For cities like Worcester, Fitchburg and Marlborough, with dual property tax rates, the triennial state-required property revaluation can get complicated, as evidenced by the recent uproar over Worcester's latest assessments, which more than doubled the values of some commercial and industrial properties over 2011.
“I can tell you that the feedback from our clients is really of shock. Most of them are completely shocked and confused, and it's really a tough blow to landlords that have been really struggling for the past five years,” said Matthew J. Mayrand, vice president of real estate brokerage firm Kelleher & Sadowsky Associates Inc. of Worcester. “I think there's almost a perception that you're dealing with all these extremely wealthy business owners and in many cases, it's small businesses that are struggling.”
Worcester officials have said the dramatic changes in some values came about because manual overrides that had been given in the past were not applied in this round of revaluations. The officials said the values of more than 2,000 properties had manually entered data and formulas for years, overriding calculations the system had made to determine a property's value.
“The overrides that were accepted before should not have been accepted,” City Assessor William J. Ford wrote in an email. Concerning this year's assessments, he added, “We applied standard appraisal practice and abided by the laws, rules and regulations of the commonwealth.”
He said two appraisers looking at the same property may vary slightly in their decisions, but should be within 10 percent of each other when their analyses are done.
“The issue here was that the obsolescence adjustments (reducing the value of a property due to deficiencies in building design, or external factors) were not supportable by the market, sales significantly exceeded the assessed values, and the lease rates and expense ratios (operating expenses based on comparable properties in the market) were not market-supported,” Ford said.
Whereas residential values are determined by a market approach, taking into account what comparable properties within the community sell for, there aren't enough transactions in the commercial and industrial markets to do the same.
Values for those properties are determined by the income approach, used for properties that would be bought and sold with the intent of producing income. Data including rents, occupancy rates, operating expense ratios and the amount of income a property is expected to produce given current market conditions are taken into account. But while that's the industry standard, not everyone agrees it's the best way.
“There's a lot of assumptions that you need to make in order to use the income approach, and I think what's happened is they've made a lot of bad assumptions,” Mayrand said.
But Fitchburg assessor Tom Caputi said that while some of his work is subjective, determining property values isn't in the assessor's hands as much as people may think, and the most important thing is to stay consistent with how values are determined. He said the income data put into a computer system helps analyze changes that have been made to the market over the previous 12 months.
“So you correlate your income and cost approach to come up with a fair market value for industrial (properties),” he said. “People set the market. I'm just analyzing what takes place out there.”
Beth Proko of the business interest group Worcester Citizens for Business doesn't believe the income approach was properly used in the city's revaluation.
“This revaluation process appears to be using rents and sales based on ideal market conditions,” she said. “This is just not realistic in my opinion. Most landlords I know have done everything to try and keep their rents low for both commercial and residential tenants, especially during these difficult times.”
Scott Graham, who owns a mixed-use warehouse at 385 Cambridge St., said he was shocked when he saw his property's value had jumped 77 percent from last year, to nearly $1.5 million from $835,000. He expects his taxes to go up by almost $12,000.
“That's a lot of money to come up with in one year and there's no way I can swallow that, so I have to spread it amongst our tenants who are already struggling,” he said. “I feel that these tenants, lots of them are just going to leave the city and go to neighboring towns where it's cheaper.”
Ford said about 500 property owners were assisted with questions and issues regarding their assessments, resulting in 105 property values having been changed. Values of three properties rose, while the rest fell.
Brokers like Mayrand and Peter Kovago of Glickman Kovago & Co., said that while many clients are angry about assessments and the tax increases they'll lead to, they aren't so concerned with the values themselves impacting future sales.
“Most are not relying on assessed value to make (a) decision on whether to buy a piece of property,” Kovago said. “All they're going to care about is, 'What is my tax bill at the end of the day?' I think we all, at the end of the day, put very little weight at the assessed value.”
Mayrand added, “It's a problem and it's been going on for a long time, and these new values honestly seem a little unfair. They don't seem to align with the real estate market and certainly where the market has been trending for the last five years.”
He said that although taxes in Worcester have a history of being “prohibitively high,” sophisticated buyers would be aware that their taxes could change since another assessment is likely to be done because a property transfer triggers the city to revalue a property that may have not been assessed recently.
Although the manual overrides are largely blamed for the gap in values, they aren't the only cause.
“The big difference is it does not appear properties were reviewed in a cyclical manner,” Ford said. That allowed several years to go by without properties being looked at. Ford said some property owners have told him they feel the playing field is more level now.
In Fitchburg, one section of the city is assessed each year so that each property is looked at every five years. The state requires assessments be done every nine, at most. Daniel Brogie, interim principal assessor in Marlborough, said city assessors revalue properties every year, but a more in-depth analysis is done in triennial evaluation years.
Bob Bliss, a spokesman for the Massachusetts Department of Revenue, said the purpose of the triennial revaluations is to keep current with property values.
As for Worcester, Bliss said his department is confident in the city's findings.
“A lot of things can change over four years. The assessor's approach can change too. Obviously, there's been some changes to the commercial and industrial properties in Worcester. What we look for is consistency in assessing approach. We think there's consistency with the approach that they use.”n