Saturday, January 28, 2012

Best and Highest Value Use

So this is interesting and no, this isn’t really about assessments. I mean, it is about assessments, but there are so many bigger issues rolled into this new legal development.

In the new litigant a week merry-go-round in Judge Wettick’s courtroom (it really must be getting crowded), the latest is the (collective) property owner of one R.J. Casey Industrial Park who has a slew of issues.

One of many points is a contention that it is against Pennsylvania’s uniformity clause to assess commercial property differently than residential property which is indeed how it is done here and most everywhere else. Problem with that is that commercial properties across the state have been assessed different than residential properties for decades. So I will let the attorneys fight over that one, it is just one of the issues.

Then they seem to point out the dearth of information on the assessment. Here are points 16 and 17 in their filing:
16. Regarding commercial properties, the Property Record Cards available for purchase on the Third Floor of the County Office Building, do not contain any information on the New Assessments. 
17. Accordingly, unlike residential property owners, commercial property owners evaluating their New Assessments have no access to any information that the County used to determine the New Assessments.
Lots of capitals in that, but to be sure I feel their pain. Though I do get a chuckle of someone really digging up (and dusting off) a property record card and expecting to find much relating to the latest machinations written down in ink. Are those things still written in cursive? For the record, the online information is just a small part of what what went into determining new residential values.  I see no reduced form from any of the many regressions that were used.  'Comps' are at most part of the equation and many overinterpret their role in the assessment I am pretty sure.  There is a funny story back from when the original 2001 Sabre numbers came out which didn't really used comps the same way CLT did.  The county web site did not list any 'comps' for a property, but people so expected to see them that eventually the web site was altered to show a few comparable properties that were picked ex post... though the properties listed really had no specific input into setting a particular property value becuase of the way the Sabre Systems algorithms worked. (that is a very short version of a very very long story.. but I digress). 

To be fair I should go back to point 15 in the filing which is clearer and shows they did start out digitial:
15. Regarding Commercial Properties, the county provides no information online regarding the comparable sales used to determine New Assessments or even the gross square footage of an improvement on a commercial property. The County does provide this information online for residential properties.
Well, some information at least. Otherwise ditto. 

Nonetheless, the motivation in the end must be to get a lower assessment and a lower tax bill.  First off realize that for commercial property across the nation the standard for property assessment is not market valuation that it commonly is for residential values but “Highest and Best Use of the real property”. For a lot of properties that distinction may not be such a big deal, but for some in certain unique locations it could be a big deal.

So here the property owner is upset having seen their assessment for 6 properties jump from $2.7 million to $11.3 million. A scary 340% increase in nominal value. Even with our notional revenue neutrality it works out to a potential tax increase of 280%, so more than enough to be upset. So.. is the increased assessment some gross error on the part of the assessors, or is something else going on?  Could it be the highest and best use for the property has changed?

Again, like the Mt. Washington parking space, we may have found the most exceptional case out there. Is there anything unique about this property?

So where is this property?  All of the properties at issue in the filing are located in the otherwise depopulated Chateau neighborhood (why we still call it a neighborhood is another issue since literally no more than 10 people live there.. likely a lot less.. unless you count folks sleeping under the slots machines I guess). The properties in question are all along the riverfront a half mile or so from the edge of a property recently redeveloped and otherwise known as 777 Casino Dr. Nice new bike trail cuts through the properties in question and there are some nice marinas there it looks like. 

So lets ponder the 'old' assessment values which everyone likes to refer to as 2011 values which they really are not. They are, again, base year assessments based on what circumtance were in 2002, if not prior.  Yes, the 2002 base year assessment really means that the ‘old’ values were based on what the market would bear for a property in 2002. Back then the idea of a casino was not yet really formed, and even if it was there was no thought the casino would be placed over on the North Shore there where the Rivers Casino wound up. Remember Don Barden really came in with a somewhat unexpected bid and was clearly not expected to beat out the Penguins backed project slated for the Lower Hill District, nor the Station Square locations that everyone was focusing on. The location on the North Shore and the big empty plot of land on the North Shore there was fallow and without anyone really expecting much to be made of it anytime soon. I am pretty sure that was a big drag on all nearby real estate. Even the North Shore Connector was so far from completion, and opposition so loud, that it would not have been reasonable for it to have had any impact on real estate values at the time. Now it is on the verge of opening. Could it not have some positive impact on land values anywhere near it.
So now, 10 years later.. it is not to say there is any vast demand for land over there and I am unclear was nearby development the casino has wrought… but would it really be reasonable to think there has not been any impact on nearby property. In this case the 5 properties in question are add up to either 5 or 10 acres (I am confused because the itemized parcel 22-J-67 is listed as being owned by the URA?? even though there is no mention of the URA in the filing??)  of land all effectively riverfront parcels though I am not sure if they own all the way to the river itself.

Someday when we ever really see data out of all this I will work up a map of the value per acre along all of Pittsburgh’s rivers before and after the reassessment.  It might be interesting to see how the price gradient moving away from the river has changed over time. It would be an interesting factoid at least to see if any of the vast efforts to redevelop our riverfronts have had any meaningful impact capitalized into real estate values of real estate close to the riverfront. Just imagine the counterfactual if they did not and what that would mean?

So there is a bit of Henry Georgism in the highest and best use construct. It is certainly true that the parcels might not currently be ‘worth’ the new higher assessments placed on them.. but if assessments stay low, and taxes stay low, there will that much less incentive to ever fully develop those properties to the “highest value” use.  There is only so much riverfront property near the Casino (and the stadia and the science center) to be had. I think that is the core reason commercial properties are assessed differently to begin with. 

I'm thinking there is a future casino-annex hotel latent in the geography there. Best and highest value use?


Anonymous BrianTH said...

Very interesting post, and I agree the more the tax system provides incentives for not holding off on development, the better.

Incidentally, can the type of model they used capture something like "future casino-annex hotel"?

Saturday, January 28, 2012 10:43:00 AM  
Anonymous Anonymous said...

Love your posts but I think you are mistaken regarding the methodology for assessing commercial property. "Highest and best use" has a role, but the state statutes are clear that all 3methods (comparable sales, income approach and replacement value) are to be used. Any good commercial appraisal will reference and discuss all three approaches. So, if the current property is leased and producing income, its doubtful an appraiser (or the assessor) would consider a hypothetical hotel. Instead, the value would be based on sales of similar properties or a capitalization of the rental income. Keep in mind too that the assessment is to be as of a date certain (1/1/12), again making reference to theoretical uses dangerous.

Saturday, January 28, 2012 3:25:00 PM  
Blogger C. Briem said...

To be sure I don't know what particular method they used on those particular properties, though I think they would have picked one of them and not mix them. I would kind of bet they used the income approach though..

and I also meant it when I said this was about more than the assessment. I do not think anyone considered a hypothetical hotel... but what I suspect will happen is that big jump in the value of land at the casino site is being capitalized into some of the nearby land. So the real debate one could have is whether that makese sense in some way.

Saturday, January 28, 2012 3:35:00 PM  
Blogger C. Briem said...

Just thinking about this more I will just say again the hotel comment was a tag line meant to connect this to the bigger picture. In no way did.

However you can think about it in another way. Take an extreme case. Once there was fallow land worth little and someone builds a successful skyscraper on it. Little plot of land next door was valued little before the new skycraper. No development happens on that land but it is now adjacent to where there is a lot of development. Has the value of said parcel changed? A philosphical question in a sense if there are not any comparable sales to model a price that way.

So no.. this wasnt a skyscraper and the land in question was not unused.. but clearly a big jump in property value at the casino site. The casino and its value and its income basis is clearly no longer hypothetical.

Saturday, January 28, 2012 4:48:00 PM  
Anonymous BrianTH said...

I guess I have been assuming the model was sophisticated enough to pick up locational effects even without strict comparables (say even between commercial and residential properties).

Saturday, January 28, 2012 6:29:00 PM  
Blogger C. Briem said...

For residential parcels I am quite sure CLT's methodology has a multiple regression model for a number of regions within the county (probably not enough regions which is where any problems will arise), and as I have been told a weighting of some specific comps.

but for the large commerical properties.. few in number and many of which are very unique in circumstance and characteristics you get into some other issues and most certainly not enough data for the same treatment as residential parcels.

so it is a semi-routine econometric exercise these days, even have (some) undergrads doing it these says to compute the impact on real estate near some new project good or bad. Could be a brownfield, or a brownfield redevelopment, or lets say in transit, a new subway (not here of course, but that is the basis of all TRID funding)..

Saturday, January 28, 2012 6:36:00 PM  
Anonymous BrianTH said...

Yep, all those studies of locational effects is part of what I had in mind.

Saturday, January 28, 2012 11:56:00 PM  

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