$1.2 billion more in D.C. commercial property assessment reductions
By Debbie Cenziper, Ted Mellnik and Jennifer Jenkins,
D.C. tax officials, criticized earlier this year for reducing commercial property assessments by $2.6 billion, lowered other assessments by an additional $1.2 billion through little-known settlements with property owners who had appealed to D.C. Superior Court, records show.
The $2.6 billion in assessment reductions, first reported by The Washington Post in August, helped spark a contentious D.C. Council hearing in October, when members asked pointed questions about the tax office, which is overseen by Chief Financial Officer Natwar M. Gandhi. Those reductions represent a $48 million decrease in potential revenue for the 2012 tax year.
Before the council, Gandhi defended the $2.6 billion in reductions, saying they did not affect the tax base. The reductions were made before the cases were heard by the city’s independent appeals board, which Gandhi said had made similar cuts in other years.
“Whether the reductions came from settlements or contested cases, the results for the District were essentially the same,” Gandhi testified.
But Gandhi’s calculation did not include the $1.2 billion in assessment reductions approved this year in cases filed at Superior Court — almost as much as in the three previous years combined. The settlements require the city to issue at least $15 million in tax refunds.
The Post examined about 900 completed tax cases dating to 2009 to determine how often the city settled and by how much assessments had been reduced.
Including the court settlements, reductions from commercial appeals resolved in 2012 rose to $4.1 billion, The Post found. That compares with $1.4 billion in reduced valuations approved in 2011 and about $3.2 billion each in 2010 and 2009.
In a written statement, the tax office defended the court settlements, saying many of the cases had been filed in tax year 2010, when the economy was in a slump. Several tax lawyers said the District’s valuations were too high at that time and did not account for the impact of the recession. The tax office said the number of tax cases being appealed increased from 234 in 2007 to 762 in 2010.
“Assessments for 2010 were made as of January 1, 2009, right at the point of the collapse of the real estate market,” the tax office said. “As a result, it was a time of tremendous uncertainty as to the true market values of properties. This uncertainty created an unprecedented number of appeals, particularly as it relates to commercial real property.”
The D.C. Council has scheduled a second hearing for Thursday to explore tax office practices and other issues in Gandhi’s agency.
In an interview, D.C. Council member David A. Catania (I-At Large) said he had been unaware of the increase in settlements of appeals to Superior Court. He pointed out that Gandhi in the past had publicly criticized reductions made by the appeals board, saying that they hurt the tax base.
Gandhi “was very aggressive, very aggressive a couple of years ago on this front,” Catania said. “I don’t know if there’s a change in policy. But keep in mind, this is absolutely a reversal. He’s all over the place. These kinds of things just cause people to wonder what’s going on.”
Gandhi did not respond to requests made to his office for an interview.
In its written response, the tax office said, “There was no change in philosophy or policy, just an effort to protect the revenue stream by minimizing risk and expense to the District.”
Appraiser negotiated deals
This year’s settlements were negotiated under then-chief appraiser Tony L. George, who was hired in late 2011. George resigned in October. The Post had reported that he had not disclosed to D.C. officials the termination of his contract as an assistant chief appraiser for Fulton County, Ga. His supervisors and several colleagues in Fulton told The Post that he had reduced assessments there without explanation.
George did not return calls and e-mails seeking comment.
Dozens of the court settlements were reached through a pilot program suggested by lawyers who represent commercial property owners and agreed to by the city, The Post found. Appeals usually go into court-supervised mediation, where lawyers trained in tax law facilitate negotiations.
Cases in the pilot program were resolved outside the mediation process, with tax office officials meeting with property owners and their attorneys in the agency’s offices in Southwest Washington. The D.C. attorney general’s office, which represents the tax office on appeals, sent an attorney to about half the sessions. The goal was to clear lingering cases and expedite the process, city officials said.
The attorney general’s office said about 125 cases were handled through the pilot program. The Post’s analysis found that the city this year negotiated more than 200 settlements overall.
Minturn Wright, a D.C. lawyer who represents property owners in tax appeals, said he had about two dozen cases pending at Superior Court this spring when he got a call from a city attorney who asked him to meet with George at the tax office. Wright recalled being told to bring all his cases.
“Almost every case got settled there, that I know of, all of my cases and almost everyone else’s also,” Wright said.
It is difficult to evaluate the settlements because the public record does not include a rationale for the adjustment or supporting documentation. In addition, the city typically does not disclose income and expense data, appraisals and other documents used to value commercial properties.
An official from the attorney general’s office declined to comment on specific settlements, but he defended the process. “We have no reason to believe the settlements are inappropriate in light of all the circumstances, including the risks of litigation,” said Ted Gest, a spokesman for the attorney general.
Several lawyers who represent property owners said the settlements were fair and long overdue. The tax office, they said, significantly overvalued commercial properties in 2009 and 2010, when the effects of the recession hurt values. Almost all the 2012 court settlements involved property assessments from those years, records show.
The tax appeal lawyers said the settlements were part of a push by city officials to lighten the load of court cases.
(The Washington Post Co. settled two cases through mediation in Superior Court this year, reducing the assessments on its headquarters on 15th Street NW from $91 million to $74 million for tax year 2010 and from $95 million to $88 million for tax year 2009.)
The settlements are “a win-win,” Richard Reinhard, deputy executive director of the Downtown D.C. Business Improvement District, told the D.C. Council at the October hearing. “The taxpayer and the private sector both save money.”
The increase in settlements, however, has raised concerns among some city appraisers, with one voicing a complaint this spring on an employee hotline.
The Post’s analysis shows that most reductions to assessments used to result from decisions by the appeals board. In 2009, for example, board decisions accounted for $2.7 billion of the $3.2 billion in reductions, records show.
This year, through settlements of cases pending before the appeals board or Superior Court, tax office officials made nearly all the reductions themselves: $3.8 billion out of $4.1 billion. Although the settlements of the court cases involved recession-era cases, the the cases pending before the appeals board were for the 2012 tax year, when commercial values were recovering.
Gandhi and others have said the settlements allowed the District to avoid the cost of litigation. Tax office officials have not said how much the city might have saved, and they previously acknowledged that no cost-benefit analysis was done before the shift.
The Post’s analysis shows that about half the appeals completed in Superior Court between 2009 and late 2011 ended in dismissal, with no drop in the city’s proposed assessment. The rest were settled, with a reduction in value over the three-year period of about $1.4 billion.
After George became chief appraiser in late 2011, reductions through settlements grew to $1.2 billion in a single year.
The tax office said the increase in settlements of court cases corresponded to the increase in appeals.
But the number of dismissals didn’t rise along with the appeals; only the number of settlements increased. Tax appeal lawyers said there were fewer dismissals because they had strong cases based on skewed data during recession-era years.
Catania said that he couldn’t comment on the validity of the settlements but that he wondered why Gandhi did not tell the council more about them. He said Gandhi has made similar moves without alerting city leaders.
Last year, the council launched an inquiry into the potential loss of millions in revenue after it was discovered that the tax office had decided to no longer collect a portion of the recordation tax from commercial property owners who had refinanced.
“There was a cover of darkness, reversal of policy,” Catania said. “It’s a continuation of a theme, one question after another that begs an answer.”
Reinhard, who supported the city’s push to settle cases, also said this year’s approach to appeals should not have been so “mysterious.”
“We do believe in transparency, which was not totally there with these settlements,” Reinhard said this week. “It all happened rather quickly and without much explanation.”
Nikita Stewart contributed to this report.