to attain a reduction in the property’s overall assessed value.
While this practice seems, for now, limited solely to Philadelphia, case law shows that county tax authorities across Pennsylvania have a history of periodically taking a more active approach to tax assessments to raise revenue. In the wake of the Pennsylvania Supreme Court’s Valley Forge
decision last year and its potential to limit school districts from such revenue generation, tax practitioners should be vigilant about changes to their clients’ local taxing authority assessment practices.
Understanding whether real estate has been appropriately assessed can be complicated. In Philadelphia, property owners who wished to dispute their assessments had to submit a First Level Review, which was due May 25, 2018. If an owner missed the First Level Review deadline, a 2019 assessment may still be formally appealed until Oct. 1, 2018. Property owners who have not received the results of the First Level Review, or who are dissatisfied with the outcome, must file an appeal by this deadline or waive the right to challenge the assessment. Similarly, if an owner wishes to challenge the assessment of a property valued at over $1 million, he or she must pay for a formal appraisal or risk waiving the right to appeal. To learn more about how Philadelphia has assessed your property, visit https://property.phila.gov.
Corinne Samler Brennan, JD, and Amanda Dougherty, JD, are attorneys at Klehr Harrison Harvey Branzburg LLP in Philadelphia. Brennan, a partner, focuses on business and consumer bankruptcy and commercial litigation. She is licensed to practice law in Pennsylvania and New Jersey. Dougherty, an associate, is a member of the firm’s litigation department and focuses on real estate tax litigation. She is licensed in Pennsylvania. Brennan can be reached at firstname.lastname@example.org, and Dougherty can be reached at email@example.com.