Surge in D.C. tax office settlements reduces commercial property owners’ bills
By Debbie Cenziper, Nikita Stewart and Ted Mellnik,
District officials have knocked $2.6 billion off the taxable value of commercial properties owned by some of the city’s most influential developers through a series of settlements negotiated this year by the Office of Tax and Revenue, The Washington Post found.
The settlements — which in most cases went against the earlier recommendations of staff appraisers — reduced the 2012 assessments of more than 500 commercial properties. Some owners saw the value of their multimillion-dollar properties lowered by 40 percent or more, which shaved tens or even hundreds of thousands of dollars off their tax bills.
In a city chronically strapped for cash, the settlements represent a $48 million reduction in potential revenue for the 2012 tax year.
Tax office officials say they have embraced the settlements to save costs on tax appeal litigation. But the reductions have spurred anger and confusion among some tax office employees whose concerns have filtered out to internal auditors and the FBI, which has launched an investigation, according to three people familiar with the matter who spoke on the condition of anonymity because they fear they could lose their jobs.
In the past, the city’s chief financial officer, Natwar M. Gandhi, who oversees the tax office, has sharply criticized property tax reductions issued by the city’s independent tax appeals board. Gandhi has supported a change in law that would give the District the right to appeal the board’s reductions in D.C. Superior Court — a move meant to protect the city’s tax base. Yet in a year when the District’s commercial sector grew, tax supervisors signed off on settlements with property owners before the appeals process played out.
The $2.6 billion in property value reductions is more than eight times the total from 2011, when the tax office agreed to 164 settlements for a total reduction of $305 million, city records show. In 2010, there were 11 settlements with a total reduction of $43 million. In 2009, there were 35 settlements with $83 million in reductions.
Gandhi said he had no role in the tax office’s decisions to settle with property owners. But he defended the process and the settlements, saying the tax office must weigh the risk of costly litigation and acknowledge when early values assigned by appraisers appear to be wrong.
“It is a process that involves a great deal of judgment,” he said. “. . . Every dollar I care about — no doubt about that. But at the same time, we are human beings trying to do the job as best we can.”
Gandhi added that the $2.6 billion reduction represents a small fraction of the city’s property tax base, which includes homes, buildings and lots.
“When you look at large numbers like that, it’s a legitimate question,” he said of reaction to the $2 billion-plus figure. But, he added, “that is out of a tax base of $246 billion, amounting to less than 2 percent of the overall tax base.”
Property taxes are the city’s largest source of revenue, accounting for about 30 percent. Commercial properties were valued at about $71 billion this year. Commercial property owners pay a higher tax rate than residential owners — $1.65 per $100 of assessed value for the first $3 million and $1.85 per $100 above that, compared with a flat 85-cent residential rate.
The settlements have raised concerns among some employees in the tax office, where three years ago manager Harriette Walters was sentenced to federal prison for stealing more than $48 million through fraudulent tax returns, the largest embezzlement scheme in city history.
At least one tax office employee recently complained about the process, prompting an ongoing investigation by the agency’s Office of Integrity and Oversight. In recent weeks, the FBI also has been looking into the deals.
An FBI spokesman said the agency does not confirm or deny the existence of investigations. Gandhi said he could not comment on any federal investigation but acknowledged that his agency had received a complaint and that the internal-affairs unit is investigating.
Three former D.C. tax office supervisors contacted by The Post said they were surprised by the settlements.
“Are you kidding?” said Richie McKeithen, a former tax office director who left in 2010 to become chief assessment officer in Philadelphia. “Dr. Gandhi made a concentrated effort to criticize the appeals board for reducing values. Yet it appears . . . that you are reducing the value yourself after you just levied it.”
David Fitzgibbon, the city’s former chief appraiser who left in 2011 for the same position in Fulton County, Ga., said that “if the staff followed the procedures that we followed for years, I would find it difficult to think that that many values were wrong.”
Out of public eye
The settlement process largely played out behind closed doors. Tax office officials said supervisors are authorized to significantly adjust property values without approval from higher-ups. The Post reviewed the publicly available settlement records for more than 40 cases and found only brief explanations for even the steepest reductions, which often occurred after staff appraisers provided written accounts supporting higher values.
In three out of four of those cases, the negotiated value was closer to what the property owner had wanted rather than what the appraiser had recommended.
“They’re just giving it away,” said one veteran city appraiser who for fear of termination declined to be identified. “It’s demoralizing because we are doing our jobs and then they change our assessments. Values are being undercut so much.”
The appraiser said tax office supervisors last month warned staff members that they would lose their jobs if they talked to the media. Tax office officials say all media inquiries must go through proper channels, and they said they were not aware that any appraisers had been threatened with termination.
Four people with knowledge of tax office operations told The Post that the upswing in settlements began under the direction of the city’s new chief appraiser, Tony L. George. George, who was hired last year, called a meeting with the city’s appraisers and told them to settle everything “within reason,” the people recalled. As chief appraiser, George has final say on settlements.
George did not return repeated calls seeking comment.
His supervisor, Director of Real Property Tax Administration Robert Farr, said he was not in the meeting but had heard that George talked about settlements. He said he did not recall any negative feedback from appraisers. Settlements are generally struck because of appraiser errors or new information that has come to light, such as income and expense data, he said.
“We don’t always get the number correct on the first try,” Farr said.
Current tax office chief Stephen Cordi said the $2.6 billion reduction approved by the tax office is in line with overall reductions made by the appeals board in prior years.
“The results are the same,” he said.
Last year, however, the total reduction for commercial properties was $1 billion, just over a third of this year’s total. Cordi said last year’s total was an “outlier” caused by a “substantial drop in initial commercial assessments” f0r 2011.
Cordi said supervisors decided to settle this year — rather than let the appeals process play out — because they believed it would save the city money. If property owners disagree with the values assigned by the appeals board, they can take their case to D.C. Superior Court.
“Each case is a hazards-of-litigation decision,” Cordi said. “. . . If each of those cases had gone into litigation, we may have collected more or less, and our judgment . . . it would have been a lot less.”
Cordi could not provide an estimate of how much the city may have saved, adding that no impact statement or cost-benefits analysis was done.
Farr said the District, by law, also must give property owners refunds and pay 6 percent interest if the city loses or settles in court. Taxpayers must prepay their taxes before filing an appeal in court.
Last year, the District spent about $730,000 in interest for all property tax refunds, which totaled $15.5 million, including those decided in court, according to data provided by the tax office. Officials said most of the refunds were for undisputed cases, not assessment appeals; they could not provide more specific data.
Farr said another reason for the settlements is the number of outstanding tax appeal cases in D.C. Superior Court, which now stands at about 1,200, mostly for commercial properties.
“I would say that we were recognizing the backlog of cases and recognizing the fact that we had outstanding cases dating back to 2009,” Farr said.
D.C. courts spokeswoman Leah Gurowitz said the court’s analysis does not show a lingering pileup of cases.
“It is incorrect to say that there is a backlog of tax appeal cases in the Superior Court,” she said. “While there has been a significant increase in the number of tax appeals filed in the past several years, the time it takes such cases to get resolved has not increased significantly.”
Overall, Farr said the increase in settlements this year has had little net effect — the overall taxable value of properties that received settlements increased by 5 percent over 2011.
The tax office said in a report last year that the overall value of the city’s commercial properties for tax year 2012 grew by as much as 20 percent. Erica Champion, with the D.C.-based CoStar Group, a commercial real estate information firm, said the uptick started in late 2010, when the city’s commercial sector started seeing lower vacancy rates and higher rents.
“It’s pretty dramatic how much better the District has held up,” she said.
Developers of buildings that settled with the city include longtime builder Douglas Jemal, whose company received a $25 million reduction for 12 properties in Northeast, city records show. The 53 percent reduction, signed in March by George, the chief appraiser, lowered the company’s property tax bill this year by an estimated $460,000.
The two-sentence explanation in the settlement agreement for the properties cited zoning restrictions that affected land values.
The District’s tax appeals board declined to provide The Post with the documentation submitted by property owners to support their cases, saying data such as rent rolls, expenses and income are proprietary.
In a written statement, the tax office said the lower value “reflects a split zoning on the properties as well as severe restrictions due to the historic designation.” The tax office did not provide specifics, saying valuation records are confidential.
Jemal and the attorney who represented him on the tax appeals case did not return calls seeking comment.
A $58 million reduction went to Gallery Place, the office and retail building in the heart of Chinatown. The building was built by two of the city’s most influential developers, Herb Miller and John E. “Chip” Akridge III.
The building was originally assessed at $214 million. The owners appealed. After further study, a city appraiser raised the assessed value of the building to $239 million, writing among other things that “the petitioner’s value . . . is unsupported by recent sales in the market.”
The appraiser also said the building’s expenses “appear overstated with respect to professional fees” and that the property sits in the “premier retail destination of downtown Washington, D.C. and represents a Class A trophy building.”
Gallery Place is next to Verizon Center, home to the National Basketball Association’s Washington Wizards and the National Hockey League’s Washington Capitals.
George signed off on a settlement that dropped the building’s taxable value to $181 million, a 24 percent reduction. The decision reduced the building’s tax bill by about $1 million. No explanation was listed on the settlement form.
In response to inquiries from The Post, the tax office said that the higher value was “indefensible” and that Gallery Place “submitted evidence that supported their position.” No specifics were provided.
Miller also defended the settlement, saying the building’s rents have not increased, because tenants have five- and 10-year options.
“Because Gallery Place was one of the first buildings to kick start the revival of the Chinatown neighborhood in 2004, rental rates for the lease agreements for the majority of the tenants are well below the rental rates of the neighboring buildings that joined the community later,” Korenna Cline, spokeswoman for Gallery Place, said in a written statement.
Some property owners and their attorneys have long been critical of commercial assessments in the city.
“I’ve been doing this for 27 years, and I wouldn’t still be doing it if they got it right,” lawyer Tanja H. Castro said. “It’s a whole combination of factors. I do think that the current chief appraiser is working hard to do a better job.”
W. Shaun Pharr, a senior vice president with the Apartment and Office Building Association of Metropolitan Washington, said in an e-mail to The Post, “For years, AOBA has been pointing out problems with the quality and accuracy” of assessments.
Current and former city appraisers and supervisors, however, said some of the same owners appeal year after year, no matter what the city’s values show. They describe a David-and-Goliath battle — high-powered lawyers and tax appeal specialists pushing back against an overwhelmed government agency.
“The appellants had so much more in terms of resources,” said Fitzgibbon, the District’s former chief appraiser. “They have the $1,000 suits, and we had the $80 sports coats.”
Gandhi has also been critical of the process, saying in a 2010 Post article that the city is often outmatched by a “battery of high-priced lawyers, who do nothing but appeal.”
Hundreds file appeals
Owners of about 2,700 commercial properties filed appeals for the 2012 tax year, down slightly from last year, city records show.
Appeals are considered first by the appraiser who arrived at the original value in the tax office. After appealing to the tax office, owners can take their case to an independent board — known until recently as the Board of Real Property Assessments and Appeals (BRPPA) — that is appointed by the mayor and approved by the D.C. Council.
Before the board holds a hearing, however, tax office supervisors can sign what is known as a “stipulation,” a final assessed value approved by the city and the owner.
In the past, the tax office agreed to a relatively small number of settlements, city records show. Former supervisors said they vetted the city’s values using statistical studies, bias tests and other quality control measures.
“We felt that we had a good assessment,” Phyllis Holmes, a recently retired supervisor in the tax office, said of earlier assessments. “Although they may have provided additional documentation . . . if it did not support any movement in the assessment, we did not do a stipulation. We held on to our values.”
McKeithen, the former director in the tax office, said: “We didn’t cave. We felt good about our values.”
Tax office officials have long been critical of the appeals board, saying untrained board members too often side with commercial developers. Gandhi has pointed to the board’s reductions as a contributor to the District’s budget gaps, saying in 2010: “The amount of money we are losing is of great concern. When dollars are scarce, you’re looking for leakages in the system, and this is a major leakage.”
Last month, the board was wholly restructured; it will have six full-time commissioners as salaried city employees and eight part-time commissioners who will be paid hourly. The chair, paid $120,000 annually, has to have at least five years of experience as a certified appraiser, and the vice chair has to be a lawyer.
The recent settlements occurred under the old board. Cordi, the tax office chief, said there was nothing unusual about the increase in settlements this year. In the past, he said, the tax office often verbally recommended lower values to the board, then let the board come up with a final assessment. This year, he said, the board would not accept recommendations, forcing the District to settle more often with property owners.
“I knew only by hearsay that they were refusing to accept recommendations,” he said.
A former appeals board member, who wanted to remain anonymous to speak openly about the process, said the board did not refuse to accept the tax office’s recommendations.
“I categorically deny that . . . [in] any case that came before me . . . that I and my panel refused to accept the assessor’s recommendation,” the former board member said.
Farr, director of the Real Property Tax Administration, had a different explanation for the settlements. He said the appeals board was too often ruling against the recommended lower values in favor of higher values.
He said that was a problem because it meant more property owners would appeal to Superior Court.
Farr added that the appeals board by law had the right to reject the settlements. But Gregory Syphax, chairman of the newly revamped commission, said district rules prohibit the board from changing assessments after a stipulation unless there is a technical error.
George’s former job
As chief appraiser, George oversaw the appeals process and was required to approve all settlements with reductions in value of 40 percent or more.
George was formerly the assistant chief appraiser in Fulton County, Ga. His contract was terminated in 2010 amid criticism that he was overruling lower-level appraisers by adjusting the assessed values of properties, said Bill Huff, chairman of the county’s Board of Tax Assessors.
“The value that they came up with . . . was often disregarded and changed by Tony before it came to us,” Huff said. “We were not particularly pleased with that. It’s based upon the values, ultimately . . . based upon support of facts. We didn’t feel like it was happening properly. There were too many canned responses.”
According to county records, George had refused a request for his resignation and said in an e-mail to board members that he was being targeted because he is African American and had made his own whistleblower complaints about improper reductions in property values.
Gandhi’s office declined to provide George’s résuméand job application, citing an exemption in the District’s public-records law for “personal information.” City agencies often provide such records, which are generally considered to be public records with appropriate redactions.
Gandhi said his agency relies on an outside firm to screen high-level job candidates and internal investigators to conduct thorough checks after they are hired.
Huff, of Fulton County, said no one in the District had contacted him about George’s past performance. “I didn’t know Tony was working there until investigators called me,” he said.
Jennifer Jenkins contributed to this report.