Judge rules against Philly’s assessments of high-rise condos with tax abatement

In a case that involved a few of the city’s most prominent luxury condo buildings, a judge has ruled that Philadelphia’s method for assigning land values to nearly 300 condo units with 10-year tax abatements was improper and not credible.

Common Pleas Court Judge Idee C. Fox ordered the city to refund taxes to condo owners involved in the case, who own units in two buildings on Rittenhouse Square and in the Residences at the Ritz. In the case of one unit in the 1706 Rittenhouse Square building, the ruling will reduce the 2019 tax bill by 70 percent, from $6,053 to $1,843.

The case involved the city’s 2017 changes to the way it assigns value to the land underneath buildings, which significantly increased tax bills for many property owners with the 10-year abatement for new construction because they pay taxes only on the value of their land.

Because the multimillion-dollar condos had tax abatements, the amount of tax money involved in the case was relatively small. But lawyers for the condo owners said the case could impact assessments and tax bills for new condos as they are built, because the ruling criticized the city’s method of assigning land values.

“We’re not talking about many millions of dollars, but we are talking about a decision that may affect many projects going forward,” said Philip Korb, a lawyer with Ballard Spahr who represented the condo associations.

The city disagrees and is “considering its options moving forward,” said Mike Dunn, a spokesperson for Mayor Jim Kenney’s administration.

“The trial court judge determined assessments for the specific condominium units that were a subject of the appeals before her,” Dunn said in a statement. “The judge did not determine assessments for all condominium units throughout the entire city.”

The ruling, issued last week, is unrelated to a different judge’s ruling last week that the city and School District must repay nearly $50 million in 2018 taxes to owners of about 700 commercial properties. But it delivers another blow to the Office of Property Assessment, which has faced criticism from property owners and City Council members in the last year — especially for its 2019 and 2020 reassessments that increased tax bills for hundreds of thousands of homeowners.

The city’s 2017 changes to land values that were at issue in the condo assessment case were irrelevant to many homeowners. But for those with the 10-year tax abatement for new construction, the land value is the only portion of the assessment used to calculate taxes.

The land value changes led to other appeals by homeowners with tax abatements, some of which have been successful in arguing that an appeal can consider the land value alone and not the entire assessment.

For condos, each unit in a condo building must be assigned a portion of the land underneath the building, since all condo owners own a part of it.

In the case of one condo unit at 1706 Rittenhouse Square, the land value increased nearly 300 percent in 2017, raising the tax bill from $1,176 to $4,656. The change set the land value at 8 percent of the condo unit’s total value. That unit — in the same building where former Phillies pitcher Cliff Lee once owned a condo — had a total 2017 assessment of $4.16 million.

Without the abatement, the unit would have a 2017 tax bill of more than $58,000, meaning the abatement offered a tax break of more than $50,000 for one year alone. The buildings involved in the case have been sites of protests against the controversial 10-year abatement; advocates for school funding have called for eliminating or reforming the tax break.

The condo owners’ lawyers argued that the city’s use of a fixed percentage of a unit’s total value as the land value did not make sense. When added together, all the assigned land values of the units in a building resulted in total land value for the building that was unreasonably high, they said.

“When you added all those up, you got these land values that … were like $40 or $50 million an acre,” said Matthew White, another Ballard Spahr lawyer who represented the owners. “The land would have been more expensive than you’d find in Central Park South in New York City."

At a January trial for the appeals of the three condo buildings, the Office of Property Assessment had an expert defend its practices as consistent with assessing industry standards. But Fox ruled that the testimony appeared to be “a means created to justify the city’s desired ends.”

“This court did not find the city’s evidence to be reliable or credible,” she wrote.

Fox sided instead with the condo associations’ lawyers and their expert’s analysis of the land value. She set a total land value for the 1706 Rittenhouse Square building, and said the land value of individual units should be calculated by taking the total land value and multiplying it by the percentage of ownership the individual unit owner has in the overall building. The same method should be used for the Residences at the Ritz and the 10 Rittenhouse Square condo building, Fox said.

The other buildings’ land values have not yet been calculated as ordered by the judge. For 1706 Rittenhouse Square, Dunn said, the total amount the city and School District must refund taxpayers is about $320,000.