80 rms, grt vu, no tx; how property tax assessments let the rich rip off the rest of us.
It wasn't the first time Gould had turned to Peebles. Gould and Blackie Auger, then co-owners of Washington's Mayflower Hotel, had hired Peebles to ratchet down that assessment too, slicing off more than $11 million. That little maneuver cost the District $200,000 in taxes, the price of drug treatment for at least 50 people. But the developers' real payoff came this spring, when the Mayflower, assessed at a modest $65.9 million, sold for more than 100 million (although fixtures, silverware, and other items were thrown in).
If death is still an inexorable standard in the District, property taxes for the rich are amazingly negotiable-especially when they hire a Peebles. While all city buildings must by law be assessed within 5 percent of market value, the 31-year-old Peebles, a friend of former Mayor Marion Barry, doesn't sweat it. Last year, he won assessment reductions from the D.C. government in almost 90 percent of the cases he brought before it-keeping millions of dollars from the coffers of the financially strapped D.C. government. But when eyebrows rise at his success, Peebles cries foul: "No one ever criticizes Michael Jordan for being the best. I'm doing nothing wrong except to be the best. If that ruffles the feathers of the WASPy business community-so be it."
But there's a difference between Michael Jordan and R. Donahue Peebles: Peebles takes the court with one hell of an inside advantage. Just three years ago, he was chairman of the D.C. government's Board of Equalization and Review (BER), the very board that reviews the appeals of developers like Auger and Gould. During Peebles's tenure, he personally oversaw the appointment of 10 of the board's 15 members-an arrangement that simplified matters for him when he became the guru of D.C. tax reduction.
Nor is Peebles the only person to work both sides of the District's tax assessment business. Thanks to a growing cottage industry of real estate attorneysmany still dizzy from the D.C. government's revolving door-city building owners sliced more than $35 million from their taxes last year, and tens of millions more every year from 1986 to 1989, when D.C.'s commercial real estate market was booming.
If that's good news for developers, it's devastating for the District, which counts on property taxes for a quarter of its budget. Last month, it announced plans to cut welfare payments to single women with kids.
But developers aren't the only ones making out at the expense of the poor. Whenever the possibility of lawyers looms large-whether in cases involving developers or simply the wealthy-defensive city estimators guess low. "Higher-priced properties tend to be underassessed more often," says Matthew Watson, former D.C. auditor. "An assessor will tend to be gun-shy on expensive properties, because underassessing means they're less likely to get an appeal and have their work questioned. It's a normal thing to avoid getting questioned as much as you can." Hence the absence at appeals court of prosperous homeowners such as magazine publisher Bill Regardie, whose house is market-valued at $1.5 million and assessed at $760,000; real estate tycoon Calvin Cafritz (MV=$2.8 million, AV=$1.5 million); and Attorney General Richard Thornburgh (MV=$475,000, AV=$249,635). Oh, and Mayor Sharon Pratt Dixon, whose assessment of $253,000 is nearly $100,000 less than her home's market value.
"Familiarity has a lot to do with it," speculates local housing attorney Eric Rome. "People tend to give good breaks to people they know." (Attorney Brendan Sullivan's assessment of $700,000-$1 million less than market value-may speak volumes about his "familiarity.") Yet Rome sees the phenomenon in context. "That's part of our system," he shrugs. "This whole town runs on that kind of juice." If you're not well known, connected, or lawyered-well, no juice.
About the same time Gould received his annual letter, another longtime resident received his. Like Gould, he thought the assessment on his row house was a little too high; the current asking price for his neighbor's identical house was $6,000 less than his own assessment. So he took the recommended first step in making an appeal-calling the assessor. She told him to call her back if the identical house sold-which it promptly did, at the asking price. Thinking he was in for a $6,000 reduction, the man called the assessor again. Five calls, 10 calls-no answer. Finally, in frustration, he contacted the woman's supervisor, who promised prompt action. He waited. Nothing happened. By this time, tax appeal season had almost ended. He gave up and paid the tax.
"The system tends to neglect residential properties. It's not friendly to homeowners," admits Peebles, who knows the system as well as anyone. "If anything could improve the process," agrees another former BER member, "it would be to provide a fairer shake to the small homeowner."
But to Iverson O. Mitchell III, the new head of the BER, the system is just about as sound as it can get. "I don't think that any system could be designed to please everyone," he says. And the record makes it perfectly clear which folks the system aims to please. How appealing
Every year, the District mails all its property owners-commercial and residential-an assessment for the upcoming year; those numbers determine each owner's tax bill. For single-family homes, the city's procedure is simple but crude: A rough calculus factors in past assessments, market trends, and the sale prices of nearby homes. The inevitable errors made in the process are what the BER, composed of five-year mayoral appointees with real estate backgrounds, is supposed to correct.
When the Capitol Hill house next door to Barry Hayman's mom sold for $170,000 in 1987, her assessment suddenly jumped to $150,000, even though the two Civil War era dwellings were in profoundly different condition. At first, Barry Hayman tried calling the assessor to straighten things out for his mother, but his queries went unanswered. So he got out a camera and some paper and prepared a dossier for the BER.
"The former owners restored their house perfectly," he wrote, "with new floors, circuit breakers, central air-conditioning, a darkroom, recessed lights, a brand new kitchen, even electricity to their garage." His mom's house, Hayman asserted, had been untouched since the fifties. The stairs tilted into the parlor, the fixtures were antiquated, the kitchen lacked a dishwasher, the pine floors had never been sanded or carpeted, and the unfinished basement consisted of dirt walls and floor. And then there were the snapshots. "I thought the photographs said it all," he says. "Some of this stuff gets a little gray, but this one should have gone through."
Instead, after appearing before a BER panel, Hayman received a form with two handwritten lines. Insufficient evidence to justify a reduction," it said. "Property found to be in equalization." His mom paid her tax.
There's an old crank quality to folks like Hayman who obsess over their tax assessments; while their numbers are few, their photos, graphs, and conspiracy theories are many. Yet a surprising number of D.C. homeowners, fanatic and otherwise, have tales of assessment frustrations: the figures that jumped inexplicably from one year to the next, the assessments that turned out to be $16,000 more than the sale price a month later. But only 2,096 of D.C.'s 122,000 residential owners wound up before the BER last year. The vast majority of those with complaints simply give up in the face of the unresponsive board.
"It takes an anal retentive to do these things properly," says Hayman, who now helps other citizens appeal. "I don't think most citizens could do it. It's pretty complicated to accumulate and process the information."
But even when you get your numbers right, you may still find yourself on the wrong side of a BER decision, because, compared to the well-heeled lawyers, little guys like Hayman can be pretty annoying. "I went on that board expecting to bring some justice to residential property owners," recalls a former BER member. "[But] I have to admit that after I had been on the board for the first year and had the opportunity to hear commercial cases, they were much more interesting. They were for big dollars. Board members simply didn't care about residential cases. They were bored."
Far more interesting are the city's 45,000 office buildings and their owners, a significant number of whom appeal their assessments before a spindly D.C. government staff. Last year alone, 19 government assessors squared off with owners or representatives of 901 office buildings. By the time the game was over, the D.C. government was out $36.8 million dollars. One Wisconsin Avenue building owner represented by Peebles actually got his assessment reduced twice in one month-from $7 million to $5 million and then to $3.3 million.
The local Apartment and Office Building Association thinks these assessments are fine. Assessments get reduced, they explain patiently, when assessments are too high. But citizens see it another way. "We pick up the difference," snaps homeowner Judy Rosenfeld, who has watched her tax assessment shoot up 216 percent in four years while numerous office buildings around her talked their way into rollbacks. For the city, "we're the goose that lays the golden egg." How the other half lives
The Augers-Blackie, Lulu, and their three kids-have millions riding on their D.C. tax assessment: They own or co-own at least a dozen downtown properties including Blackie's House of Beef, Deja Vu, and two prominent hotels. Around tax time, they've hired Peebles to keep every cent they can out of the government's grasp. Peebles isn't cheap-he takes a nice percentage of the tax savings for himself-but the investment clearly pays off. In 1990, he reduced the Augers' land assessment at 22nd and 23rd Streets NW from $28.5 million to $10.6 million. That same year, he trimmed the assessment on a property at 2115 M Street NW from $34 to $31 million. In 1991, he took the assessment on the same property from a proposed $36 million right back down to $31 million. For the Augers, that meant about half a million dollars to spend on something more interesting. To the city, it meant forfeiting the rough equivalent of six months of intensive job training for 125 unemployed youth.
Mind you, Peebles isn't the only tax shark in the BER sea. Powerful firms like Wilkes, Artis, Hedrick & Lane; Amram and Hahn; Arent, Fox; and a dozen others do a brisk business during tax season, making sure developers and wealthy homeowners give as little as possible to the city. And they, too, have their inside advantages. Robert Klugel, former chief of the D.C. government office that oversees assessment policy, now presents cases before the BER as a consultant for Marvin F. Poer & Co., one of the region's largest assessment appeals specialists. ("All these people are friends of mine," he said recently of the BER.) Former member Ted Wade sometimes shows up at hearings as the Wilkes, Artis expert witness. And BER member Michael H. Jackson, who left the board in 1988, was bringing cases before it the very same year.
For the lawyers and other wizards such as Peebles, the incentive to fight for a hefty rollback is high because they often work on commissions of anywhere from 10 to 35 percent. And thanks to the the vagaries of BER rules and a stunning absence of any official documentation for D.C. assessment decisions, they have plenty of room to work their magic.
By all accounts, office building appraisal demands more art than science: Commercial property owners may successfully dispute anything from rent figures to the tenor of the neighborhood to the price of a good view, gradually chipping away at the assessment. While residential assessments often reflect the sales prices of neighboring houses, commercial owners have the luxury of pleading exceptions based on, among other things, the income they generate, the amount they've shoveled into improvements, and downturns in business. Because many commercial assessment appeals involve proprietary information, virtually all of these discussions are shrouded in secrecy. But the net result of such negotiating is illuminating: Nearly 30 percent of appealing office building owners manage to roll back their assessments.
Paul Hayes, who left the BER in 1988, explains how the board makes decisions. "Each committee-normally two or three people-would schedule one hearing every 10 or 15 minutes," he says. "They'd hear probably in the neighborhood of four an hour for six or seven hours. At the end of the day, they'd discuss the cases among themselves, and one would be assigned the responsibility of writing out the decision by hand. It would be four or five lines at most. Frequently they were one sentence- 'Petitioner failed to document case sufficiently.'"
With developers, that one sentence didn't come up too frequently. And for those seeking an explanation of why D.C.'s property tax revenues were $36.8 million short of expectations last year, sending the city government scrambling to curtail programs, this sentence may suffice: "Reduce, board concurs with the petitioner evaluation."
Among the perennial big winners in this BER giveaway is the ABC News headquarters at 1717 DeSales Street NW, which lopped $15 million off its assessment in four years. Wilkes, Artis helped the Arnold and Porter building at 1200 New Hampshire Avenue NW slice $47 million from its bill in three years. During the same period, the assessments of two buildings owned by Calvin Cafritz were reduced by $54 million. And two office buildings owned by megadeveloper Charles E. Smith (2101 L and 1101 17th Streets NW) were rolled back $28 million.
To understand the process, however, you have to see it at work. So follow master-rollbacker Peebles to BER headquarters at Judiciary Square, where he explains to a three-member panel that what really diminishes the value of his client's building is a subway stop. Who'd want a building on top of the Metro station? You can't put a parking lot in it.
"I drive," explains Peebles. "My secretaries drive. It's more desirable to push a button and take the elevator downstairs." He pauses a moment, and then comes up with a better argument. "It's more desirable to not be exposed to the elements. My staff would agree."
Perhaps the board is dumbfounded by the brashness of the argument. Or perhaps they aren't really listening. That would explain why no one asks the most obvious questions: What about the revenue that will undoubtedly pour in from the subway-the businesses that will inevitably open nearby? What about the tremendous convenience of getting to work? Those benefits simply don't come up.
Steven Skalet is a tax assessment attorney who unhappily lacks Peebles's inside track. "The bad publicity BER gets is warranted," he says. "There are wide discrepancies in assessments and on appeals-decisions based on a lot of factors, from the quality of the presentation to how the panel feels about the property.... A lot of it seems to be based on how the members feel."
How must BER members feel, one wonders, when their former chairman, Peebles, who put many of them in their seats, pulls up to the table and tells them, "Hey guys, listen, this building's on top of a Metro. I wouldn't call that some kind of money-maker, would you?" But without a paper trail, there's no way to know anything about those members' feelings-or anything else.
This year, the assessment office even stymied a citizens' group's efforts to get general data for its annual neighborhood survey. "We were stonewalled," says Luis Zapata, co-chair of Citizens for Fair Assessments. "They kept promising us the data. Finally, when it was too late for our study, they promised it for next year." True concessions
Thorough, publicly accessible records of assessment decisions-even if they existed-would tell only part of the tax assessment story, though, since folks like Peebles obtain most of their breaks from the D.C. government before they even get to BER's table. During tax years 1990 and 1991, the bulk of Peebles's cases-and by far his biggest rollbacks-were won when the D.C. government simply acceded to his clients' complaints.
Commercial cases reach the BER only after savvy owners have gone through the Department of Finance and Revenue's (DFR) "stipulation process," in which a petitioner can win a reduction by claiming that the assessment was based on an "administrative error." City assessor Beatrice Gaines explains what that means. "If there was information missing at the time of the assessment, if the taxpayer comes in with plans and shows that our dimensions or story heights were inaccurate-that changes things. That's a gross building error. They are administrative errors, mathematical errors."
Such adjustments sound innocuous. They're not. Take the "administrative error" at 4000 Wisconsin Avenue NW that caused the assessment to plummet from $52 million to nothing in 1988. Although hundreds of customers were streaming in nightly to see Broadcast News and Tequila Sunrise at the building's theater complex, the owner argued that the roof was incomplete. At the time, D.C. code held that a taxable building had to be "erect and under roof," or 100 percent done. While the building was under enough roof to show movies on six screens, the ballast hadn't been laid. The D.C. government gave in-giving up more than $1 million in taxes.
The stipulation process is perfectly built for informal bribes, since assessors work by neighborhood and building type. Most of the big, classy downtown buildings tend to get assessed by the same tiny troupe. When Peebles got all those stipulated tax reductions, he was working with just a handful of assessors. "The assessors are in a powerful position," says a DFR employee. "They could become familiar with building owners, they could get chummy with petitioners or their representatives. There's lots of power in the assessor's hand."
Of course, so many "administrative errors" might be plausible when you consider that many of those assessors were hired with little to no training in the field. But will assessors admit administrative errors when Henry Homeowner complains? "Residential properties are rarely stipulated," says Peebles. A BER official is even more frank: "Never, in my experience."
When questioned about his success, Peebles points out, "I stay within the letter of the law." Exactly. Which is why that letter must be rewritten. Reducing the influence of the well-connected is the first step in D.C. tax reform. And City Council Chairman John Wilson (whose house is assessed at $90,000 less than market value) has proposed legislation toward that end. For the first time, departing BER members would be required to cool off for five years before appealing cases before the board. And current members would be required to provide written, signed justifications of their decisions. That's a perfectly reasonable start. But what follows should be a process in which tax assessment experts, lawyers, and the like are unnecessary-a process in which citizens can be heard.
Such a process exists, as it happens, just to the north of D.C., in Montgomery County. In 1974, tired of the complaints of red-tape-tangled residents and wary of all the bucks it was losing to developers, the county decided to help ensure that the Blackie Augers paid as fair a share as the Barry Haymans. So it established an Office of the Public Advocate-not just to train citizens how to appeal their own assessments, but also to keep developers from skirting their financial responsibility to the city. The scrappy office of four has a 50 percent success rate with its appeals.
But until D.C. is willing to close the loopholes that allow the big guys to get away cheap, the taxpayer whose name lacks the ring of a prominent family or developer-an ordinary person like, say, Constance Stonestreet-will have to pay the difference. This May, in a room down the hall from where Peebles was pleading a case, Stonestreet and her cousin sat down to discuss their storefront church on a boarded-up stretch of Georgia Avenue. Their assessment more than doubled from 1988 to 1991, and while their neighbors pay $26 and $19 per square foot, they pay $48. They appealed. They proferred graphs, comparative analyses, old assessments, measurements, and photographs. Step by step, they laid it out, and then they waited.
"Insufficient documentation," said the BER a few days later.
BER may have had a perfectly good explanation for forcing Stonestreet to pay the full assessment It may have an even better reason for forfeiting tens of millions a year to die wealthy while the average man- and anyone dependent on government programs-gets screwed. The problem is, guys like Auger, Gould, and Peebles may be the only ones who know exactly what those reasons are. Betsy, Dance is an intern at The Washington Monthly, Claudia Kolker is a Washington writer.
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|Date:||Jul 1, 1991|
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