The current snafu over tax assessments on commercial property in the District was as predictable as a rush-hour traffic jam on a rainy day. Indeed, since early this year, all signs pointed to a raft of disputes, appeals and litigation stemming from unprecedented increases in tax assessments.
As expected, commercial property owners cried foul when the city suddenly jacked up assessments on office buildings, hotels and department stores. Not surprisingly, the D.C. Board of Equalization and Review slashed a good many of those assessments on appeal. What is surprising, however, is that the board granted whopping reductions in some cases, virtually making a mockery of some appraisals.
How could there be such glaringly wide disparities between the city's soaring appraisals of so many commercial properties and the drastically low assessments established by the Board of Equalization and Review? The city's appraisers and the board obviously aren't applying the same standards. If they are, then the interpretations are grossly different.
How is it possible that the two sides can be so far apart, for example, in applying what should be standard criteria in establishing a tax bill for Hecht's downtown store? The chairman of the Board of Equalization and Review and Hecht officials were quoted recently as saying that the store's assessment was cut because the focus of retail trade has shifted west in the old downtown core, affecting Hecht's sales. But a memo from the city's Standards and Review Division points out that using sales figures to establish hypothetical rents "ceased to be applicable" when business volume began declining and land values started to climb.
Retail sales and escalating land values. Apples and oranges.
While it is true that an appraisal is essentially an opinion of what value is, there are established methods by which appraisers attempt to fix value. Unfortunately, that process and the commercial real estate market might have been skewed in recent years by the exorbitant prices that investors have been paying for land. Hence, the seeds of the current dispute were sown almost five years ago when investors new to the market were willing to pay almost any price to grab a piece of a lucrative real estate market.
By their own admission, city appraisers expected strong reactions to their sudden rush to make up for years of underassessment of commercial property. When assessments took such wild swings upward after years of relatively little change, the results were bound to produce a field day for lawyers.
Property values began to surge nearly five years ago in a binge of buying and building, but the city's assessments didn't keep pace. When assessors did move to close the gap, it might have been a case of too much, too soon. It might have been more prudent to take a more gradual approach to recovering lost tax revenue. A flat rate increase as an interim measure also might have been a wiser choice. "We're supposed to estimate market value, and that's based on sales" of property in the vicinity, an official in the D.C. Real Property Tax Office allowed last spring.
In any event, it is inconceivable that those market values could have been so out of line as to be rolled back as far as they were by the Board of Equalization and Review.
As a result of the board's actions, the city's tax base has been lowered by an estimated $1 billion, and the perception -- right or wrong -- is that big commercial property owners are getting away without paying their fair share of taxes.
Perceptions aside, the imbroglio over assessments is the product of two extremes -- an overreaction by city appraisers to rapidly changing market conditions and years of underassessing commercial property, on the one hand, and overreaction by the Board of Equalization and Review to a flood of appeals -- some of them questionable -- from property owners.
To be sure, some assessments may have been out of line, but it's difficult to imagine any being off by as much as $33 million. And to lower an assessment from $10.8 million to $5.8 million when the property was sold for $8.4 million boggles the mind.
What all of this suggests is that the District has a flawed system that not only penalizes residential property owners but also undermines the city's economy. It suggests further that the District ought to go back to the drawing board and devise a more realistic and reliable set of criteria for appraising the various types of commercial property in the city.