Real estate war in the suburbs: Spot assessments infuriating property owners

Cash-strapped suburban school districts have begun an aggressive campaign of initiating reassessments on everything from hotels and retail centers, such as the King of Prussia Mall, to multifamily properties and the Valley Forge Casino — costing some property owners tens of thousands of dollars a year.

Their target is commercial rather than residential real estate since it has the biggest bang for the buck. Apartment buildings have become a particular favorite as their values have shown some of the biggest gains over the last decade.

In Pennsylvania, school districts have the authority to appeal assessments on properties if they believe they are too low. Hamstrung from raising funds through other means and continuously facing funding cuts, these so-called reverse appeals have become an increasingly common method for districts to get more money into their coffers.

The owners of these properties, especially those of apartment buildings, believe districts are illegally "spot assessing" their real estate and the process goes against Pennsylvania's uniformity clause. This law states that taxes should be "uniform" across all property types and that a property type, such as office, industrial or apartment, can't be singled out or taxed at different levels.

Some of the biggest owners of real estate in the region have banded together to stem the situation. Along with the Pennsylvania Apartment Association, they are pushing legislation that would prohibit districts from having such power.

It's an issue that won't go away any time soon and will likely only get more contentious.

"When you have a loss of revenues, which the school districts have experienced, you have services cut, employees that are let go and at the end of the day the students get hurt," said Robert J. Ianozzi Jr., an attorney who represents several districts in Montgomery County. "You need to replace the lost revenue and school districts avail themselves to their statutory right and apply that to those properties that are under-assessed. What the districts are doing is leveling the playing field. This is about all property owners paying their fair share."

A chilling example

An example of this situation, which sent chills throughout the real estate community, took place in Chester County. An organization called the Chester County School District Managers hired a real estate appraisal firm to review the market values and assessments of all apartment properties from 2004.

Appraisal firms are typically paid a certain percentage of the reassessed value of a property.

The hired firm identified several apartment complexes in the county that it determined where potentially under-assessed. Five of those were in the Downingtown School District. The firm recommended that an assessment appeal be made on one property, the Black Hawk Circle apartments, owned by Westover Cos. of King of Prussia.

Black Hawk consists of two parcels. One that is 6.5 acres with 108 apartments and, at the time, was assessed at $3.17 million. The other parcel totaled 3.5 acres with 93 apartments and was assessed at $2.94 million.

The Chester County Boards of Assessment Appeals, where all of these issues initially go to, increased the fair market value of each parcel by $1 million. That resulted in increased assessments of roughly $53,000 in annual tax revenue for the district.

Westover appealed the reassessment to the Chester County Court of Common Pleas, arguing that the district singled the property out and didn't follow the uniformity clause. Westover won.

The school district then appealed the case to the Commonwealth Court of Pennsylvania, which sided with the district in a ruling handed down in March 2013. Westover filed a petition to appeal that result before the Pennsylvania Supreme Court, which declined to hear the case.

That final ruling, which sided with the school district, put commercial property owners on notice that they would be facing an uphill battle when it came to reassessments by school districts. These situations typically settle before reaching court — but increasingly that hasn't been happening.

Guntram Weissenberger, president and CEO of Westover, has two other apartment properties, the Lafayette and Gulph Mills Village, facing reverse appeals by Upper Merion School District. The cases are now before Montgomery County Court of Common Pleas.

"If you only choose our properties and a couple of others, what happens to uniformity if everyone else gets to stay with their level of assessment?" Weissenberger asked. "We understand school boards are fighting for funds and we need to address the expense side of education, too, but to pick out a couple of properties that they feel are under-assessed and appeal them? Our argument is that is unconstitutional. You have skewed the market and created a lack of uniformity."

The stepped-up vigilance by districts has put pressure on landlords to raise rents, said Michael Markman, president of BET Investments of Horsham, which bought 1,400 apartments in seven complexes during the last two years and is dealing with five such appeals in the court system. Markman is involved with a group of apartment landlords mobilized by the situation and they have hired lobbyists to push through legislation that would either eliminate or curtail school districts from engaging in the practice.

"It doesn't seem fair to me that one agency of government can do something that another cannot," said Christine Young-Gertz, government affairs director at the Pennsylvania Apartment Association. "Every member is willing to pay their fair share but not expected to take the burden for the properties that the school district isn't targeting."

Seeking legislation

A bill that was introduced during the last legislative session that would have prohibited school districts from appealing assessments died. State Rep. Kate M. Harper (R-Montgomery) had inserted a provision that would have still given school districts the authority to file reassessments but only if the district would stand to bring in $10,000 or more in revenue from the process. It, in essence, targeted larger properties and was a deal breaker.

"School budgets go up every year and school administrators are always looking for ways to increase revenues," Harper said. "Suburban school districts depend heavily on their commercial property tax base and if some big property owner is not paying their fair share then that means a bunch of other people are paying their fair share. It might be widows on fixed income."

Another version of the bill will be reintroduced during the next legislative session that begins next month.

"We want a bill to rein in spot assessment and take pressure off of our properties in a way that is palatable to everyone," said Young-Gertz of the apartment association.

Both sides agree the issue has exposed a weakness in the state's current method for countywide reassessments. Politically unpopular and expensive reassessments seldom get done and some counties have gone decades without doing one, even though it may mean additional tax revenues that outweigh the cost. Many point to Maryland as a possible model for how Pennsylvania could do assessments. It reassesses every property on a rolling basis every three years.

"The only way to really be fair and uniform is to have more frequent assessments," said Joseph D. Pasquarella, senior managing director at Integra Realty Resources, an appraisal and consulting firm. "The counties should be funded so that they have more frequent assessments and all properties assessed from time to time."

Some landlords and developers believe the situation has started to thwart transactions and may harm future development. To counter some of the uncertainty, developers have begun to approach school districts to strike upfront deals before breaking ground. These arrangements last for 10 or so years and lock in the assessed value.

It has had other consequences. Sophisticated buyers and sellers of real estate have started to arrange deals so that a sale, and therefore a sale price, doesn't get publicly recorded and grab the attention of a school district. This is done by selling a partnership entity that owns the real estate rather than the actual property. As a result, the sale price is concealed and a county transfer tax is also avoided.

Source: Philadelphia Business Journal