Melissa Bailey Photo
City Assessor Bill O’Brien.
Remember when city officials lured a developer to build Connecticut’s largest apartment tower downtown? Now they’ve quietly quadrupled the project’s eventual tax bill — and the resulting dispute has landed in court.
The dispute not only reflects a breach in the relationship between City Hall and backers of a showpiece project at the heart of a downtown revival.
If the legal challenge’s claims are true — that the city with no basis suddenly jacked up the assessment of a project wildly beyond officials’ own original public projections — then the matter would call into question a central plank of Mayor John DeStefano’s reelection campaign: That he has increased New Haven’s grand list of taxable property by $149 million amid a recession. 360 State’s disputed assessment could account for two-thirds of that gain. As much as $100 million could prove bogus — or at least far more than city officials projected it to be when they originally touted the project.
360 State opened in 2010 with 500 apartments and a parking garage. A food co-op is set to open in October on the ground floor. The building is both financed and owned by Multi-Employer Property Trust (MEPT), a union pension fund. As part of a deal to convince architect/ developer Bruce Becker to proceed with the 32-story tower, the city agreed to phase in real estate taxes on the property over seven years.
The latest assessment shows MEPT will have to pay about $5.7 million in taxes when the deferral is over — four times the amount the city originally estimated when it was courting Becker to town. That original estimate formed the financial basis upon which MEPT committed to the project and anticipated it could meet its financing costs. (Because of the tax deferral program, MEPT doesn’t have to pay that full bill for another five years; its tax bill this year is less than $100,000.)
Thomas MacMillan File Photo
Developer Bruce Becker.
When it’s fully phased in, the unexpected tax bill would devastate the project’s cash flow, from a net positive $248,000 to a net negative $4.6 million per year, according to 360 State’s legal counsel.
With that danger looming, MEPT is now fighting the assessment in state Superior Court.
City Hall’s top lawyer, Corporation Counsel Victor Bolden, Tuesday defended tax assessor Bill O’Brien. He said O’Brien has a legal obligation to assess the property according to state law — not according to any prediction that might have been made before the building was built.
Documents prepared by the city’s Office of Economic Development estimated the city would receive $1.4 million in taxes from the property once the taxes were fully phased in.
The city estimated the property would bring in $1,399,656 once the taxes are phased in, rising to $1,637,571 in another five years, according to responses Economic Development Administrator Kelly Murphy prepared to questions by aldermen and released to the public in July 2007.
Based in part on that understanding, the pension fund agreed to the deal, and Becker set to work building on a vacant lot on the grave of the former Shartenberg department store.
The latest grand list of taxable properties shows a stark contrast with Murphy’s prediction in 2007.
When Mayor DeStefano released the latest grand list in February, MEPT emerged as the city’s fourth-highest taxpayer. 360 State added $130 million in taxable property to the grand list, according to the list. DeStefano, who was running for a record 10th term in office, proclaimed New Haven had added $149 million to the grand list, the largest growth across the state.
The growth would have been closer to $50 million if the city had stuck with an assessment in line with the projections it offered in 2007 based on an internal calculation by its assessor’s office.
After the sticker shock of its new assessments, MEPT took the case before the Board of Assessment Appeals.
The board wasn’t legally required to hold a hearing because of how high the assessment was. Assessments of over $1 million can be directed straight to state court, according to board member Jeff Granoff.
But the owners asked for a hearing and the board complied, he said.
The board ended up denying the appeal, Granoff said: “They presented their evidence, we evaluated it and looked at it, and we felt it would be denied.” He declined to comment further on the reasons behind the denial.
MEPT then took the battle to Connecticut Superior Court in Meriden, where the case is now pending. MEPT filed two suits against the city on June 15, claiming it had suffered from “manifestly excessive, disproportionate and discriminatory” property assessments.
The suits were filed by two limited liability corporations affiliated with MEPT: MEPT Chapel Street LLC, which owns the residential portion of 360 State, and MEPT Chapel Street QALICB LLC, which owns the parking garage and commercial space.
Records show the city pegged 70 percent of the assessed values at: $114,556,820 for the residential component; $3,038,840 for the commercial part; and $12,455,660 for the parking garage. That’s a total of $130,051,320.
Given the current tax rate of 43.9 mills, taxes on the property compute to $5,709,252 once fully phased in — four times as much as the city estimated in 2007.
The suits charge the assessor “overvalued and over-assessed” the residential and commercial properties in the latest grand list.
The assessments were so out of whack they “could not have been arrived at except by disregarding the provisions of the statutes” governing tax assessments, the suits charge.
Bruce Becker declined to comment for this story.
In two responses filed in court, a city-hired law firm, Halloran & Sage LLP, denied the assessments were unfair.
So why did the property assessment quadruple?
Press Release Math
City Assessor Bill O’Brien offered an explanation Tuesday.
He said the city has three main ways to determine the value of real estate: The cost to build, comparable sales, and the income coming into the building.
For example, O’Brien said, the value of a project should be more than the cost of building it. To determine a project’s cost, O’Brien said, the city looks not only at building permits but also at what developers say in public.
In the case of 360 State, O’Brien pointed out, “there were news press releases” and statements in the media about the cost of the building.
In its tax deferral agreement with the city, MEPT declared it expected to spend $109 million to build the project. In 2010, stories in the Independent and the New York Times pegged the project cost at $190 million — but that figure included grants for components like “green” fuel cell.
O’Brien declined to give a specific explanation of why the assessment was so high.
He did say that income to the rental properties is “very relevant.”
And he offered this reflection: “In general, it’s not unusual for anyone seeking a building permit” to “underestimate” the cost of the building prior to constructing it.
Sky-High Compared To Competitors
O’Brien was also asked why the assessment appears to be higher than that of some other residential buildings around town.
For example, the Eli luxury apartments on Church Street were assessed at $60.38 per square foot. The residential portion of 360 State was assessed at more than four times that rate — $256.67 per square foot.
“Making those kinds of comparisons is not fair,” O’Brien replied: The Eli was a retrofitted rehabilitation of a 1938 building, he said. By contrast, 360 State is brand new.
“I’m not too sure there are many brand new” residential buildings to which to compare 360 State, O’Brien said. 360 State has “no deterioration” and “no economic obsolescence” due to a neighborhood going downhill, he said.
“It is certainly unique” in that it’s “new, modern and contemporary,” O’Brien said.
O’Brien added that the city may assess new buildings at any point during the year to update their value as they are constructed.
360 State has another difference from buildings like the Eli — it includes below-market public-housing apartments.
Earlier Document Unavailable
The projected tax revenue provided by the city in 2007 was based on an initial assessment compiled by O’Brien’s office. That assessment was not available as of press time.
Despite that working assessment, the tax deferral deal the city struck with 360 State developers never included any guarantee of what the future assessment would be, city Corporation Counsel Bolden noted in an emailed statement. The estimates cited by Murphy were not part of the legal documents the parties signed.
“Aside from the initial improvement period, the agreement does not guarantee that the property will be assessed at a specific number,” Bolden wrote. “Instead, the agreement only addresses deferring the impact of any assessment increase.”
The tax deferral deal, signed in November 2008, states that the initial real estate assessment would start at $2 million, before the building is built. Then, when construction is done, the city assessor would make a new assessment of the property. The increase in value would be phased in as followed: The first year, in 2011, the total increase is deferred. Then the increased assessment will be phased in by 20 percent for another five years until it reaches 100 percent.
“The Assessor is required to follow state law in determining the assessed value of all property in the City, including 360 State, and the tax deferral agreement does not say anything different,” Bolden wrote. “In fact, the agreement expressly requires compliance with the applicable state law.
Bolden added that “the City declines to engage in a lengthy public exchange on a matter currently before the courts.”
O’Brien: “If We Don’t Like You…”
360 State developer Becker posed some questions to O’Brien Tuesday morning, when the assessor appeared before a dozen businesspeople and city officials in a question-and-answer session hosted at City Hall by the city’s Economic Development Corporation.
Becker didn’t bring up 360 State’s case. He did ask O’Brien to talk about how the city deals with appeals and deferments.
O’Brien estimated the city has 27,500 real estate parcels, including those that are tax-exempt, as well as 85,000 taxable motor vehicles and 4,400 personal property accounts. Real estate gets revalued every five years; the last reval came in 2006.
Historically, O’Brien said, the Board of Assessment Appeals gets 600 appeals each reval cycle, 200 – 300 of which end up in court.
O’Brien said there was a spike in appeals last year, which he attributed to tough economic times. His critics — including aldermen who held hearings that led to promised reforms in O’Brien’s office and the tax appeals process — claimed his office engaged in bizarrely out-of-whack commercial assessments across town based on “drive-by” looks.
How long does an average appeals case take to be resolved in Superior Court? Becker asked O’Brien.
That depends on “if we like you,” quipped the assessor.
“If we like you,” the case will go quickly, O’Brien responded.
“If we don’t like you, we can drag it out for 10 years.”
O’Brien quickly added that he was kidding. He said of the cases that end up in court, 40 percent get withdrawn due to a settlement and about 30 percent go to trial.
O’Brien said the average trial takes two to three days. The city likes to solve appeals promptly: “We like to clear the decks.”
If 360 State’s case isn’t settled before trial, the court will determine whether the owners suffered “manifest” discrimination — and whether DeStefano’s claims of robust grand list growth hold up to cross-examination.