How real estate pros view AVI

"I can make a firm pledge. Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes."
- Senator Barack Obama in September 2008  

Too bad the President Barack Obama of 2009 is not the Mayor of Philadelphia, where, according to the City Controller's report, 343,191 properties will experience tax increases ("losers," according to the report) while only 107,603 properties will show tax cuts ("winners," indeed). These are shocking numbers that should have all of our attention. It should have the taxpayers up in arms, but, instead, to quote Led Zeppelin, they are "dazed and confused" about it. This is not exactly what City Council and Mayor Michael Nutter should be rubber stamping if they wish to support the middle class.

In a spat between Democratic incumbent City Controller Alan Butkovitz and likely challenger Democrat Brett Mandel, both anticipated candidates are fighting over whether Philadelphia's newly proposed property tax assessments are fair, with Butkovitz claiming it's going to hurt a lot of Philadelphians while Mandel's saying not so fast – that even Mandel, himself, is being dramatically undertaxed.

Someone saying he doesn't pay enough tax? Haven't we heard that before?

Republican candidate Terry Tracy is calling for more transparency in the revised tax initiative. "We deserve clear proof that the end result is not just another back door tax increase. We can ill afford to further burden a population that already boasts a poverty rate of almost one in three," Tracy warns.

I wanted to go outside of the political world and see how those that dealt with real estate every day felt about the Actual Value Initiative (AVI).

Dr. Kevin Gillen is a Senior Research Consultant at the Fels School of Government at the University of Pennsylvania. Gillen produces quarterly reports on housing prices throughout the City of Philadelphia and is the numbers guy that every developer and Realtor listens to. So what's Gillen's take? "I think of it as being akin to setting a broken leg: initially painful, but a good and necessary thing in the long run. The current assessments are not only inaccurate, but are also inequitable and regressive. While implementing AVI will cause some pain to some property owners, it will be far less than the pain caused by the current assessments, and should lead to not only a better-functioning real estate market, but also to a better-functioning city."

Jeff Block, an Associate Broker at Prudential Fox & Roach (where this columnist also works), shares a similar view. "I am a staunch proponent of fair taxes for all—based on the actual value of properties.  Even though this means higher taxes for my home, and many Philadelphians, what is fair is fair.  Every $500,000 home should pay the same taxes.  Moreover, this helps the city and the real estate market because it provides predictability. This is why I was so disappointed after my initial review of the "actual value" numbers. It seems to me that AVI should stand for Arbitrary Value Initiative … I [was] at a listing in Passyunk Square. Bought for $287,000 in 2008. 2014 AVI assessment is $192,000. Passyunk Square down 35% since 2008? Really? For every house like this, everyone else pays more."

Antonio Atacan, the Operating Principal for Keller Williams Realty in Center City, has taken strong exception to the AVI. "These massive tax increases will negatively affect the city's home ownership rates and the recovering real estate market. I believe everyone, including the business community, must contact their council members, the mayor and the media and call for a "cap" on how much our taxes can be increased. My taxes personally doubled from $8000 to $16,000, and I know of home owners who saw a 500% increase. Thomas Jefferson said people get the government they deserve … I feel if we stand strong, we will defeat the size and impact of the tax."

So what's an unhappy trooper to do if you're part of the majority facing a higher assessment?

"Don't do any knee jerk reaction yet because there's a lot of open and unknown pieces to the pie," cautions Craig Lerch Jr. , the CEO/Broker at Lerch & Associates Real Estate in Abington, Montgomery County. "The number one thing that needs to take place to have fairness with the new assessment is for the city to immediately and venomously collect all the past real estate taxes outstanding out there. That's a huge amount of money. Had we collected that money, we may not be in the position we're in."

Mike Frolove, a PA/NJ licensed real estate broker and appraiser who teaches real estate finance at Temple University's Real Estate Institute, agrees that the City of Philadelphia should have collected $1.2 billion last year in real estate tax. Instead, the city has to deal with tax deadbeats – lost revenue that has been pegged between $282 and $518 million. Frolove advises unhappy homeowners to have a "warm and fuzzy" meeting with their local assessor – something Frolove says can be done as long as the homeowner makes the request by March 31, 2013. But Frolove warns, "You must have hard evidence."

Carl Primavera, arguably the top zoning and land use attorney in Philadelphia, reminds us that we still don't know the final impact of AVI until the millage rate is set. He gave the following example. Under the old plan, if a house had a city-derived market value of $100,000, an "assessed value" was determined by multiplying the market value x 0.32 (a city-chosen random number), which yielded $32,000. From that number, a millage rate of 0.09 was multiplied, finally yielding the real estate tax of $2,880. According to Primavera, if the new market value goes up by 50% to $150,000, the real estate taxes could actually go down, as the $150,000 would by multiplied solely by a new millage rate of, say, 0.0125, and end up with a tax of $1,875.

So, as Lerch and others have noted, it all comes down to where the millage rate is pegged. Could be 0.0125 if there's no $30,000 homestead exemption available to the public. Could be 0.0140 if there's a homestead exemption. Could be a number in between. You can also pull a rabbit out of a hat, as no one knows how that will play out.

Gillen's observation on the calculation of millage rate? "This is heavily dependent upon three things: what improvements to our tax delinquency rate that the city makes, what level of the homestead exemption (and other potential tax relief) that Council decides upon, and how the City and School District decide to split property tax revenues between them. My own analysis indicates that this last item is the most important. Historically, the City kept only 40% of property tax revenues and the School District got the other 60%. My calculations indicate that the millage can drop significantly if the City's share increases only a few percentage points."

So until we know the millage rate, we fail "Philly Algebra 101." Until then, though, we can concentrate on ensuring our assessment is fair. If you choose to have an informal meeting with your assessor and things don't pan out, there's always the option of a formal hearing, which you must file with the BRT no later than the first Monday in October, according to Primavera. Hearings are expected to occur in the last quarter of 2013 and the beginning of 2014.

Overall, Primavera believes that the AVI will be a smooth and fair transition. "I'm keeping my fingers crossed," Primavera said. "I'm an optimist."