What evidence does it take to raise a common law uniformity challenge in this post-Downingtown era? We got a partial answer last week in Nernberg vs. Allegheny County, where Commonwealth Court affirmed Judge Wettick’s four page opinion.

The answer in a nutshell - don’t complain that your downtown office building is assessed differently from a random sample of suburban residential properties. If that’s your complaint, your remedy is the STEB ratio, not the ratio you believe residential properties are assessed at.

So if you are in a position similar to Mr. Nernberg, and you still want to raise a uniformity challenge, you must adduce evidence that similarly situated properties (i.e. other downtown office buildings) are treated differently, and then the most you can expect is to receive the  same treatment those similar properties received. 

Based on the clear Downingtown suggestion that common law uniformity challenges are available only to properties that are included in a meaningful property subclassification that is underrepresented in the general population of data, this result was entirely predictable.

And so should the companion case that Commonwealth heard arguments on with this case. In the companion case, Nernberg, raised a common law uniformity challenge to the assessment of his Squirrel Hill residence. In support of his appeal, he adduced evidence that other residential properties in his neighborhood were assessed at a lower percentage of market value than his.

Which brings up a threshold question. Are residential properties underrepresented in the general population of Allegheny County (or even Squirrel Hill) properties? Obviously not. And if not, does a uniformity challenge even lie, because doesn’t Downingtown restrict uniformity challenges to those meaningful subclassification of properties that by reason of their underrepresentation in the general population are not adequately reflected in the STEB ratio? We shall have to wait for the decision.

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[For fans of NBC’s The Office, which has been rumored to have a sequel or spin off in development: How about The Assessment Office, with Michael Scott as chief assessor?]

In what observers viewed as an improbable upset, political novice Michael Scott of Dunmore running as a write-in candidate, defeated dual party candidate Toby Flenderson of Scranton in the race for chief county assessor. With almost all the votes counted, Scott is 10,000 votes ahead and seems assured of victory.

It was just three months ago that Flenderson, currently a finance professor at Lackawanna Community College, but formerly a human resources executive with a local paper company, seemed unstoppable with both party nominations plus the support of various business and labor groups. Then on August 14th, local common pleas Judge Ryan Howard ordered the county to discard its 1928 base year assessment, and reassess all county properties for tax year 2010 using current values. When asked to comment on the ruling, as the apparent heir to the assessor’s office, Flenderson said he knew it would cause some turmoil, but that reassessment was long overdue, and in the end county property owners would benefit from more accurate and fairer valuations.

Shortly after WNEP first broadcast these comments, a firestorm of protest erupted. First Dwight Schrute of Schrute Family Farms in Abington Twp, complained that reassessment would force the sale of his family’s popular 400 acre site. “We are surrounded by upscale shopping centers and golf course communities; and if this harebrained idea isn’t stopped, our taxes will go from $200 to God knows what,” he said. Similarly Kelly Kapoor of Kapoor Properties, the largest landlord in the county with almost 2,000 units, said reassessment would leave them no choice but to raise rents 20% across the board.

Flenderson was criticized for hiring as his campaign director Andy Bernard, son of Louis Bernard, the owner of the appraisal management firm, Modern Day Appraisals, which is thought to have the inside track for all the necessary appraisal work. Never answering the charge directly, Flenderson accused his critics of enjoying an unwarranted taxpayer subsidy for too many years and that the upcoming reassessment would eliminate the “unfair advantage they have long enjoyed at the expense of others.”

In early September coal heiress Jan Levinson of Harveys Lake Borough in Luzerne County, persuaded Michael Scott the former regional sales manager for the now defunct Dunder Mifflin Paper Company to mount a write in campaign with her financial backing. 

Scott’s campaign slogan was “Preserve Pennsylvania Phirst”. When asked what it meant, he just smiled and looked at the camera, saying “they know what it means.” Polling data indicates his most effective ad was a montage of photographs from 1928 when Scranton was the 20th largest city in the U.S., and the county was booming. The voice-over celebrated how people were moving in, jobs in the steel and coal industries were plentiful, and the first (and only) countywide assessment was done. The ad cuts to 2008 with photos of the Washington Post article calling Scranton “the armpit of the nation.” Michael Scott then says to  the camera, “my opponent says we need to join the 21st century, but I say let’s go back to 1928!”

Scott’s campaign manager, Jim Halpert, told reporters the ad was originally conceived by graphic designer Pam Beesly as soft self-parody, but when pitched to local focus groups, it delivered a powerful message. As one tearful participant told Halpert, Lackawanna County has nothing to remind it of its bygone era except its assessment system, and now Flenderson wants to take that away also.

Judge Howard had no comment except to say that, rumors to the contrary, he was not involved in any of Louis Bernard’s various business ventures.

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The typical Pennsylania  property assessment appeal involves the simple question of what’s a property worth. The property owner and taxing authority battle it out, with the property owner incongruously arguing in these cases for the low valuation. There is expert testimony on both sides of the question, and the trial judge’s task is to decide whose expert is more credible. As with most fact questions, appellate courts give wide berth to the trial court’s fact finding, absent an error of law or abuse of discretion.

There are three standard methods of valuing property, cost (less depreciation and obsolence), comparable sales, and income capitalization. For income producing properties, income capitalization is the preferred method. To oversimplify, income capitalization involves calculating the property’s “net operating income” and dividing that by the “capitalization rate” a typical investor would seek for similar properties.

An article of faith in assessment appeal cases is taxpayers seek higher capitalization rates and/or lower NOI, and taxing authorities argue for lower capitalization rates and higher NOI. That’s because high cap rates and/or low NOI result in low valuations, and vice-versa.

In a typical bank appraisal, property taxes are a recognized expense in the net operating income calculation. But in assessment appeal cases, allowing taxes to be a factor in the NOI calculation is correctly seen to skew the figures in the property owner’s favor, resulting in a Catch 22 situation. After all, the higher the taxes, the lower the NOI, the lower the value, and vice-versa. I mean, if taxpayer wins the appeal and the assessment is reduced, then taxes are reduced, which in turn causes a concommitant increase in both NOI and value, thereby negating the justification for the reduction. So, the answer is to remove property taxes from the NOI calculation in assessment appeal valuation questions; and instead to increase the capitalization rate by a tax load factor.

Thus, a bank appraisal might indicate NOI of $250,000 for a property with $50,000 in annaual taxes. If the cap rate is 10%, then the income valuation is $2.5 million. But in a income valuation for an assessment appeal, taxes skew the result. By removing the taxes from the calculation you have NOI of $300,000 which necessitates an adjustment in the cap rate. Otherwise we have an inflated value. So the question becomes how far north do you adjust the cap rate to remove taxes from the equation?

The answer is you increase it by the tax load burden, or the effective tax rate as a percentage of market value. For example, if the property taxes in a community are 2.5% of market value, then the tax burden is 2.5% and the adjusted cap rate is 12.5%.

The topic for this post is how to calculate the tax load burden rate in Pennsylvania.

The “Pre Tax Appeal” report feature of this site allows you to calculate a tax load burden for any of Pennsylvania’s 2,500 tax districts. After selecting the appropriate municipality and county, limit the report to one based on actual value alone, and enter $1,000 for the value. It will utilize the STEB ratio to equalize the assessment and then apply the the applicable millages to arrive at an annual tax per $1,000 of current value. Divide that number by 1,000 and you have the tax load rate.

For example in the recent  Pennsylvania case Parkview Court Associates v. Delaware County  Commonwealth Court Judge Simpson wrote,

Taxing Authority’s expert acknowledged real estate taxes are not considered expenses in determining net income in a tax assessment appeal. With regard to Taxpayer’s real estate taxes, Taxing Authority’s expert stated that after a stabilized net income is estimated, a capitalization rate is determined. Part of the process of determining a capitalization rate includes an adjustment for the real estate tax load burden. [Emphasis added]

Later he says that the Taxing Authority’s expert used a tax load adjusted capitalization rate of 12.35%, but provides no information as to its calculation. Utilizing this site’s Tax Appeal report function we can calculate that properties in Yeadon Borough, Delaware County have a tax burden of $29.43 per thousand dollars of current value, or a tax load rate of 2.94%. See report here. That would indicate that the unadjusted cap rate for the multi-family residential property was 9.4%.

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Pennsylvania Act 267 of 1982 delegated to the Pennsylvania State Tax Equalization Board the power and duty “to establish, annually, prior to July 1, a common level ratio in each county for the prior year.” The act goes on to provide:

In arriving at such ratio, the board shall use statistically acceptable techniques, including sales ratios. The board’s method in arriving at such ratio shall be made available to the public. The ratio shall be certified to the chief assessor of each county …..

You might think from reading this that the Pennsylvania Code publicly spells out the statistically acceptable techniques the board uses to calculate the ratio. You might even think the board does the calculation’s heavy lifting and actually sifts through the 500,000 deeds filed annually in Pennsylvania and culls out the “valid” sales to be included in the data pool. 

It is easy to understand how someone might think this. After all even Allegheny County’s attorney Henry Wojcik in the recent Pierce case filed a brief claiming the state board is

possessed with special expertise in property assessments and charged by state law with determining the acceptability of assessments within a county, concerning what constitutes an acceptable: a) common level ratio, b) predetermined ratio, and c) coefficient of dispersion in Pennsylvania and how these statutory standards should be employed to achieve compliance with the Uniformity Clause of the Pennsylvania Constitution.

Now after reading this, and keeping in mind the millions of tax parcels throughout Pennsylvania that are assessed for local tax purposes, you might think STEB has its own building on North Front Street and satellite offices in all 67 counties, all to track and monitor the accuracy of assessments and their relationship to current sales prices. 

Now here is the reality. If you want to know the statistically acceptable methods used, you will have to ask the board. The board consists of three political appointees and has an office staff of six employees. The chief assessors of each county provide STEB with a list of all the sales within the county, with assessed values and sales prices for each sale. (It is supposed to be provided monthly, but some counties just can’t seem to get around to doing it on any regular basis.)  The local assessors divide the list into two groups, valid sales and invalid sales, with only the valid sales to be included in the data pool used to calculate the common level ratio.

Now, I ask, who is really calculating the common level ratio, the county assessors, who select the data, or STEB? Once the data pool is determined, it’s sixth grade math to calculate the common level ratio. All of which makes Henry Wojcik’s argument that STEB is this state agency with specialized expertise and oversight authority, all the more laughable.

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Early in Mike Wojcik’s oral argument before the Supreme Court Wednesday in the Pierce case, Justice McCaffery commented that he was concerned about senior citizens on fixed incomes being taxed out of their homes and then bizarrely volunteered he thought taxes should be based on acquisition rather than current values. Bizarre, because a) he wasn’t seeking a response from Wojcik and b) surely he knows the uniformity clause of the Pennsylvania Constitution does not permit use of acquisition values. But maybe he was just distracted by recent news of Harveys Lake resident Marge Sims.

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