A tax case in Allegheny County also spurs a judge to limit government's ability to initiate reassessments of individual properties.

Pennsylvania taxpayers recently scored an important victory when the Allegheny County Court of Common Pleas reasserted taxpayers' right to protection against property overassessment, while limiting taxing authorities' ability to proactively raise individual assessments.

Pennsylvania is the only U.S. state (besides California) that does not mandate periodic reassessments. Instead, it employs a county-by-county method: Each county annually submits sales data to the State Tax Equalization Board, which then creates a "common level ratio" between market value and the previous reassessment value.

Intervals between reassessments vary widely, with Butler County conducting its last reassessment in 1969 and others currently in reassessment. This results in a stilted system that assesses many new owners' properties at the sales price (which may or may not reflect market value), and leaves other assessments unaltered, without updates to reflect changes in the economy and submarket.

Pennsylvania's constitution requires uniform taxing schemes and prohibits government from distinguishing between residential and commercial properties when levying property taxes. As such, all taxing authorities dealing with assessments must administer the laws "in a spirit to produce as nearly as may be uniformity of result."

Actions in Allegheny County

Allegheny County, home to Pittsburgh, has faced extensive litigation over the sales data it submitted annually to the state equalization board for calculating the county's common level ratio. This ultimately resulted in its 2022 common level ratio being retroactively reduced after a county judge held that the county had been "cooking the books" by sending skewed data to the state board. Taxpayers received a special lookback period to appeal their 2022 assessments, and thousands had their property taxes reduced after applying the statistically correct ratio.

Pennsylvania is also one of the few jurisdictions that permit taxing bodies to file assessment appeals against specific properties to raise taxpayers' assessments. In Bhardway vs. Allegheny County, a residential property owner's assessment increased after a school district in Allegheny County filed a tax assessment appeal on the taxpayer's property, and the owner appealed to a higher court. The taxpayer then filed a motion to use an alternative ratio, highlighting the county's lack of transparency and history of sending artificially inflated data to the state equalization board. Finally, the taxpayer argued that it would be financially burdensome for taxpayers to disprove the county's ratio.

Specifically, the taxpayers in the Bhardway case sought to prove non-uniformity under the common-law method by introducing evidence of the assessment-to-value ratios of similar properties in the neighborhood, rather than from the entire county. The Pennsylvania Supreme Court had already approved using such evidence to protect taxpayers from high assessment ratios and to promote uniformity. Allowing this evidence also showed that justices recognized that ratios can vary greatly by location within a county.

In May 2024, the trial judge entered an order granting "parties" permission "to utilize the common law method for establishing common level ratios." This ruling would have been an affront to taxpayers by seemingly allowing taxing bodies to establish various common level ratios for different property classes, in contravention of the Pennsylvania Constitution and established jurisprudence.

Fortunately, taxpayers successfully argued that the Pennsylvania Supreme Court's approval of the common level method did not extend to, or approve of, taxing bodies' disparate treatment of residential and commercial property owners. Allowing taxing entities that ability would instead disrupt uniformity, create confusion, and result in more litigation, they argued.

On Sept. 3, 2024, the judge amended his original order in the case and limited taxing bodies' ability to use the common law method. As it stands, taxing authorities can now only use such evidence if it does not sub-classify properties, or to dispute a taxpayers' evidence by using similar properties of the same nature in the neighborhood.

While the judge's ruling protects taxpayers from the long reach of taxing entities, only legislation mandating periodic reassessments statewide will solve the problems that naturally arise from Pennsylvania's outdated base-year system, which does not accurately reflect the ebbs and flows of the real estate market. The state's current system burdens taxpayers with non-uniform and outdated assessments, while taxing authorities struggle to balance their budgets.

Until the state corrects these fundamental flaws to ensure fairness for all, it is essential that taxpayers continue to file tax appeals that assert their protections against overassessment and right to uniformity in taxation as guaranteed by the Pennsylvania Constitution and courts. 

Commercial property owners may still reduce taxes based on COVID-era interest rate cuts, but that window may be closing.

The Federal Reserve finally delivered a much-needed reprieve for investors by lowering the federal funds rate by 0.5% on Sept. 5. This reduction is especially welcome after an extended period of rapid interest rate hikes. For commercial property owners, however, a window may be closing on the opportunity to reduce property tax assessments based on the low interest rates that reigned during the COVID-19 pandemic.

Mortgage rates have eased slightly this year from a peak in October 2023. The average 30-year mortgage rate reached a 23-year high of 7.79% the week ending Oct. 26, 2023, marking the end of its climb from a staggering historical low of 2.66% in December 2020, according to the Freddie Mac Primary Mortgage Market Survey.

This striking contrast is crucial for commercial property owners, particularly those who bought their properties between early 2020 and the summer of 2022. That's when historically low interest rates had the 30-year mortgage rate bouncing along as low as 2.10%.

An investor who purchased commercial real estate in this timeframe may still be enjoying a favorable mortgage rate locked with their acquisition. By the same token, the property tax assessment on that transaction might still reflect an inflated purchase price from those years, owing to the effect that ultra-low-cost debt was having on market pricing at the time.

Today, taxpayers in this position may be able to argue that current market conditions no longer support that valuation, providing an opportunity for an assessment reduction and tax savings.

Learn the law on assessments

A taxpayer deciding whether to appeal their assessment should begin with an understanding of the objectives and legalities governing the assessor's actions. Most jurisdictions assess property based on a percentage of its fair market value at a specific date, often Jan. 1 of the tax year.

Assessors frequently rely on market sales data to estimate value, giving significant weight to recent sales involving the subject property. But the sharp change in interest rates, coupled with stricter lending standards, recently has led to a significant slowdown in commercial real estate transactions.

Because the assessor relies on sales data, this lag in transaction activity means they may not fully capture the impact of today's financial environment on current pricing and property values. For taxpayers, this presents an exciting opportunity to argue for reduced assessments.

To successfully claim a reduction, it is critical for the taxpayer to understand how the assessor valued their property and how current market conditions differ from those at the time of acquisition. For instance, if the property is being taxed based on transaction values from 2020-2022, the taxpayer could reasonably argue that its worth has since decreased due to inflation, the rise in interest rates, and tightened lending standards.

In preparing arguments for a reduced assessment, the property owner should be ready to show how conditions and trends that drive commercial real estate value support their call for a lower valuation. Several key factors are weighing down real estate values today, including rising interest rates, inflation, elevated operational costs, and anemic rent growth.

Vacancy rates remain high across many commercial sectors and rent growth has slowed. Lenders are adhering to strict terms on allowable loan-to-value ratios, reserves and other requirements, even after the Federal Reserve's recent rate cut. The Federal Reserve's July 2024 Senior Loan Officer Opinion Survey reflects that tighter lending standards and limited demand for commercial real estate loans are still in effect.

Commercial property prices fell by 7% over the past year and are down 21% since March 2022, according to Green Street's Commercial Property Price Index. Taxpayers can leverage this valuation decline when seeking a property tax assessment reduction.

Show effects of change

When meeting with the assessor or tax review panel, demonstrate the property's decreased value by comparing the lending environment and market conditions from the time of purchase with those at the most recent assessment date. Additionally, present any other salient factors, like the inflationary pressure on insurance, maintenance, and operational costs. While rents may have risen, assess whether that increase is sustainable or inflated considering today's higher tenant improvement costs.

Taxpayers should decide whether they need third-party experts to support their case. An experienced appraiser can provide an objective valuation and serve as an expert witness if necessary.

Even taxpayers who believe they have a good grasp of their property's worth can benefit from the advice of a recognized third-party expert, who can strengthen their case by explaining and substantiating the data to the assessor. An appraiser who is educated about the local submarket and who can convey that knowledge in a format this is easily digestible will likely raise the chances of success.

The window is closing

This opportunity will not last long. The further removed the assessment year is from the low-interest-rate period associated with the property's inflated assessment, the less relevant those conditions will be in seeking and supporting a property tax reduction. Moreover, the longer a property's assessed value remains unchanged, the harder it becomes to argue for a reduction.

Taxpayers can increase their chances of success by working with knowledgeable local appraisers and advisers familiar with property tax law in the subject property's jurisdiction. Preparing for a possible trial will often lead to a favorable settlement before reaching that stage.

Taxpayers should seize this chance now to secure the tax savings they deserve, before the opportunity is gone.