Commercial property tax assessment shenanigans in DC

The Washington Post reports that the Office of Tax and Revenue has settled a number of commercial property tax assessment challenges, costing the city close to $50 million in tax revenues.  See "Dramatic rise in D.C. tax office settlements."

From the article:

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.

This is interesting for a couple reasons.

First, the city's commercial properties are selling for record prices, because comparatively speaking, Washington DC is one of the world's most stable real estate markets.

See "Brookfield to sell 1225 Connecticut Ave. NW," "Market Square selling to Wells for $615M," "Urban Office Sale Runners Up," "Japanese firm pays $147.5 M for 801 Ninth St. NW," and "Los Angeles firm to close on Hamilton Square acquisition" from the Washington Business Journal, which discuss the ever escalating sale prices for Washington's commercial office buildings--at least for the Class A and trophy properties (older properties sell in the $300 to $400 per square foot range).

It's a global market with global players and prices to match.

For example, this is from a Bisnow DC Real Estate e-letter in April:

Jamestown has entered into an agreement to purchase 733 10th St from Skanksa for around $140M, or $817/SF, market sources tell Bisnow.

In short, commercial buildings are selling for $600 to $1,000/s.f., therefore they are worth a lot of money, and it becomes difficult to justify reduced assessment values.

Left: Washington Post graphic on the past 4 years experience with commercial property tax assessment challenges.

Second, Los Angeles County is going through a big scandal now over how the County Tax Assessor, to score political and other favors, reduced assessments for certain property owners.

See "The Scandal Roiling the L.A. County Assessor's Office Suggests Your Tax Bill Is All About Who You Know, and How Much You've Donated to Assessor John Noguez" from the LA Weekly.

I'm not saying it's the same kind of thing going on here.  But it doesn't look good.

After all, there is a cozy relationship between DC's top officials and the real estate industry, after all, commercial real estate drives the local economy and provides a significant proportion of the city's tax revenues--the Central Business District generates not quite 20% of the city's revenue.

And there is the constant problem of the Commercial Property Tax Assessment process being subject to extra-normal suasion. E.g., that's how R. Donahue Peebles got his start in real estate, see "From a Native Son, Politics of Getting Rich (Post, 2007).

Also see these articles from the Washington Post archive, "Assessment Rollbacks Spur Fairness Charges; Reductions for Commercial Property Owners Said to Shift Tax Burden to D.C. Homeowners " (1988) and "Benefits of a Tax Board's Revolving Door; Ex-Chairman's Record on Assessment Appeals Beats the Average" (1990).