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Nov

Tax Pitfalls, Opportunities in Pittsburgh

Here's what investors should know before buying or developing in the Steel City.

Over the past decade, Pittsburgh has been named the most livable city in the continental U.S., a hipster haven, a tech hub and other trendy titles. Publications laud the city's affordable housing stock in a stable real estate market, access to the arts in an established cultural community, and world-class healthcare and higher education that place the Steel City at the forefront of medicine and robotics.

This attention has drawn real estate investors to submarkets well beyond downtown Pittsburgh's Golden Triangle. Even in the midst of the pandemic and the economic uncertainty that has come with it, a surprising amount of new development has continued in the region.As investors from outside the region consider investing in this real estate market, they should be aware of idiosyncrasies and pitfalls lurking in Pennsylvania tax law.

Welcome, Stranger

As in most states, assessors in Pennsylvania cannot independently change a property's assessment upon its transfer. However, Pennsylvania lets local taxing districts appeal assessments and request value increases, which they often do following a sale. Locals call this the "welcome stranger" tax.

"One of the most common reactions I hear from our out-of-state clients who are new to this market is disbelief that school districts can appeal assessments," says Sharon F. DiPaolo, Esq., the managing partner of Siegel Jennings' Pennsylvania property tax practice. "Of course, in most states that's called a spot assessment, but in Pennsylvania it's just another appeal."

In fact, local school districts (which take the largest piece of the property tax pie) filed more assessment appeals than property owners in 2017-2019, according to The Allegheny Institute for Public Policy data. "The most difficult part for buyers is accurately estimating what is obviously a large part of a property's value equation," DiPaolo explains. "Buyers can budget for the legal costs of defending against an appeal by the government, but it's much harder to underwrite the real estate taxes when they can't know where the assessment will eventually be set. We have seen many investors choose not to enter this market because of the uncertainty."

Allegheny County in particular is unusual in that it has a March 31 assessment appeal deadline, and Pennsylvania uses the filing date as the effective date of value for assessment appeals.This means that properties already under appeal for 2020 should be valued as affected by the early fallout from COVID-19, and 2021 appeals will have to consider the pandemic's continuing impacts on property values.

Understanding the local legal landscape can help investors budget for potential risks, and thoughtfully structuring a deal can sometimes help reduce that risk. For instance, when appropriate, transferring a property's holding company rather than the property itself can avoid triggering an increase appeal.

Further, properly allocating a purchase price—either among multiple properties in a portfolio or among the different components of a going concern—can avoid misinterpretation of deeds and transfer tax statements by local taxing authorities. This also ensures Pittsburgh's 5% transfer tax is applied to the real estate only.

Net lease investors should also be aware that, while many states can be described as "fee simple" or "leased fee" jurisdictions, Pennsylvania is unique in that, in practice, its courts will usually tax a leased property according to whichever of those values yields greater taxes. Through a series of cases over 15 years, Pennsylvania's appellate courts have struggled to base a property's taxation on its "economic reality."

Currently, a property achieving above-market rent is assessed according to its leased fee value (which will be greater than the fee simple value), while a property with below-market rent will be taxed at its fee simple value (which will be greater than its leased fee value). Under this system, two physically identical properties within the same taxing district can be assessed at wildly different values.

Neighborhood Discrepancies

Anthony Barna, senior managing director of Integra Realty Resources Pittsburgh, cautions investors to vet property specifics. "People keep saying,'Pittsburgh's hot,' but it's not the whole region," he says. "It's not even the whole city."

While office vacancy in the CBD had reached a 10-year high even before the onset of the pandemic, some nearby neighborhoods including Oakland and the Strip District can barely satisfy demand. Similarly, new apartments in popular neighborhoods like Lawrenceville are stabilizing quickly at record rental rates, yet rents and occupancies in other neighborhoods remain flat.

"The lack of a significant population increase in the city, coupled with the large number of new residential units coming online, threatens the economic balance and risks an oversupply," Barna observes.

Even more fundamentally, Barna says "a lot of our neighborhoods don't yet have the infrastructure to actually support what someone might want to build." In fact, Amazon cited infrastructure concerns as a major factor in its decision to drop Pittsburgh as a final contender in its HQ2 search.

Similarly, developers should investigate available tax breaks, which vary by location. Frequently these come in the form of Tax Increment Financing (TIF) or Local Economic Revitalization Tax Assistance (LERTA). In 2019, Pittsburgh opened all neighborhoods to potential tax benefits for new developments that meet certain employment or affordability requirements.

Tammy Ribar, Esq., Director at Houston Harbaugh who concentrates her law practice in commercial real estate transactions, advises that additional opportunities are available through various government bodies and can entail program-specific deadlines. "I think the best advice I can give to buyers is to research and understand in advance what programs are available and be informed about applicable deadlines, so that a relatively easy opportunity for savings is not missed," says Ribar.

Based on the recent pace of construction throughout the city, many investors have clearly decided that Pittsburgh's anticipated rewards outweigh its risks. And as many have learned, working with knowledgeable locals during planning can help to avoid headaches – and create significant savings later.

Brendan Kelly is an attorney in the Pittsburgh office of Siegel Jennings Co. LPA, the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys.

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Pennsylvania Property Tax Brendan Kelly Northeast Real Estate Business

Jul

Ohio’s Misguided Tax Fix

Published Property Tax Articles

A proposed law to close the "LLC Loophole" from real estate transfer taxes is a solution in search of a problem.

Ohio legislators are drafting a measure to apply the state's real estate transfer tax to the transfer of any ownership interest in a pass-through entity that owns real property. This proposal will cause more problems than it solves.

Ohio assesses its transfer tax, called a conveyance fee, on each real estate transaction based on the purchase amount reported on a conveyance fee statement and filed with the deed. If a pass-through entity owns the property, a sale of interest in that entity is exempt from transfer tax. The proposed changes would apply the conveyance fee to those transfers, however.

Also, if the property purchase price exceeds currently assessed value, recording the conveyance fee statement and deed with the county will usually trigger a lawsuit by the school district to increase the assessment and tax bill.

Transfers exempt from transfer tax include gifts between spouses or to children; sales to or from the U.S. government, the State of Ohio or any of its political subdivisions; transfers to provide or release security for a debt or obligation; and sales to or from a non-profit agency that is exempt from federal income tax, when the transfer is without consideration and furthers the agency's charitable or public purpose. Generally, the policy is to impose the transfer tax only after a market transaction with market consideration.

What's the problem?

Lawmakers consider the proposal on transfer tax and pass-through entities a tool to fix the problem of real estate value escaping taxation, both at the time of transfer and, more importantly, as part of the assessment. The two supposed loopholes that the proposal aims to close are:

The transfer tax loophole argument assumes that some buyers may structure their purchase as an entity transfer, in part, to avoid the transfer tax, which can be significant for a highly valuable property.

The property tax loophole describes the more likely "problem" the proposed law purports to address. This argument suggests that some buyers attempt to avoid real estate tax increases when the purchase price is higher than the current tax assessment by structuring the deal as an entity transfer

Ohio assumes that a recent, arm's length sale price is the best evidence of property value for real estate taxation. Filing the deed and conveyance fee statement prompts the school district to file a lawsuit to increase the taxes. The conveyance fee statement indicates the purchase price, carries evidentiary weight and is presumed to be completed under oath, even though as a practical matter it is more like a clerical function and seldom completed by any party to the sale.

When interest in the ownership entity transfers without direct conveyance of the real estate, the transfer tax is inapplicable under current law and no purchase price is recorded. Some sales may be structured this way, trying to avoid exposure to an increase in property taxes by filing a conveyance fee statement.

Everyone should bear their share of the tax burden based on fair property valuation, but this proposed bill does not solve the problem of people skirting their responsibility. It also can lead to unintended consequences including the loss of privacy, increased transaction costs, implementation and enforcement costs, and less real estate investment.

A multilayered dilemma

There is no indication that using a pass-through entity is even an effective way for investors to avoid triggering an increased assessment. Ohio school districts file increase complaints not only when deeds and conveyance fee statements are recorded, but also in response to mortgages, LLC transfers, SEC filings, and sometimes the opinion of outside consultants. There is little evidence that significant numbers of sales are missed because they are the transfer of ownership interests. Thus, there is no loophole that needs to be closed.

The proposal disrupts uniformity, because using a recent purchase to set the assessment midway through Ohio's three-year valuation cycle treats taxpayers who've recently bought their properties differently than others. This is non-uniform treatment, which the Ohio Constitution prohibits.

The conveyance fee statement is often completed and filed by someone not a party to the sale. Common errors occur, usually in allocating the total asset purchase price. Historically, these incorrectly reported purchase prices were being applied to set real estate tax values with increasing rigidity, leading to assessments that did not accurately reflect the value of the real estate.

Assessments should only value real estate, but assessments based on these total asset prices would include the value of non-real estate items as well. To the extent that the value of these other items -- for example, an ongoing, successful business operation -- were also being taxed through sales taxes or a commercial activity tax, these taxpayers were subjected to double taxation.

The solution exists

A recent amendment to the tax law mandates that a real estate assessment reflect the unencumbered fee simple interest. The Ohio Supreme Court recently confirmed in its Terraza 8 LLC vs. Franklin City Board of Revision decision that the amendment requires assessors and tribunals to evaluate all circumstances of a sale, and not blindly apply the number reported on the conveyance fee statement.

The appraisal of the unencumbered fee simple interest provides uniform assessment for all taxpayers, while acknowledging the circumstances of real world transactions. It limits double taxation by making sure real estate tax is based on real estate value only, and yields consistent results whether a sale price is higher or lower than the current assessment.

It ensures uniform measurement and taxation for everyone; just as you would not impose taxes based on gross profits for one taxpayer and net profits for another. It also ensures that the tax is applied consistently, whether the owner just bought the property, has owned it for decades, leases it, occupies it, owns it individually or owns it through interests in a pass-through entity. Valuing the unencumbered interest also results in predictability, aids budgeting, and alleviates deal-killing uncertainty.

There are legitimate reasons to convey property through the transfer of ownership interests in an LLC or other pass-through entity, including privacy or other tax planning. The proposed bill undercuts those legitimate concerns without addressing the perceived problem of real estate value escaping taxation. Consistently valuing the unencumbered fee simple interest of real property through uniform assessment and uniform application ensures that no real estate value escapes taxation, and that no taxpayer bears more than their fair share of the burden.

Cecilia Hyun is a partner at the law firm Siegel Jennings Co. L.P.A., which has offices in Cleveland, Pittsburgh, and Chicago. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Jan

RETAIL SUFFERS FROM EXCESSIVE TAX ASSESSMENTS Assessors attempt to ignore market realities when valuing retail property.

Published Property Tax Articles

Retail property owners' pursuit of fair treatment in real estate taxation seems to generate a river of appeals and counter-appeals each year. What makes this ongoing melee especially perplexing and frustrating for property owners is a sense that taxing entities will often ignore market realities and established valuation practices to insist upon inequitable, inflated assessments. This tendency to forsake industry norms is rampant, and calls for a dose of reality. This article uses the term "real value" to describe that often ignored element of true property value or genuine value of the real estate only, meaning the market value that buyers and sellers recognize as a product of an asset's attributes and the real-world conditions affecting it. Real value in this usage is not a legal term, but encompasses issues that real estate brokers, property owners, appraisers, lawyers and tax managers regularly discuss in retail valuation. The array of issues that affect real value or market value range from the influence of ecommerce on in-store sales to build-to-suit leases, sales of vacant space, capitalization rates for malls of varying quality, proper accounting for economic or functional obsolesce and more.

All of these important and timely issues find their way into an age-old discussion of how to properly value the real estate, and only the real estate, in retail properties for property tax purposes. Although these topics may involve complex calculations or judgments, buyers and sellers regularly use these concepts to arrive at mutually agreeable transaction prices, which is exactly the sort of real value that assessors should recognize for taxation. Some taxpayers may be surprised to learn that the arms-length sale of a property on the open market isn't universally accepted among taxing entities as representing that property's real or taxable value. The path to remedying assessors' tendency to avoid finding the real value of the real estate only is to educate tax authorities and their assessors by appealing unjust assessments, and by sharing the details of beneficial case law that continues to shape tax practices across the country.

Cases in Point

Tax laws vary from state to state so that the applicable principle that comes from the case decision in one region may not fit neatly in another region. Nevertheless, trends and concepts are always important guideposts that need to be recognized. Taxpayers who present case law from other regions to their local courts can begin the process of introducing the truth of real value in their market. A number of new retail property tax cases have come from the Midwest. These cases deal with issues that tax payers coast to coast have argued and continue to argue in the struggle to establish real value in court for retail property. ln 2016, the Indiana Tax Court heard an appeal from the Marion County tax assessor, who was unhappy with an Indiana Board of Tax Review decision that granted lowered assessments on Lafayette Square Mall for the 2006 and 2007 tax years. The assessor had originally valued the property at $56.3 million for 2006, but the county's Property Tax Assessment Board of Appeal reduced that amount by more than half. Simon Property Group, which owned the mall during the years in question, appealed to the Board of Tax Review, which further reduced the property's taxable value to $15.3 million for 2006 and $18.6 million for 2007. During the appeal, taxpayer, Simon Property Group, presented evidence of the mall's $18 million sale in late 2007. It stated it had begun to market the property for sale because it was suffering from vacancy and leasing issues and the property no longer fit its investment mission. The taxpayer's appraiser independently verified the sale and concluded it to be arms-length, having been adequately marketed and there being no relationship between buyer and seller and no special concessions for financing.This scenario seems like what most of us in the tax assessment community would consider a textbook example of market-defined value. Yet the county assessor appealed the review board's conclusion to the tax court.

What is noteworthy here is that the court affirmed the tax board's conclusions, which were also in line with the taxpayer's evidence from a real-world transaction. The sad part about this event is that it required years of review and expense to prove that a sale in the open market reflected value. In Michigan in 2014, the Court of Appeals heard a case presented at the Michigan Tax Tribunal which concluded in favor of the taxpayer, Lowe's Home Centers. The case is significant because the court accepted a market based value as true taxable value. The taxpayer's expert testified regarding its appraisals and indicated that they were appraising fee simple interest or the value of the property to an owner, and at the highest and best use as a retail store, valued as vacant. They distinguished between existing facilities and build-to-suit facilities, explaining that the subject property is an existing facility and that the build-to suit market rent or sale price is based upon cost of construction, whereas the existing market sale price or rent is a function of supply and demand in the marketplace. Basing his analysis on the above fundamental premise, the taxpayer's appraiser valued the property in detail. Again, what makes this case significant is that the tribunal accepted the taxpayer's argument, and the court affirmed that decision.

Incremental Acceptance
While these principles seem universal, they have been rejected in many regions of our country. Tax-assessing communities wage battles to impose excessive values based on a rejection of the actual market. As most tax systems are based in the market value concept, the only resource for these taxing jurisdictions is to distort the concept. These issues are as old as dirt, but resolution remains elusive. The lesson here for the retail property owner appealing an assessment is to advance arguments that reflect real-world conditions supported by evidence. The decisions in these cases and others tell us that someone is listening to those arguments, and taking heed.

Philip Giannuario is a partner at the Montclair New Jersey, law firm Garippa, Lotz & Giannuario. the New Jersey and Eastern Pennsylvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. Philip Giannuario can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Dec

Time for your Annual Property Tax Check

Published Property Tax Articles

Question: What do the following have in common? A developer of a new mixed-use power center. The owner-operator of nursing homes or assisted living facilities. A national retailer with a large distribution center. A 100+ unit multifamily owner or manager. The owner of hotel chain. A high-tech manufacturer with a research and development facility. Answer: They all pay property taxes.

Whether you are a real estate investor or need real estate to house and facilitate your business operation, your real estate taxes will be one of your highest expenses, and one that you must pay even if your property is vacant or underperforming. Now is the time for your yearly check-up on your Ohio properties to determine whether the values that form the basis of your property taxes are fair.

Review your assessment

Start by reviewing the assessment on your tax bills. In Ohio, your tax valuation should reflect a reasonable sale price under typical market circumstances for the land and improvements as of the tax lien date of January 1, 2017. Verify that the information in the county records is accurate. For many Ohio counties, including Cuyahoga, much of this information will be online. Double-check building size, land size, year built, number of stories, etc.

Grounds for a change in value

The following are the most common types of evidence considered by boards of revision, which is the initial reviewing body:

Sale

One way to demonstrate value is with a recent, arm's length sale price. Generally, if a sale occurred within two years of tax lien date, did not include any non-real estate items, and was typically motivated, the price will be good evidence of the real estate value for tax purposes.

Appraisal

An appraisal can also be used to justify a change in value. Appraisal done for tax appeals must value the property as of the tax lien date. The appraiser should also be ready to testify at the hearing. Appraisals for tax appeals may have requirements that are not necessarily present for appraisals for other purposes, such as financing, so it is helpful to talk to someone familiar with the process.

Property Conditions

If there are unusual conditions, severe deferred maintenance, sudden changes in occupancy, or ongoing vacancy issues that affect the value of your real estate, that information should be brought to the attention of the board. Recent sales of properties similar to yours that support a lower value for your property may also help demonstrate that your valuation is incorrect.

Filing Deadline

The deadline to contest your assessment for properties in all Ohio counties is March 31. Because it falls on a Saturday in 2018, the deadline will be extended to April 2. The complaint form can be obtained from the county in which the property is located. The form is only one page; however, there are restrictions on who can file a complaint (i.e. what relationship they have to the property) as well as some technical requirements that may be missed by those unfamiliar with them. Generally, only one complaint can be filed per triennial period, although there are some exceptions.Once the deadline has passed for a particular tax year, the chance to contest that assessment is lost.

Procedure

After your complaint is filed, the local school district where the property is located has the opportunity to file a counter-complaint. After the period to file both complaints and counter-complaints has expired, the county board of revision will schedule a hearing. Each county board has its own rules regarding the submittal of evidence, requests for continuances, etc. At the board of revision hearing you will have the opportunity to explain why the assessment of your property is inaccurate. Boards of revision are not generally bound by the Ohio Rules of Evidence; boards are also empowered to conduct their own research. The board of revision may adopt the value you are seeking; it may make no change, or grant you are partial decrease. It may even increase the value, so it is important to consider carefully before filing a complaint.

Appealing the BOR decision

If you do not agree with the decision of the board of revision (BOR), you can appeal it to the county court of common pleas, or the Board of Tax Appeals (BTA) in Columbus. The BTA is an administrative tribunal that only hears tax related cases. Proceedings at this level are more formal than at the board of revision. Prior to September 29 of this year, a decision of the BTA could be directly appealed to the Ohio Supreme Court. Now any appeals from the Board of Tax Appeals and courts of appeals to the Ohio Supreme Court are discretionary and not as of right. The Supreme Court can decide not to hear your case. It is unclear yet the consequences of this recent legislative change, but there may be an increase in disparate treatment across the state as a result.

School district increase complaints

All Ohio taxpayers should be aware that Ohio is one of the few states (Pennsylvania is another) where school districts are enabled to file an action to get your tax valuation increased. Usually, this occurs when a recent purchase price is higher than the most recent tax assessment. Be aware of how the taxes will be prorated when you are working on a sale transaction. Depending on the timing of the sale, you may end up owing additional taxes for a period during which you did not actually own the property.

No one enjoys paying taxes, but with some research and preparation, you can make sure that your share of the real estate tax burden is fair.

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., and 2017 CREW Cleveland President. Siegel Jennings has offices in Cleveland and Pittsburgh and is the Ohio and Western Pennsylvania member of American Property Tax Counsel (APTC) the national affiliation of property tax attorneys. Cecilia Hyun can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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Aug

Property Owners Celebrate Fair Taxation Ruling by Pennsylvania Supreme Court

Published Property Tax Articles

"Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed."

Commercial property owners around the country are cheering a recent Pennsylvania Supreme Court decision that breathes new life into constitutional guarantees of uniformity in taxation. Overruling a decade of lower court decisions, the ruling reestablishes the primacy of constitutional uniformity protections to taxpayers in the strongest possible language, fittingly issued just one day after the July 4 holiday.

Nearly every state constitution requires uniformity in taxation, meaning that two like properties should receive the same assessment, no matter how they are owned, occupied, built or financed. Yet commercial property owners across the nation have been under attack by assessors attempting to alter appraisal theory in order to pin higher assessments and higher real estate taxes on specific owners.

These assessors have been singling out occupied commercial properties by setting assessments based on financing mechanisms that fail to meet standard appraisal definitions of market sales, incorrectly basing taxable value on data relating to sale-leasebacks, turnkey leases and contract rights arid duties associated with tenant financing.

In Pennsylvania and Ohio, the only states that provide school districts a statutory right to file increase appeals, the school districts have been targeting specific commercial owners for higher assessments using this same flawed methodology. These selective or “spot” appeals disrupt constitutionally required uniformity in assessment. Many Pennsylvania school districts have been paying contingency fees to behind-the-scenes consultants to select properties for appeal.

Commercial Portfolio Owners Beware

The consultants’ favorite repeat targets are national real estate portfolio owners that cannot vote in local school board elections. The practice has gained traction over the past five years, with national companies being forced to defend against an ever-increasing number of increase appeals in which school districts seek discovery of the property owner’s confidential real estate information and then use it against the owner to justify an increase in assessment.

This practice violates fundamental fairness and puts targeted commercial owners at a competitive disadvantage with commercial owners whose assessments are not increased. It also shifts more of the tax burden from residential to commercial owners, since most school districts are loathe to sue voting residential owners to increase their assessments.

In Valley Forge Towers Apartments LP vs. Upper Merion Area School District, the school district filed increase appeals only against commercial property owners and not against residential owners. The district selected properties for appeal after consultation with Keystone Realty Advisors, a New Jersey tax consultant that employs trained appraisers and takes a 25 percent contingent fee on any increase in taxes resulting from its recommended appeals.

Four apartment building owners that had been targeted for these appeals challenged the school district’s selection of only commercial owners for appeals as violating the Pennsylvania Constitution’s uniformity in taxation requirement. Both the trial court and the first-level appellate court denied the taxpayers’ challenge, holding that the school districts goal of increasing revenue justified the selective nature of the appeals.

The Pennsylvania Supreme Court reversed those rulings. The court stated that all taxpayers must be uniformly treated, whether they are residential or commercial owners, and that no assessment scheme can systematically treat residential and commercial taxpayers differently.

The court stated no less than 13 times that all real estate is a single class. The court observed that this constitutional tenet has been in place since 1909 and was reaffirmed by the court on multiple occasions, and that the court had no intention of discarding it. The court then stated that the government may not create sub-classifications of property for different tax treatment, a point it repeated nine more times in its decision.

What the Ruling Means Going Forward

The ruling makes it abundantly clear that all real estate must be taxed uniformly, and that this constitutional protection is for the benefit of the taxpayer:

“First, all property in a taxing district is a single class, and as a consequence, the uniformity clause does not permit the government, including taxing authorities, to treat different property sub-classifications in a disparate manner,” the court stated. “Second, this prohibition applies to any intentional or systematic enforcement of the tax laws and is not limited solely to wrongful conduct.”

The court then remanded the case to determine if there was a systematic disparate treatment of the Valley Forge taxpayers. It will be unnecessary to show that the school intended to treat the taxpayers differently from other taxpayers.

The principal takeaway from the case is that all taxes must be uniformly assessed, and that any purposeful or unintentional systematic assessment that treats taxpayers in a disparate manner is unconstitutional.

The Pennsylvania Supreme Court’s decision underscores the need for a real estate taxation standard that treats residential and commercial properties uniformly. In current practice, assessors around the country assess commercial and residential properties using different standards. Residential property is taxed on a fee-simple, unencumbered basis: that is, the property is assumed to be vacant and available for purchase as of the assessment date.

Commercial property, on the other hand, increasingly has been assessed on the assumption that it is occupied by a successful business. In those instances, the assessment reflects the way that the business finances its occupancy, whether it chooses to lease the building or own it outright. Commercial property frequently trades as part of an ongoing business or with long-term leases, deed restrictions or other use restrictions in place. But to be uniform, property taxes must rely upon a single interest valued for tax purposes.

The only interest that is uniform across all categories is the fee-simple, unencumbered value. As the Valley Forge decision makes clear, there can only be one standard because all real estate is a single class.

Now, across the country, tax professionals can use the Valley Forge decision to bring fairness to commercial property owners.

Sharon DiPaolo

Sharon DiPaolo is a Partner in the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. Sharon can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Mar

Pennsylvania Supreme Court Takes Up Issue of Reverse Property Tax Appeals Across State

Published Property Tax Articles

The Philadelphia School District is looking to increase the number of reverse property tax appeals, which could result in more tax dollars for schools such as South Philadelphia High School

Pennsylvania property owners and tenants, who pay some of the highest property taxes in the nation, are no doubt aware of the annual deadline to file a property tax appeal. After all, one look at a new tax bill is often enough to make even the most seasoned tax manager scramble to contact their local tax counsel.

However, very few taxpayers are aware that the assessment they may have accepted as favorable could easily trigger a reverse appeal filed by the local school district.

Assessment appeals filed by the taxing entities, often referred to as reverse appeals, are increasingly common as cash-strapped school districts seek to fill their coffers. Just as a tax manager might view an inflated assessment as a reason to appeal, more and more school districts see potentially under-assessed properties as a much-needed source of additional revenue.

To the bane of many taxpayers, this tactic has now reached the city of Philadelphia. Despite undergoing a citywide property revaluation for the 2014 tax year, with another currently slated for 2018, the Philadelphia School District recently decided to begin filing reverse appeals against properties it feels are under-assessed.

On Sept. 15, 2016, for the first time, the school district authorized the superintendent to contract with an outside law firm for the sole purpose of filing reverse appeals on the district’s behalf. It also authorized the superintendent to contract with Keystone Realty Advisors LLC, a real estate valuation and advisory group that will serve as the primary identifier of under-assessed properties in the city.

Changes a long time in the making

To many in the world of tax appeals, the emergence of reverse appeals in Philadelphia was unsurprising and inevitable. Keystone had previously peddled its services in a number of other Pennsylvania counties, including Lackawanna and Luzerne. Additionally, last year the Philadelphia School District hired Uri Monson to fill the vacant chief financial officer position. Monson previously served as chief financial officer for Montgomery County, another Pennsylvania county that saw a number of school districts utilize Keystone’s services to identify potential reverse appeals.

In Philadelphia, Monson says the reverse appeal initiative will focus on properties that are undervalued by at least $1 million. City Councilman Allan Domb has indicated that there may be up to $75 million in untapped revenue from commercial properties alone. The school district, which receives 55 percent of the city’s total property tax revenue, stands to gain up to $41 million.

According to Monson, reverse appeals are a tool to ensure that the school district’s funding is spread equitably across all taxpayers throughout the city, and are not intended to target particular neighborhoods or classes of property. Commercial taxpayers are not so sure.

Currently pending at the Pennsylvania Supreme Court is the case of Valley Forge Towers Apartments N, LP vs. Upper Merion Area School District and Keystone Realty Advisors, LLC. At issue before the court is whether the Upper Merion Area School District and Keystone Realty Advisors violated the uniformity clause of the Pennsylvania Constitution by selectively filing reverse appeals on commercial properties, while ignoring significantly under-assessed single-family properties.

The court will have to decide whether a school district’s statutory right to file an appeal, and an economic reason for doing so, insulate the district from review when it decides to appeal an assessment.

The long-term results

The Supreme Court’s decision will likely have far-reaching effects. Should the court decide that the school district and Keystone’s method for selecting reverse appeals does indeed violate the uniformity clause, that finding will likely preclude taxing districts throughout the state, including Philadelphia, from selectively filing reverse appeals.

On the other hand, if the court rules in favor of the school district, it will legitimize the current reverse appeal process that is slowly permeating the state. The latter result may even inspire additional taxing districts to explore reverse appeals as a source of revenue generation.

The court has already received over a dozen friend-of-the-court briefs from various groups with an interest in the outcome, seeking to weigh in on the issue. Oral arguments were heard on March 8, 2017, though it will be months before the court issues a decision.

Whatever the outcome, taxpayers will want to pay close attention to the Supreme Court’s decision, especially those considering purchasing property in Philadelphia or any other school district that actively pursues reverse appeals.

Under the current system, one of the easiest ways for the districts to pick up on potential appeals is to compare the sale price against the property’s current assessment. Unfortunately, this often means unexpected litigation expenses for new property owners and the potential for higher-than-anticipated tax bills.

Gregory Schaffer photo

Gregory Schaffer is an associate at the Montclair, N.J., las firm Garippa Lotz & Giannuario, a New Jersey and Eastern Pennsulvania member of American Property Tax Counsel (APTC), the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Oct

Why Taxing Authorities are Suing Taxpayers

Published Property Tax Articles

Municipalities and school districts increasingly file lawsuits to increase property tax assessments.

As property owners increasingly participate in transactions across multiple states and countries, they could be shocked to find themselves defending against a lawsuit filed to increase their real estate taxes.

A minority of states allow the local real estate tax assessing body or school district to appeal a tax assessment, arguing that the property's value and resulting taxes should be higher. States where these types of appeals are allowed include Ohio, Pennsylvania and New Jersey. Property owners in those states should be aware that someone may be filing a lawsuit to increase their property taxes.

Method to the madness

Taxpayers cannot prevent a school district or assessing body from appealing a property tax assessment in states that allow them to do so. Property owners should be especially watchful in the following situations where it is more likely to occur:

Sales – In Ohio, if a recorded sales price is higher than the current assessment, it is almost guaranteed that the local school district will file a complaint to increase an assessment, particularly in large markets around urban areas.

School district attorneys routinely review recorded sales for comparison to the current assessment. Although recent legislative changes have increased assessors' ability to consider all relevant facts of a sale, a recorded sales price is still a formidable challenge to overcome.

In Pennsylvania, and particularly in Western Pennsylvania, sales are the most common trigger for an appeal to increase a tax assessment. In states where chasing sales price may run afoul of constitutional protections, the local taxing authority may wait until a few years after the sale closes before filing the appeal.

Mortgages – In response to lower sales prices and increased sales volume resulting from foreclosure or bankruptcy during the Great Recession, taxing bodies also file appeals to increase taxes based on recorded mortgages.

Similar to the tracking of recorded sales, attorneys for the taxing authority will review the amounts of recorded mortgages and compare them to the current assessment.

When the mortgages are secured by collateral that includes other assets in addition to the real estate, this practice can lead to inaccurate and inflated real estate tax assessments.

Other available filings – A recent case in Ohio shows the spread of this practice from recorded mortgages and deeds to Securities and Exchange Commission (SEC) filings.

The local school district filed an appeal to increase the assessment of an apartment in Athens from approximately $12.6 million to $48.98 million, based on an SEC filing by a mortgage lender.

The property owner's attorney has stated that the SEC filing includes the total value of the business purchased, which includes other assets in addition to the real estate.

The local county board of revision granted the revision at the first level of review and the case is currently on appeal.

Outside consultants – In Pennsylvania, taxing authorities filing complaints to increase assessments are on the rise, particularly in counties that have riot undergone a reassessment in some time, based on the recommendations of outside consultants.

These consultants contract with a particular taxing body, typically the school district, to review assessments and recommend appeals on properties they identify as under assessed.

Although this consultant activity seems most prevalent in the eastern part of the state, the regular practice of school districts filing appeals is spreading across Pennsylvania.

Meanwhile, in Ohio certain school districts have even begun to file complaints to increase values in cases that have previously been tried in court.

Practical pointers

Because sales trigger so many of these cases, it is important to get pre-closing advice on the property tax consequences affecting your specific property. There may be measures the taxpayer can take in structuring the transaction to avoid or minimize an increase in taxes.

Be aware of the tax consequences of recorded and publicly available documents, including SEC filings, particularly with portfolio asset purchases across multiple states.

Filially, attorneys for the taxing body may use procedural tactics to fish for non-public documents that could help them argue that a property is under assessed. For example, school districts in Ohio have used the discovery process to subpoena financing appraisals from lenders.

Local expertise is key

Because real estate taxing schemes vary greatly, owners should consult local tax professionals to determine the best strategy to defend against an appeal that seeks to increase the property owner's taxes, or to minimize the potential that such an appeal will be filed in the first place.

Procedural, jurisdictional and evidentiary traps abound for those not well-versed in the local law.

For example, in Ohio, property taxes are levied and paid one year behind, meaning that taxes for the 2016 tax year are paid in calendar year 2017. Similarly, appeals to reduce or increase the tax assessment are filed one year behind.

If a taxpayer purchases a property and the sale closes on Dec. 31, 2016, for a recorded price that is higher than the current tax assessment, the school district will be aware of that sales price and can contest the 2016 assessment any time from Jan. 1 through March 2017.

If the school district appeals the assessment based on the sales price and is successful, the assessment will be increased to the sales price, effective at the beginning of the 2016 tax year.

That means the buyer could be on the hook for increased taxes for a period of time when he did not own the property.

Local taxing bodies have been filing appeals now more frequently to increase property tax assessments, attempting to generate revenue after property values and sales prices dropped during the economic downturn.

Even though the market has improved, these taxing authorities are unlikely to now abandon the practice.

Consult with professionals who have local experience to defend against these suits in order to maintain fair real estate assessments and taxes.

Cecilia Hyun 2015

Cecilia Hyun is an attorney at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh. The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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May

Tax Resolution Conundrum

Published Property Tax Articles

Pittsburgh resolves to reduce taxpayers' inflated property assessments.

Politics makes strange bed fellows. Pittsburgh's city council recently ordered its finance director to draft policies that protect taxpayers from assessment appeals by the city, and even to file appeals on taxpayers' behalf.

Unlike many states, Pennsylvania allows the three entities that levy real estate taxes (counties, schools and municipalities) to appeal annual real estate assessments, just as taxpayers do.

Taxpayers file appeals when they believe their property is over-assessed, in order to reduce their assessment and their real estate taxes.

When taxing authorities file annual appeals, they seek to increase assessments and taxes. The city of Pittsburgh has historically filed appeals following the sale of a property assessed at a lower value than the sale price. This practice, where taxing authorities essentially sue individual taxpayers (and voters) to increase real estate tax payments, is common in Western Pennsylvania.

In a strange twist, first-term city councilman Dan Gilman recently introduced legislation to limit the city's ability to file increase appeals and, in some cases, to even direct the city to file appeals to decrease property assessments. The resolution passed and the mayor signed the measure on Feb. 23.

The resolution starts off with two self-limiting provisions. First, it bars the city from appealing the assessment of a property for two years after the property sells. Second, the resolution prohibits the city from using a property's sale price as the basis for an appeal seeking an assessment increase.

These provisions restrict the city from doing what it is permitted to do by Pennsylvania statute, which states that "[Any county, city, . . school district . . which may feel aggrieved by any assessment of any property . . shall have the right to appeal" an assessment the same as the property's owner.

The resolution further limits the city to appealing a property's assessment once every three years. Pennsylvania's statute allows taxing authorities to appeal annually.

David "J.R." Sachs, president of A-1 Van Service recently battled Pittsburgh taxing authorities over his property's assessment, and believes the new resolution is a good idea.

After Sachs purchased three dilapidated buildings and contaminated land along the banks of the Allegheny River in 2013, the school district appealed his assessment, seeking an increase to the purchase price. Sachs saw his assessment mushroom from $489,800 to $540,000 following the appeal, while the assessments of neighboring properties without recent sale prices remained unchanged.

The new resolution "gives people a chance to invest in their properties and improve them before getting hit with a tax increase," Sachs says.

Perhaps most unusual is the resolution's requirement directing the city to generate a list of properties with assessments 50 percent or more greater than their market value, and to "appeal values downward on behalf of those owners." This provision turns current practice on its head.

In a taxpayer-initiated appeal seeking an assessment reduction, the city's legal department has historically defended the assessment and fought against reductions. Now, the city will be required to file appeals seeking reductions on behalf of taxpayers.

This last provision is not entirely unprecedented in Pittsburgh. In 2005, Allegheny County, where Pittsburgh is located, conducted a countywide reassessment following a court mandate, releasing the new assessment figures but refusing to certify the assessment. Instead, the county resisted implementing the assessments in litigation that wound up in Pennsylvania's Supreme Court.

During this litigation, in April 2006, Allegheny County filed 11,000 appeals on behalf of taxpayers who saw their assessments rise since the prior reassessment in 2002 as a result of previous appeals by school districts or municipalities. Allegheny County brought these appeals to hearing and requested reductions. City and school district representatives appeared and defended the assessments.

The city's recent initiative may have unintended consequences, according to Pittsburgh lawyer, Michael I. Werner of ZunderWerner, LLP. Werner has extensive experience representing property owners in appeals of their property assessments. "When the county did the same thing in 2006, property owners were confused. In some instances, the owners did not want the county to file appeals on their properties," he says. "This put us in an odd position: Because the owner was not the appellant, we were unable to withdraw the appeals. The county was trying to help, but they inadvertently created new obstacles for many property owners."

"It is a noble thing they are trying to do, but it raises the question of whether a city employee, who does not know the specific property and who does not have an attorney-client relationship with the property owner, is in a position to properly represent that owner's interests," Werner says. "City-initiated appeals to reduce an assessment should only be filed at the request of the property owner."

The city's resolution also calls for its finance director to collaborate with the Pittsburgh school district and Allegheny County to implement and expand its new policies. Given the history, it seems unlikely that the school district will join the city, either in self-limiting its appeal rights or in filing appeals seeking lower assessments.

Pennsylvania school systems are strapped for cash due to the state legislature's budget impasse: lawmakers are more than eight months past deadline to pass the 2015-2016 budget, and many school districts have been forced to take out loans to meet operating expenses. Increasingly, school districts have become more aggressive in filing increase appeals as they seek new sources of revenue.

What happens next is open for debate. Even though Pittsburgh's mayor ratified the resolution on Feb. 23, one councilwoman introduced a measure on Feb. 22 to repeal it. The new proposal remains in committee. All assessment appeals for properties in Pittsburgh were due March 31, and hearings will begin in May and June.

sdipaolo150 Sharon DiPaolo is a partner in the law firm of Siegel Jennings Co., L.P.A., the Ohio and Western Pennsylvania member of American Property Tax Counsel, the national affiliation of property tax attorneys. She can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

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Apr

Washington County Pennsylvania 2017 Property Tax Reassessment

Property Tax Videos

Sharon DiPaolo, an attorney for Siegel Jennings tax law firm, discusses the upcoming property tax reassessment for Washington County Pennsylvania in 2016/2017 and what you can do to file an appeal.

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Dec

A Fair Share of Taxes

Published Property Tax Articles

Frequent reassessments benefit Pittsburgh-area property owners.

Pittsburgh-area properties are being reassessed more frequently than in the past – and that is good news for property owners. Periodic reassessment helps to keep property assessments current with actual values and ensure that everyone pays their fair share.

Unfortunately, frequent reassessments are not the norm throughout Pennsylvania. Pittsburgh and surrounding counties are the exception, with Allegheny County (in which Pittsburgh is located) having four reassessments in the last 15 years. Nearby Indiana County is undergoing a reassessment now for tax year 2016, its first since 1968, and neighboring Washington County is undergoing a reassessment for tax year 2017.

Pennsylvania lacks a mandatory revaluation cycle. A revaluation or reassessment is a thorough analysis of every property in the entire county, with the objective of bringing each property’s assessment into line with its current market value. Revaluations are often conducted by outside firms, usually with the assistance of the local assessment office. Occasionally, in-house assessment offices conduct reassessments.

Without a mandate to reassess, some counties go decades without a reassessment. Rural Franklin County, for example, last reassessed in 1961. Assessors there attempt to keep properties equalized by placing newly constructed assets on the tax rolls for what they believe the properties would have been worth in 1961.

The more time that passes, however, the more tenuous this methodology becomes. Further, assessors are prohibited from “spot assessing,” or changing assessments on existing properties without a countywide reassessment. Thus, as different parts of the county appreciate at different rates, the equality of assessment becomes more and more skewed.

Blair County, west of Pittsburgh, decided to undertake a reassessment for tax year 2017 after commissioning a study from the attorneys at Weiss Burkardt Kramer. Comparing actual sales in the county to assessments, the study concluded that Blair County’s more than 50-year-old assessments do not meet the constitutional uniformity requirement.

Says attorney M. Janet Burkardt, a partner at Weiss Burkardt Kramer: “If assessment systems are not periodically adjusted, they become regressive so that properties appreciating at a higher rate are taxed at less than their fair share, and properties appreciating at a lesser rate or those who have depreciated in value, pay more than their fair share in taxes.”

Because properties that benefit from unfairly low assessments rarely appeal those values, inequities become locked in over time. For instance, in one county where revaluation had not occurred in decades, major office buildings were, on the whole, dramatically under-assessed.

Some under-assessed buildings paid such low taxes that they enjoyed a competitive advantage in attracting tenants. A neighboring office building, despite paying dramatically higher taxes than its competition, had no recourse to appeal because it was also under-assessed and could not meet the test that its market value was too high. The solution? A county-wide reassessment.

The longer a county goes between reassessments, the harder the next reassessment becomes. First, big increases in assessments spark taxpayer outrage, tempting county leaders to push the problem off to another day.

Infrequent reassessments are also more time-consuming and expensive; reassessments in Pennsylvania usually stem from litigation, which is expensive and inefficient. Less frequently, county leaders prompt the reassessment, as Indiana County did when it had reached the statutory cap on its tax rate.

In marked contrast, Erie County, to Pittsburgh’s north, was the first county to impose a reassessment cycle on itself. “Our goal in reassessing is to gain uniformity and accuracy,” said Scott Maas, Erie County’s chief assessor. “We meet with property owners informally and we welcome the opportunity to update our data and make corrections. We want to get it right.” Maas initiated the county’s periodic reassessment cycle and oversaw the 2003 and 2013 reassessments.

Pittsburgh’s record four reassessments in 15 years followed years-long litigation in two different cases that went all the way to the Pennsylvania Supreme Court. Ultimately, the Supreme Court ordered the reassessment. Pittsburgh’s reassessment in 2013 sparked 100,000 appeals; for 2015, only a few thousand taxpayers appealed, demonstrating that most properties’ assessments have been resolved to the property owners’ satisfaction. If Pittsburgh were to continue to reassess in the next three to five years, building on this fresh data and satisfactory values, the likelihood is that there would be minimal appeals year-to-year.

Frequent reassessments benefit property owners. When the appeals process corrects errors, the data under under-lying the assessments improves and yields more accurate values in the next reassessment. Pennsylvania law requires that reassessments be revenue-neutral, meaning that rather than local governments enjoying a windfall when assessed values increase, governments must reduce tax rates, so many property owners see a reduction in taxes when reassessments occur.

Most importantly, reassessment yields more uniform assessments. Uniformity of assessment is required by Pennsylvania’s constitution. When assessments are uniform, everyone pays their fair share. Pennsylvania’s Supreme Court spoke to this in 1909: “While every tax is a burden, it is more cheerfully borne when the citizen feels that he is only required to bear his proportionate share...”

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