Hartford Business Journal

16 Hartford Business Journal • June 24, 2019 • www.HartfordBusiness.com SPECIAL REPORT: CITIES PROJECT City Assessor John S. Philip. Hartford and New Haven devel- oper Bruce Becker says the uneven property-tax setup matched with the high mill rate dissuades commercial investment and fosters an environ- ment in which the city must cut tax deals to spur development, especially for larger, costly projects. He knows that firsthand. He redevel- oped the 777 Main St., 26-story office tower into 285 apartments in 2015, an $85-million project that relied heavily on public financing and tax credits. He also got a tax break from the city. Without that support, he said the project wouldn't have happened. "Relying on the property tax exclu- sively to fund municipalities,'' is inef- ficient, Becker said. Delayed revals One source of Hartford's problems over the years is that it often waited long periods between revaluations. When that coincided with wild swings in the real estate market it led to dramatic changes in assessed property values. For example, Hartford waited 10 years before conducting its 1998-1999 reval, which shrank the city's grand list 38 percent, to $3.6 billion, while the mill rate jumped from 29.50 to 47. The grand list nosedived because assessed property values hadn't fully taken into account the effects of the late 1980s and early 1990s savings- and-loan crisis, which put Connecticut and the nation into recession. Over a 40-year period starting in 1962, Hartford only conducted three revals. Today, state law requires mu- nicipalities to do revaluations at least every five years. "Waiting 10 years to do a revaluation is not a great idea," Philip said. Some have pitched the idea of con- ducting revaluations more frequently to better capture real estate value changes in a more timely manner, but it's seen by many as too costly. Hartford has also experimented with a commercial property-tax sur- charge that reached as high as 15 per- cent and stayed at that level for nine years, starting in 1997. The surcharge drew the ire of the business communi- ty, led by the MetroHartford Alliance, which eventually lobbied to phase out the additional tax in 2010. Hartford's mill rate has stabilized since 2011. There have been no tax increases under the Bronin administra- tion, but the mill rate went on a consis- tent and steady climb at the turn of the 21st century going from 29.50 in 1998 to its current 74.29 mills today. Bottom-line impact The effect of Hartford's bifurcated tax system is that commercial landlords and their tenants are shouldering a much higher tax burden than homeowners. In fact, city homeowners have an ef- fective tax rate of about 2.2 percent, on par with the statewide average, while commercial properties have an effec- tive tax rate of more than 5 percent. That means for every $1,000 of as- sessed value, a Hartford commercial taxpayer pays more than $50 in taxes vs. $22 for residential. By comparison, the effective property-tax rates on commercial properties in Boston and New York City are 1.8 percent and 3.9 percent, respectively, according to the Lincoln Institute of Land Policy. (Businesses in those cities, how- ever, face other unique costs. Property values are also much higher in those cities.) Hartford's high tax rate has a nega- tive effect on commercial property values, said John McDermott, a former Hartford city assessor during the 1970s, who is now a consultant to Con- necticut businesses. Commercial properties are valued based on how much net operating in- come they generate from rents. Proper- ty taxes are typically the second-highest expense behind a mortgage. When taxes rise, they eat into a building's profitabil- ity, thus eroding their market value. That, in turn, negatively impacts the city's grand list. In 1996, when Hart- ford's effective commercial mill rate was 33.4, the grand list totaled $5.8 billion. Today, Hartford's grand list sits at only $4 billion. Making things more challenging for commercial landlords, particularly those who own downtown's Class A office towers, is that rents have been stagnant for nearly three decades, settling in at about $22 to $26 per square foot, while property taxes and operating expenses increased, squeezing their bottom lines. Combined, operating expenses and taxes cost downtown landlords around $10 to $11 per square foot in the late 1980s, but reached as high as $15 to $17 in the early 2000s. Those costs have retreated a bit more recent- ly as landlords found ways to reduce operating expenses and the city kept a lid on real estate tax increases, said Putnam, the Cushman & Wakefield commercial realty broker. Meet the architect of Hartford's bifurcated tax system By Greg Bordonaro gbordonaro@hartfordbusiness.com I t was around Easter 1978 when John McDermott, who just a year earlier left his post as Hartford's assessor to take a job at a national consulting firm, got a call from then city political power boss Nick Carbone, who needed help coming up with a scheme to counteract what amounted to a pending property-tax crisis. After years of delay, Hartford was in the middle of its first property revalua- tion since 1961, which exposed tremen- dous inequity in the assessed value of the city's residential real estate. It was determined single-family home values in the city's North End were being over assessed by as much as 30 percent, while homes in the South and West ends were dramati- cally underassessed. Homeowners were threatening law- suits over those inequities, creating intense political pressure for a reval. At the same time, inflation dur- ing the previous 17 years drove up housing prices at a faster rate than commercial-building values. As a result of the pending reval, some Hartford homeowners faced tax hikes of 80 percent or more, a politically untenable situation. Carbone, who was deputy mayor and a Hartford City Council leader at the time, had a meeting set with then Gov. Ella Grasso and other legislative lead- ers to discuss legislation to counteract the potential homeowner impact. He needed McDermott to draw up a plan — and quickly. What McDer- mott devised was a tax differential scheme that would become the framework for a controver- sial policy still in place today. The plan equalized residential as- sessments and restricted the residen- tial tax burden to 14.7 percent of the city's overall budget, the same level it had been prior to the reval. It also led to a bifurcated assessment ratio. Under McDermott's scheme, com- mercial properties and apartments John McDermott >> Broken System continued Effective commercial property tax rates among U.S. cities The following are effective property tax rates for commercial properties valued at $1 million (plus $200,000 in fixtures). Effective City property tax rate Hartford 5.2% New York City 3.9% Chicago 3.8% Providence 3.7% Newark 2.6% Portland, Maine 2.1% Manchester, NH 1.9% Boston 1.8% Source: Lincoln Institute of Land Policy Source: City of Hartford Hartford's taxable grand list '89 '90 '91 '92 '93 '94 '95 '96 '97 '98 '99 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 $0 $1 $2 $3 $4 $5 $6 $7 $8 In billions Jon Putnam, Executive Director, Cushman & Wakefield

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