Big buildings are big winners under AVI

Posted: March 08, 2013

WHEN IT comes to AVI and real-estate taxes, there are winners and losers.

And then there are really big winners.

A handful of commercial properties - most of them within a 10-minute walk of City Hall - are about to get tax-break bonanzas thanks to AVI - the Actual Value Initiative - the city's new property-tax system.

An analysis of old and new market values of the city's largest (by square feet) 25 commercial buildings reveals their owners will pay about $20 million less in property taxes next year, once City Council passes the law that formalizes the tax rate. On average, their tax bills will decline by one-third.

The winners' list includes such premium locations as One Liberty Place at 1650 Market St., which will see its tax bill cut by $2.5 million. The owners of the BNY/Mellon Building at 1735 Market St. will pay $2.4 million less. The John Wanamaker Building will pay $1.1 million less.

These numbers put in high relief a truth about AVI: It shifts the burden of the real-estate tax from commercial to residential buildings. Citywide, commercial buildings are due to save about $72 million in taxes, while homes and apartments will pay $72 million more, according to preliminary analyses.

Because the Nutter administration decided to make AVI "hold harmless" - it is supposed to bring in the same $1.2 billion in real estate tax next year as it does this year - any break given to one property owner has to be made up by an increase for another.

The drop in taxes is not limited to the mega-commercial commercial properties along Market, Broad and Chestnut streets. A look at other neighborhoods shows tax declines for a number of smaller commercial properties, a list that includes supermarkets, parking garages, gas stations, beer distributors, warehouses and small factories.

In a way, this was the goal of AVI. It was supposed to bring fairness back to the real-estate-assessment system by bringing values in line with real market conditions. Over the years, those values had gotten out of whack, due to the city's irregular and spotty efforts at reassessment.

Large commercial properties were an exception to this rule. The Board of Revision of Taxes had a special team of assessors for larger commercial properties that was aggressive in re-evaluating them. As a result, their assessed values were kept much closer to real numbers.

That said, collectively, the values were still too low. Under the AVI reassessments, the market value of the 25 office buildings will go from $2.1 billion to $3.3 billion, a 57 percent increase.

One Liberty Place, for example, will see its market value go from $170 million to $208 million under AVI. Why won't Liberty Place and the other properties pay more? Because the formula by which the tax is determined also will change.

Before AVI, buildings were taxed at only a fraction of their assessed value - 32 percent, to be exact. And the tax rate was 9.4 percent of that lower value. (The same formula applied to residential properties as well.)

If you had a large office building with a market value of $100 million, it would be taxed only on the first $32 million and at a rate of 9.4 percent. Total tax bill: $3 million.

As of next year, buildings will be taxed at 100 percent of their market value, but the tax rate is due to be lowered significantly. The figures mentioned range from a rate of 1.25 percent to 1.4 percent. This analysis uses a rate of 1.34 percent as the multiplier. City Council will make the final decision on the rate, so all the numbers on savings are preliminary.

While the market value of One Liberty Place rose 21 percent, the values of thousands of other residential properties around town went up 100, 200, 300 percent or more. Even with the lower rate, these homeowners will pay more - sometimes considerably more.

However, for Liberty Place and many other property owners, the rise in their market value will be offset by the lower tax rate.

That a handful of property owners get multimillion-dollar breaks presents a political problem for Mayor Nutter.

AVI was sold as an exercise in equity and fairness - not as a way to give large tax breaks to small number of businesses through a side door. The 25 buildings stick out like sore thumbs, given the sheer size of their tax savings. Six are in the $1 million-plus range.

Even large buildings that pay scarcely any taxes come in for breaks.

Consider the case of the 58-story Comcast Center at 1702 JFK Blvd., owned by Liberty Property Trust. It opened in 2008 and qualified for the 10-year real-estate-tax abatement the city gives to all new construction. However, its owners - and all others who get this break - still must pay taxes on the smaller land portion of the property.

In the Comcast Center's case, its owners were paying $283,000 on land valued at $9 million. The land value did not change under AVI, but since the tax rate is coming down, the bill will now be about $121,000. The Comcast building itself is valued at $212 million under AVI. If it were not for the abatement, the company would pay $2.8 million in taxes.

These large tax breaks may have been an unintended consequence of AVI (then again, maybe not), but it's going to be hard to explain to homeowners getting bills that double and triple their taxes how these big guys got a tax bonanza.

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