Like read the statute and applicable regulations, which apparently no one else did.

Pennsylvania’s Military Affairs Act provides a tax exemption for a disabled veteran’s homestead, if certain criteria are met. The veteran must must have received an honorable discharge, be 100% disabled with a service related injury, and be certified by the State Veterans Commission as having financial need for the exemption.

Vietnam War veteran Thomas Vanderhoef was both honorably discharged and 100% disabled. His home was situated on 2.13 acres in Susquehanna County. To his amazement the county board of assesment determined that while his house was exempt, only 1 acre was exempt. The board reasoned that the statute provided only for the exemption of the “land on which it [the dwelling] stands” and longstanding county practice had limited that to one acre. As the chief assessor testified at the trial,

One acre works best in the system that the county has right now. When §8902 of the Military Affairs Act came into effect, that’s what they started doing and they just continued after re-assessment. 

With the assistance of Legal Services, Vanderhoef appealed to the trial court; but it,defering to the administrative tribunal below, affirmed the board’s ruling as “reasonable”. Although the disputed tax was small, Mr. Vanderhoef, proceeding in forma pauperis, appealed to Commonwealth Court. Judge McGinley writing for a unanimous panel in Vanderhoef v. Susquehanna County, reversed the lower court for reasons that apparently surprised both sides.

To the chagrin of Susquehanna County, he ruled that the county assessment board had no say in whether Vanderhoef’s property was exempt or not, other than perhaps determining the veteran was honorably discharged and 100% permanently disabled. It is the State Veterans Commission, not the local assessor, that determines whether the veteran needs the exemption; and that determination is made pursuant to the commission’s regulations that dictate “various items of income and expense [including real estate taxes] the commission must consider when determining need.”  As Judge McGinley wrote,

It is clear from the language of the Military Affairs Act and the regulations that the taxing authority has no discretion to exempt less than the entire property or to determine the number of acres to exempt. Rather, it is the duty of the Commission, not the taxing authority, to determine the financial need for the tax emption.

Somewhat incredibly the State Veterans Commission determination as to Vanderhoef’s need was not in the trial court’s record on appeal. That may have been an oversight; or it may have been because, as Judge McGinley suggests, Vanderhoef didn’t know it was necessary and never applied.

In either event, the determination of whether to exempt or not, was not for the county assessment board, even in the first instance. And that was a result neither party apparently considered.

No Comments

Parkview Court is a mixed use complex in Yeadon Borough, Delaware County with 960 residential units. The borough invoices each unit in the complex $200 annually for sanitary sewer; and rather than sending separate sewer bills, it includes the bill in the annual borough ad valorem real estate tax bill. Similar to how many taxing authorities handle per capita taxes, you cannot pay the real estate tax without paying the sewer bill.

Parkview Court has an out of state management company pay its bills and keep its books. When this company received Parkview Court’s real estate/sewer bill, it did not split the check. Rather, for its own internal convenience, it processed the entire amount as “real estate tax”, when in actuality $192,000 of the check was really for sanitary sewer.

In its assessment challenge Parkview Court’s expert utilized the income capitalization method of valuation, but did not adjust for taxes, as was discussed in the prior post as the more appropriate method. That is, it used the typical bank appraisal method.  That of course resulted in a lower net operating income which in turn justified a lower valuation and assessment, if only momentarily, because as mentioned in the earlier post, it is logically inconsistent to justify a lower assessment using current taxes. Consequently the trial court did not find this valuation method persuasive.

The school district’s expert used the more appropriate method of adding taxes back into the net operating income calculation and adjusting the capitalization rate upward by a tax rate burden factor. But the taxes it added back included the $192,000 in sewer charges, thereby inflating the net operating income calculation! Because the sewer charge is not an ad valorem tax, but a flat fee, the tax load burden adjustment of the capitalization rate is irrelevant to that expense. Parkview Court pointed this out to both the trial court and taxing authority’s expert, but to no avail. In effect, Parkview was held to how it categorized the payment on its books, namely as 100% real estate taxes. It did not matter that the single categorization was for their own internal convenience only.

The result was predictably an inflated income valuation, resulting in an inflated valuation, which Parkview Court appealed. The standard of review on appeal to Commonwealth Court is high:

Our review of tax assessment appeals is limited to determining whether errors of law were commited, an abuse of discretion occurred, or constitutional rights were violated. While the weight of the evidence is before the appellate court for review, the trial court’s findings are entitled to great weight and will be reversed only for clear error. [Citations omitted. Emphasis added.]

Judge Simpson seems to have given great weight to findings the trial court could not have made. Here is what he wrote:

In addition, Taxing Authority’s expert factored Taxpayer’s real estate taxes into its tax-load capitalization rate. He accounted for Taxpayer’s real estate taxes by adjusting the capitalization rate upward. Nor error is assigned to this approach. Thus the trial court could conclude that the detailed method described by Taxing Authority’s expert was sufficient to accurately reflect the burden of government charges against the property. [Emphasis added.]

Actually that is dead wrong, because the trial court could NOT conclude the school district’s expert devised a tax rate capitalization rate that took into account both the ad valorem taxes and the flat rate fees, because such a rate does not exist.

Remember the tax load measures the burden ad valorem taxes impose on real property, expressed as a percentage of the property’s value.  In Yeadon Borough, the burden of the Borough, Delaware County and William Penn School District’s total tax is 2.94%. A capitalization rate adjusted upward for tax load burden is applicable only to valuations of real property where the net operating income is not reduced by ad valorem taxes, not flat rate fees. The purpose of such an adjustment is to ratchet down an otherwise inflated value based on inflated income.

The trial court here adjusted for tax load burden with a factor that did not, because it could not, take into account flat rate sewer fees (because flat rate fees are not related to the property’s value), and applied it to a net operating income figure inflated by the otherwise deductible sewer expense. The result, as the taxpayer complained on appeal to no avail, was an inflated valuation of the property.

No Comments

Allegheny County has 46 school districts, which is almost as many as South Carolina has. As you might expect, some are pretty big (Pittsburgh, North Allegheny) and some are not so big, like Northgate (Bellevue and Avalon Boroughs). Some are down right small, like Cornell S.D. (Coraopolis and Neville Island). Today’s post concerns Cornell and Northgate, because both are struggling with declining enrollments and indifferent neighbors.

For the first nine months of this year, there were 70 bona fide real estate sales in Cornell School District. Of those, 14 or 20% were distress sales by banks of repossessed properties with assessed values equal to or  greater than the sales price. That explains Cornell’s average sales price-to-assessed value ratio of 1.42 (if we eliminate the distress sales, 1.35), compared to the Allegheny County average of .86. It also explains its high coefficient of dispersion of 57.33 and price related differential of 1.48.

Northgate is a little better. It had 106 bona fide sales, of which 16 or 15% were distress sales by banks. Its average sales price-to-assessed value ratio was 1.16 (if we eliminate the distress sales, 1.00), with a COD of 49.1 and PRD of 1.22.

No Comments

With apologies to Mark Twain, I find arranging figures to yield a desired result beguiling, particulary when the desired result is a reduced common level ratio (and a corresponding lower tax bill). The subject of today’s post is how differing assumptions of what is or is not a valid sale yield different common level ratio calculations.

The common level ratio for a taxing district is typically defined as the mean (average) ratio of assessed value to sales price for all arms length sale transactions over a twelve month period. Pennsylvania’s Act 267 of 1982 requires the State Tax Equalization Board ”to establish, annually, prior to July 1, a common level ratio of assessed value to market value in each county for the prior calendar year.” The act goes on to require STEB is to use “statistically acceptable techniques, including sales ratio studies” in making the calculation.

It is generally understood that the calculation is to include only arm’s length sales data. Bona fide sales. Obviously a conveyance by mother to son for $10, does not meet the definition, nor does a bank’s purchase at a sheriff’s sale for costs and taxes. But how about a bank’s selling foreclosed property to a rehabber or flipper? The parties are not related and the sales price is the result of arm’s length negotiation. Is it a valid sale to be included in the data pool? or does its being a distress sale make it invalid?

According to the Pennsylvania supreme court a negotiated sales price indicates fair market value only if the buyer is willing, but not obligated to buy, and the seller is willing but not obligated to sell . Is it really accurate to describe a bank selling repossessed homes as “not obligated to sell”? Anyone familiar with the these sales, knows the seller has a legal obligation and a financial incentive to move these properties as quickly as possible. That obviously is why they price them as low as they do.

So, what difference does it make whether we include or exclude these sales? Let’s compare the 1/1/08 - 7/31/08 sales statistics for the North Hills School District in Allegheny County. After eliminating related party sales, sheriff’s deeds, and outliers, we have 341 bona fide, arm’s length sales for the period, which yield these statistics for that more inclusive data pool:

• CLR of 87.6%
• COD of 21.6
• PRD of 1.07

  Included in those 341 sales were 32 bank REO sales. If we eliminate those 32 sales, we have 309 sales, and we get these statistics for a less inclusive data pool:

• CLR of 82.4
• COD of 16.76
• PRD of 1.04

Because the CLR functions as an equalization ratio in assessment appeals, the 5% difference directly impacts assessed values. And this 5% difference depends entirely on the somewhat esoteric question of whether a bank selling its repossessed properties is “willing, but not obligated to sell.” The taxing authorities no doubt favor including the sales because the high assessment to sales price ratios of the REO sales will increase the average such ratio. That increased ratio means increased assessed values, which means the taxing authorites can raise the same tax dollars without increasing the millage 5%. 

Finally, please note excising REO sales from the data pool brings the COD and PRD almost within a rounding adjustment of achieving the IAAO national standards of 15 and 1.03 respectively.

No Comments

Yesterday I expressed doubts about the Supremes’ going along with Allegheny County’s argument that  it should not have to reassess because its assessments were not “out of whack”. The county should lose that argument, because it is irrelevant. The question is not whether Allegheny County’s application of the Pennsylvania statute authorizing use of base year assessments is unconstiutional, although the county’s attorney Mike Wojcik kept trying to steer the debate in that direction.

The question to be answered is whether the enabling statutes that authorize use of base year assessments for all 67 counties in Pennsylvania are unconstitutional on their face, because they permit use of base year values indefinitely. Mike Wereschagin makes this clear in his article in today’s Tribune-Review :

“This will affect every county in the state,” said Chief Justice Ronald Castille. The case stems from Allegheny County Senior Common Pleas Judge R. Stanton Wettick’s 2007 ruling that the base-year system violates the Constitution.

Which is why I thought several of the colloquies the justices had with the taxpayers’ attorneys Ira Weiss and Donald Driscoll were quite meaningful. For example, the justices were curious how Ohio and New Jersey handled assessments. The county in its oral argument dismissively called Wettick’s opinion a “law review article” because it surveyed all fifty states’ assessment practices (only Pennsylvania and Delaware have no state involvement in local property assessments), to which Justice Todd zinged back she thought the description a compliment.

The justices asked Ira Weiss whether local municipalities could continue to send tax bills if they ruled base year assessments unconstitutional, to which Weiss replied the court had broad equitable power to delay the effective date of any such decision, and thereby give the legislature a chance to act. Then there was discussion on what curative amendments are available to the legislature. Weiss told them they could go the Ohio route and require reassessments every so many years or they could go the New Jersey route and require reassessments when statistical data such as coefficient of dispersion exceed mandated benchmarks. 

The justices then asked Driscoll whether ”coefficient of dispersion” was a calculation courts would ever have to decide, to which he replied in the negative. That is true as far as it goes. The coefficient of dispersion calculation is straightforward, but it is based on a common level ratio calculation which is not straightforward. The CLR calculation utilizes a pool of data, the selection of which involves subjective considerations.

All in all, it seemed to this observer that the Supreme Court is poised to join Judge Wettick in declaring “legislation creating a base year assessment system that does not provide for periodic reassessments clearly, palpably, and plainly violates the requirements of the Uniformity Clause of the Constitution that valuations be based on current value.” And if they do, I expect them to delay its effective date by at least a year to give the General Assembly an opportunity to cure the defect, namely by amending the existing statutes to require periodic reassessments where base year assessments are utilized.

Which is why Dan Onorato not only has his bags packed for a trip to Harrisburg, but also has the county legal department working on curative amendments to the statutes in question. The school districts will no doubt offer their own amendments. We can expect Dan’s amendments, however, not only to cure the current legislation’s failure to require periodic reassessments, but also to spare Allegheny County the trauma of a countywide reassessment until after his run for governor in 2010.

And that’s why I say he’s “whacky” like a fox.

1 Comment