Philly landlords, businesses balk at steep hikes in property, U&O taxes

Henry Khounh, proprietor of 1540 Hardware, relocated his store after his landlord sought to pass on some of the city’s recent hike in real estate taxes to him. His store is located at 1822 S. 11th Street.

For about a decade, Cambodian immigrant Henry Khounh ran his 1540 Hardware on East Passyunk Avenue, grinding keys and selling snow shovels.

Then last year, his landlord, the nonprofit Passyunk Avenue Revitalization Corp., informed him that the city had hiked the taxes on the storefront property and about $3,000 worth would be passed to him as part of his lease. Khounh did the math — $3,000 was a lot of keys. His lease was up and he relocated about three blocks away.

“Honestly, I couldn’t afford it,” Khounh said Wednesday. “That’s the bottom line.”

Nancy Alperin describes similar sticker shock over her 2017 tax bill that more than tripled the assessed value on her two-story commercial property on South Juniper Street, bringing her tax bill to “$22,000 and change.”

The Duffield House’s Patrick J. Callahan shared the sentiment. He says the new $32.3 million value the city placed on the Conshohocken Avenue apartment complex boosted real estate taxes by 76 percent, or $194,000, to $448,000. He warns that the hike could lead to layoffs or higher rents.

Philadelphia’s higher property values on thousands of billboards, parking lots, apartment complexes, office buildings, and other businesses are unsettling the business community even as they produce an estimated $200 million in new taxes, leading to lawsuits and a flood of appeals at the Board of Revision of Taxes.

Philadelphia says the higher commercial values are overdue and will help fund the city and the money-starved schools through real estate and use and occupancy taxes, which are based on assessments. But landlords and businesses have griped at the year-over-year hikes, saying they didn’t have time to budget for them and that some of the higher values from the Office of Property Assessment seem out of whack.

Commercial properties typically account for 25 percent to 30 percent of the assessment appeals. This year, it’s 70 percent, or 4,500 of 6,420 appeals, Carla Pagan, the executive director at the Board of Revision of Taxes, said this week. She said that 1,600 of the 1,800 commercial appeals heard so far have resulted in assessment reductions.

A Tax Increase for Commercial Properties

In 2018, the median market value of commercial and industrial properties in Philadelphia increased sharply from the previous year, while other property types typically saw more modest increases. In the city 2019 reassessments that were released last week, the biggest increases were for owners of single-family homes.
Staff Graphic

Hundreds of property owners also joined in litigation before Philadelphia Common Pleas Judge Daniel J. Anders, claiming that the city targeted 65,000 commercial properties with “spot assessments,” violating the Pennsylvania Constitution’s uniformity clause.

The much-litigated Pennsylvania uniformity clause says that all types of properties should be treated the same when it comes to real estate taxes. If Philadelphia hiked assessments on business properties for the current tax year, it should have hiked residential property taxes at the same time, the suits say.

Philadelphia released new assessments on residential properties last week, and those real estate tax hikes won’t take effect until the next fiscal tax year, in 2019.

Philadelphia commercial property owners are emboldened by the Pennsylvania Supreme Court’s “Valley Forge” decision last July, which confirmed the uniformity clause in a case in Upper Merion Township. In it, property owners said that the Upper Merion School District targeted apartment complexes for higher taxes.

Philadelphia has said that the higher commercial assessments would raise $118 million in additional real estate taxes. But higher assessments also produce higher use and occupancy taxes, which building tenants began paying last summer. Court documents estimate that total new taxes — real estate and U&O — amount to about $200 million a year.

The mayor’s spokesman, Mike Dunn, said in a statement that “we are confident that the 2018 reassessment (announced in 2017) fully complied with all applicable law and standard assessment methodology.”

Dunn added that “properties are to be assessed at their actual market value, and that is what this assessment does.”

Landlords and businesses agree that some of their properties may have been undervalued before the 2017 reassessment. Also, some of the higher values capture new construction or property in booming parts of the city. The city bumped the value of the Rittenhouse Claridge apartment complex — on South 18th Street and adjacent to the Rouge restaurant — to $101.2 million from $55.9 million, according to city records.

But some of the new assessments more than doubled values. At a minimum, they say, Philadelphia should have gradually hiked real estate taxes.

“Everybody knows that taxes go up. Real estate taxes are a fact of life and necessary to fund schools and cities. But you can’t do a ‘gotcha,’ ” Peter F. Kelsen, a lawyer at Blank Rome who has litigated real estate assessment cases in Philadelphia for decades, said about the Philadelphia assessment hikes. Kelsen represents landlords who own 290 properties.

But, Kelsen said, real estate tax hikes “need to be managed so that from one year to the next, a property owner does not experience an unexpected huge increase in taxes that must then be passed through to tenants and has not been budgeted for by the landlord owner.”

The Philadelphia School District also has been challenging city tax assessments on commercial properties. The district retained a consulting and legal firm to find under-assessed properties and file appeals as a taxing authority. In 2016, the district sought to boost the assessments on 140 properties, targeting those parcels with the potential to yield at least $7,500 in new taxes.

Based on court records, those properties included the Meridian at Chestnut Hill, the downtown Marriott, the Lofts at 1835 Arch, the Kimpton Hotel Palomar, the Andorra Shopping Center, and a CVS pharmacy on South Street.

On Nov. 16, Board of Revision of Taxes rejected all of the challenges.

The district appealed the decision to Common Pleas Court. On Feb. 2, Judge Idee C. Fox rejected the school district’s cases, citing Valley Forge.

School district officials appealed Fox’s decision on the cases to the Pennsylvania Commonwealth Court, where it is now.

Uri Monson, the district’s chief financial officer, said the goal of the school district was for property owners to pay their fair share of taxes.