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New assessment structure packs a wallop for some Pittsburgh businesses
Sunday, April 22, 2001 By Dan Fitzpatrick, Post-Gazette Staff Writer
This is a taxing year for Thomas Harrington.
As property manager of the 64-floor USX Tower, Harrington is in charge of the city's largest office building. But his 2001 tax bill is one of the city's largest, too. It totals $8.2 million.
What hurts more, though, is how much his bill ballooned this year.
Hit with a countywide reassessment and a change in the property tax system that shifts more of the burden Downtown, Harrington now has to pay $3.4 million more in taxes than he did the year before.
He plans to pass some of the increases to his tenants, and an appeal could change the total, too. But he remains frustrated. "As we enter these economically leaner times," he told his tenants in a Feb. 23 letter, "it is counterproductive to place a disproportionate burden on the very businesses which will determine the future prosperity of the city of Pittsburgh."
So, why is this shift toward burdening Downtown businesses happening?
"We don't vote," Harrington said.
"That is the bottom line. You can tax us all day long. The reality is that buildings don't have votes."
Caught between a May 15 mayoral primary and a recent countywide reassessment that sent land values and tax bills skyrocketing in city neighborhoods such as Shadyside and Squirrel Hill, Downtown building owners are bracing for a tight year. Making their situation tighter is the recent decision by Mayor Tom Murphy and City Council to undo the way the city collected property taxes for the last 88 years.
The old system, established in 1913, taxed land at a rate six times higher than it did buildings.
The goal was to encourage development and discourage idle real estate speculation by making it more expensive to sit on land, aimlessly. Such a system, some people claim, encouraged a post-World War II building boom and allowed Pittsburgh to remain a dense city, devoid of sprawl.
The new system taxes land and buildings equally.
The switch mitigates the impact of huge land value increases in some city neighborhoods, but it makes life more painful for Downtown landlords, many of whom once benefited by having a large, inexpensively taxed building atop a small piece of land. "It definitely impacts the bottom line, there is no question about it," said Joe Petak, an asset manager for The Hillman Co., which now has to pay $660,000 more in property taxes at PPG Place. The new flat rate changes "the rules of the game," said Aaron Stauber of Rugby Realty Co., which owns the Gulf Tower and several buildings in the Cultural District. "It is going to affect how Pittsburgh does business."
"If they keep it, it is a recipe for disaster."
If the old system encouraged development, will the new one have the opposite effect? Several real estate experts said "no," arguing that developers make decisions based on the market's demand for new space, not taxes. But several others argued that the new system will make it easier for speculators to sit on land and abandoned buildings without improving them. Also, operating costs are sure to rise on Downtown buildings, making it more difficult for developers to recoup their investments and offer competitive rents.
"The threshold for development has just gone up," said Allan Wampler, owner of Downtown real estate consultant Synergy Real Estate Corp. and former development director for Allegheny County. The new system and the resulting Downtown tax increases "may make you think twice about being in the city."
"This is a big increase in a market that is not growing."
The land question
Pittsburgh's complicated story of land, taxes and speculation begins with an observation from George Washington, who was one of the first to recognize the Golden Triangle's real estate potential.
While traveling through Western Pennsylvania in 1753, the future Revolutionary War hero and president noted the Point was "extremely well situated for a fort" and behind it was a "considerable bottom of flat, well-timbered land, very convenient for building."
Several military officers saw the same potential.
After the Revolutionary War, Gen. James O'Hara purchased several empty tracts on the North Side, South Side and Downtown, including the future site of the Kaufmann's department store. Major Isaac Craig bought the land now beneath Gateway Center. Oliver Ormsby, whose father had marched through Pittsburgh during the French and Indian War in the 1750s, paid $170 for the Downtown lots now under the Henry W. Oliver Building.
These early purchases became foundations for great fortunes.
By the late 1800s, though, there were concerns that some of the wealthy landowners and "speculators" were holding back the natural development of the city, which was becoming a manufacturing center and transportation hub. In 1872, one official complained large land holders "have been like a nightmare on the progress of the city for the last 30 years."
The tax system was at fault, some said.
With agricultural and rural land taxed at lower rates than "urban" properties, it became easy for the wealthy to sit on large, empty tracts of land for years and years, waiting for prices to increase.
And they did.
From 1880 to 1910, the value of taxable real estate in the city rose from $99.5 million to $784.8 million.
The price of land, as a result, became second only to New York's, according to a 1912 study by the Pittsburgh Civic Commission. That same study concluded that companies would be slow to locate in Pittsburgh if the land remained so expensive.
"Can this paralyzing grip on Pittsburgh's growth be broken?" the report asked.
A solution, suggested first by the Civic Commission in 1912, was to tax land twice as much as buildings. This idea drew inspiration from Henry George, a 19th century American economist who railed against the monopolization of land. George believed that idle, speculative control of real estate was a key factor in the economic inequities of the late 19th century. He urged that a tax be levied not just on the value of the land but also on its potential value, thus encouraging the best and most efficient use of the property.
The Civic Commission's two-tiered tax passed the state legislature in 1913, only to be challenged by several wealthy landowners, the chamber of commerce and the city's next mayor. They argued that the higher land tax discriminated against the owners of land, and it benefited "the money-powerful skyscraper barons."
One person called the tax "unlawful, unjust and un-American."
But a repeal never gained enough political support.
Percy Williams, who authored a 1962 book titled "The Pittsburgh Graded Tax Plan," attributes Pittsburgh's first building boom in the late 1940s and early 1950s to the benefits of the graded tax, which cut the tax bill on new office buildings, warehouses, manufacturing plants and apartments. Private developers and companies funded many of these early buildings, without government assistance. By 1960, according to Williams, the new United States Steel Building was saving more than $61,000 ($355,000 in current dollars) per year in taxes compared with what it would have owed under a flat tax.
The Alcoa Building was saving $36,000 ($210,000 in current dollars) a year.
"There is no doubt in my mind that the graded tax has been a good thing for Pittsburgh," former Mayor David Lawrence said in the 1960s. "It has discouraged the building of vacant land for speculation and provides an incentive for building improvements."
"It produced," he said, a "better and more prosperous city."
Empty lots
Cincinnati attorney Peter Strauss wants to know why Pittsburgh would ever want to stop taxing land more than buildings.
Cincinnati, he said, could use such a system.
That point became more acute amid the city's recent racial unrest, which exposed pockets of poverty and neglect in a struggling city neighborhood known as Over the Rhine. While there's been some redevelopment of properties into moderate-income housing, trendy pubs, coffee houses and Internet businesses, the neighborhood for the most part has languished, burdened with more than 1,000 abandoned buildings, according to published reports.
A high land tax, theoretically, would force landlords to fix some of those properties.
"I spent a lot of my time as a council member worrying about Over the Rhine and its abandoned buildings," Strauss said. "It probably has 60 to 70 percent of the abandoned buildings in the city. If you could get that fixed up, you would be halfway there."
As a former city councilman, Strauss urged the city to adopt a two-tiered tax system that taxes land more than buildings. "It is a good way of compelling a landlord or someone in the speculation business to improve the property, and not just sit on it and wait for better times to come," he said.
But the idea never gained enough support.
When asked about it, Cincinnati developer Arn Bortz said such a system would help Downtown Cincinnati, too. He wants to build more housing Downtown, but "we can't afford to buy the ground," he said.
"There is no motivation to sell. The best way to make money is to hold onto land and make a parking lot."
Several key spots in downtown Cincinnati sit empty, including an 18-acre triangle-shaped property on the northeastern fringe of downtown, a string of lots along a road known as Central Parkway and a prime downtown parcel once cleared for Nordstrom.
When Nordstrom put its plans on hold, that land became a parking lot.
As for Pittsburgh, Bortz warned that changing the tax system may depress new development. If Downtown landlords have to pass along tax increases to tenants, it makes it more difficult to raise rents once leases expire. Without higher rents, new office towers become less feasible.
"It is going to be a negative effect," he said.
To develop or not to develop
The recent changes to Pittsburgh's property tax system probably make it less expensive for developers to hold vacant land and more expensive for some businesses to lease space Downtown.
But ultimately, it may not affect the amount of new development.
"The trouble is, real estate people don't make decisions to build or not to build based on what the tax on the building will be," said Michael Weir, a senior fellow at the Pennsylvania Economy League who studied the graded tax in the 1980s. "They make the decision based on whether they can get a tenant in the building."
Taxes, he said, are just a part of the mix.
"If someone has a development in mind, they will try and find a way to do that, regardless of the tax structure," said Domenic Dozzi, principal of Pittsburgh Industrial Parks.
"There are a thousand factors that come into play."
The Tippins family, for example, has owned 36 acres in Lawrenceville since the early 1970s. For much of that time, the old riverfront industrial properties sat empty. The old tax system, designed to prod owners such as the Tippinses, was of little influence. But the new tax system, which makes it less expensive for the family to hold that real estate longer, is of little influence, too.
The family is now actively marketing the properties to new tenants and considering a redevelopment plan that would remove some of the aging buildings. The new tax system has not impacted that plan, said Rich Little, who manages the properties for the Tippins family. "I believe we are committed to doing something that will benefit the community. We are hoping for the highest and best use."
The new tax system also may not matter much because city taxes account for only a small part of most landlords' budgets.
The average city, school and county tax burden on a Downtown building is about $2.36 per square foot, according to The Building Owners and Managers Association (BOMA). That is 27 percent of the $8.71-per-square-foot average total operating costs for Downtown buildings.
While the changes might drive up operating expenses a little, most Downtown property owners believe the new system "would not impact development one way or another," said BOMA executive director Barbara Wise-Rau.
One of the few people who disagrees with that view is Dan Sullivan, who runs the Center for Local Tax Research in Bloomfield and believes Murphy was wrong to switch to a flat tax rate.
The city's new tax system will make it easier for a landholder to continue to block development, he said. As proof, Sullivan cites the city's three development booms in the 1950s, 1980s and 1990s. With few exceptions, he said, most of that development happened without a fight from property owners.
"People sitting on grossly underdeveloped property were willing to sell," Sullivan said.
Highs and lows
The irony of Pittsburgh's recent struggles with land and values is that the old tax system may have been partly responsible for creating the recent controversy about the changes in land values.
The value of land skyrocketed in a recent reassessment of every Allegheny County property conducted by Ohio-based Sabre Systems and Service. Hardest hit were homeowners in Shadyside, Squirrel Hill and other city neighborhoods. Land values increased 210 percent in Shadyside, 203 percent in Squirrel Hill and 144 percent in the lower Hill District, due in part to the new Crawford Square housing development.
Citywide, land values nearly doubled to $2.8 billion.
Property owners and politicians reacted with indignation, arguing that Sabre's land values were "outrageously high" or varied wildly on properties that appeared to be identical. Most people agree that land values were low before the reassessment. Why they were low is unknown. One theory is that assessors may have felt a need to compensate for the high taxes on the land by keeping the value of the land low.
Perhaps "assessors didn't deal with land as a specific component," said Paul Griffith, a commercial real estate appraiser with Integra Realty Resources in the North Hills. "They were probably looking at overall value."
Whatever its shortcomings, the reassessment also pushed land values in the county closer to where they are in four other Post-Gazette Benchmarks regions.
Land in Allegheny County now represents 25.54 percent of the county's total real estate value, up from 17.57 percent in 2000. That is now more similar to the counties surrounding Cincinnati, Milwaukee, Denver and Atlanta. The reassessment also pushed the city's land values within the national average.
Staff writer Mark Belko contributed to this story.
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