Whose Boom Is It? City Cut Top Investors $166M Break In 2022

New Haven cut a $166 million break for out-of-town investors in the 10 biggest real estate deals of 2022 — leaving local taxpayers with the bill in a year that was supposed to start seeing the real estate boom pay local benefits.

The break came in the form of real estate tax appraisals that ended up far lower than the prices that buyers actually paid when they determined what the true values of high-end properties should be.

That’s one of the biggest takeaways from the Independent’s analysis of a year’s worth of property transactions, as recorded on the city’s online land records database. 

The high-dollar deals took place against a backdrop of New Haven’s latest full revaluation, which saw the city’s taxable grand list grow by over 32 percent from October 2016 to October 2021, reaching a whopping total of nearly $8.9 billion. The state mandates that every municipality undertake such a reval at least once every five years to try to bring local properties’ official, taxable values in line with their actual market worth. The taxable grand list represents the single largest source of revenue in any given year’s city budget, as it determines how much the city can collect in local property taxes. 

For years, investors have paid far more money to buy large New Haven commercial real estate than the city assessor’s office has considered those same properties to be worth. 

One explanation: a gold rush for New Haven real estate. 

A second explanation: Connecticut municipalities reappraise property only once every five years. So it takes time for values to catch up. Once a full revaluation is done, then the taxpayers at large can benefit from a bigger, more equitably distributed tax base.

That was supposed to happen in 2022. And indeed, based on the taxable grand list’s 32 percent boom, New Haven did see a significant surge in real estate value.

And yet, at the very top of the market, something seems amiss — especially when one looks at the most expensive real estate that changed hands this year. 

The $166 million sale-appraisal gap covers just the 10 most expensive property transactions of 2022. A look at the roughly 55 arms-length real estate transactions that took place this year for a combined sum of at least $1 million each raises the sale-appraisal gap to $177 million. Since Connecticut requires municipalities to tax local real estate at 70 percent of its appraised value, that translates to well over $100 million in taxable assessed value not on the tax rolls. At a current city mill rate of 39.75, that’s millions of dollars the city could have collected in taxes from these high-value properties alone if their official values had been in line with what they actually wound up selling for post-reval in 2022.

That is money the rest of New Haven’s taxpayers are on the hook for instead. While a few of those higher-dollar transactions went for less than their respective tax appraisals, a vast majority sold for more. And the more expensive the deal, the greater the sale-appraisal gap.

The reasons for the disparity vary — including the uniquely vexing difficulty of determining the true ​“value” of high-end properties during a speculative rush. 

Experts see no simple solution, and are reluctant to point any fingers. But all agree that there is a problem. A problem that in nearly every case puts money in the pocket of wealthy investors at the expense of New Haven homeowners and renters.

“It’s not surprising that they got it wrong a couple times,” city Affordable Housing Commissioner and Yale Law School Professor Anika Singh Lemar said about that sales-appraisal gap for high-end commercial properties. ​“But as there’s more of an established marketplace, there’s more of these types of buildings, there’s more transactions, then you have comparables.” 

The increase in the number of sales of large expensive commercial real estate during New Haven’s decade-long building boom should help ameliorate the ​“thin market” problem often faced in urban redevelopment, she said. The problem occurs when ​“it’s really hard to know what things are worth when a place is so underinvested in” and there aren’t a lot of real estate transactions. That isn’t the case in New Haven in 2022, and it hasn’t been so for some time.

“I’ve been thinking about this as a ​‘thin market’ problem,” Lemar said about large apartment buildings and other commercial properties still selling so high above their city appraisals. ​“It’s surprising to me that it just hasn’t worked itself out yet.” This persistent gap indicates that ​“the market is valuing differently than the city,” she continued. ​“Meaning that the city’s valuations ought to adjust.” 

Above-Appraisal Sales: Not New, But More & Bigger

Most of the highest-value local properties that changed hands in New Haven in 2022 were large luxury apartment buildings and pricey commercial real estate in or near downtown. 

Those included:

• The 500-unit apartment tower at 360 State St.: Sold for $160 million, appraised at $115 million.

• The 198-unit Taft apartment building at 265 College St.: Sold for $52.5 million, appraised at $26.2 million.

• The 124-unit Liberty apartment building at 148 Temple St.: Sold for $29.15 million, appraised at $18 million. 

• The 44-unit Elm apartment building at 104 Howe St.: Sold for $15.8 million, appraised at $8 million.

• The 400,000 square-foot Frontier telecommunications building at 310 Orange St.: Sold for $73.8 million, appraised at $26.8 million.

See below for a fuller breakdown of some of the most expensive real estate deals of the year. (Even though the 158-unit Winchester Lofts apartment building sold in 2022, likely for tens of millions of dollars, that deal isn’t featured in this article because the buyers and sellers still haven’t filed a warranty deed with the city clerk’s office documenting exactly how much the property sold for.)

This phenomenon of large apartment buildings and expensive downtown commercial real estate selling for well above official city-appraised values is not new to 2022. 

Some recent past examples include the $50 million sale in December 2020 of the 294-unit ​“Westville Village” apartment complex at 400 Blake St., which was appraised at the time as worth $38 million; the $25 million sale in April 2019 of 87 apartments across three luxury High Street apartment buildings, which were appraised at the time as worth $14 million; the $21 million sale in January 2021 of a 137-unit Upper Westville apartment complex on Cooper Place, which was appraised at the time as worth $10 million; the $18.5 million sale in December 2021 of the 42-unit ​“Whitney Modern” apartment complex at 703 Whitney Ave., which had just been appraised during the latest reval as worth $8.6 million; and the $9.2 million sale in December 2021 of the 70-unit apartment complex at 311 Blake St., which had just been appraised during the latest reval as worth $5.9 million.

And yet, 2022 appeared to see an acceleration in the frequency and prices of high-end commercial real estate selling for way over appraised value. 

Working with the regional property assessment company Vision Appraisal, the city assessor’s office completed New Haven’s twice-a-decade full revaluation process earlier this year with the goal of estimating every New Haven property’s fair market value — that is, how much a property might sell for on the open market — as of Oct. 1, 2021. 

By this reporter’s count, the 10 most expensive arms-length real estate deals in New Haven in 2022 saw a combined $390 million change hands. Those same properties’ after-reval tax appraisals, however, added up to only $224 million.

That means that $166 million in high-end real estate value that investors profited from on the open market never made it onto the city’s tax rolls.

That value could have helped cover the costs of city government services, lessen the tax burden felt by homeowners and renters, and reduce the mill rate. Instead, it went into the pockets of the buyers and sellers of some of New Haven’s highest-value apartment buildings and commercial properties.

This pattern fits in with a nationwide problem that housing researchers and tax inequity critics have identified as a systemic under-assessment of expensive real estate and over-assessment of properties that actually sell for much less.

“It is a universal fact of American property tax assessment that high-value properties are valued lower than their sale price, and low-value properties are valued above,” Yale Law School Professor and land use expert David Schleicher told the Independent. This is a really big problem everywhere, but especially in states like Connecticut, where local governments are ​“really reliant on property taxes” — and therefore collect less than they should from those most able to pay, and more than they should from those who can least afford it.

This year’s cluster of above-appraisal sales raises questions about how New Haven assesses high-value commercial properties, what state regulations may limit those valuations’ accuracies, why investors are consistently willing to pay way above tax-appraised value, and whether or not the city needs to rethink how it balances the income and comparable sales approaches when designing its revaluation formula.

By the city assessor’s office’s own definition, New Haven’s latest twice-a-decade reval gives the city a chance to ​“estimate the current fair market value as of October 1, 2021 of each real estate parcel in the city. This, by design, ensures that all classes of property owners are paying their fair share of the tax burden.” The assessor’s office in turn defines ​“fair market value” as ​“the most probable price a property is likely to sell for given a knowledgeable buyer and seller, no indication of duress or undue stimulus, an open and competitive market and no special concessions of financing, meaning the transaction is arm’s length.”

So. In 2022, at least in regards to the most expensive real estate deals in town, what happened?

Assessor: Investors "Overpay"

The city claims municipal assessors’ hands are tied by state statute in such a way that leads to appraisal-sales price gaps.

“Investor and fund-based purchasers operate with different motivations than city assessors, often overpaying based on speculative value, desired ROI [return on investment] and specific holding periods,” New Haven government’s top assessor, Alex Pullen, told the Independent. ​“Assessors, on the other hand, are bound by Connecticut State Statutes which require us to use the three generally accepted appraisal methods (cost, sales and income) in order to arrive at a fair market value.”

Those three methods get at a property’s worth by taking into account how much similar properties have recently sold for, how much in rental income an apartment building brings in, and how much it would cost to physically replace a building.

The law does require all three factors to be taken into an account. But it does not require any particular balance of those three factors. (The relevant section of state law says: ​“When conducting a revaluation, an assessor shall use generally accepted mass appraisal methods which may include, but need not be limited to, the market sales comparison approach to value, the cost approach to value and the income approach to value.”)

Pullen said that New Haven prioritizes the income method when appraising commercial properties like large apartment buildings. That’s in line with state and national best practices for how best to estimate the worth of such real estate that sells primarily for its income-producing capabilities.

Pullen otherwise declined to break down exactly how New Haven balances the income, comparable sales, and cost factors in New Haven’s own revaluation formula. ​“There is no set balance,” he told the Independent. ​“There is no ​’50% here and 50% there’ type of balancing act as the reconciliation is much more complex with the goal being to construct a model which accurately reflects similar values from both a modified cost, sales and income standpoint.”

A further wrinkle: the income data provided by property owners is provided by the property owners themselves, per state law. They have an interest in underestimating that figure when it comes time to having their assessments determined. They have an incentive to do exactly the opposite when they apply to banks and other lenders for the funding that enables them to pay the higher prices. That translates to more money to invest, and less money to have to pay the tax office. (See: People of NY v. Trump Organization.)

Pullen pointed out that state law explicitly prohibits an assessor from ​“chasing sales prices.” That means that assessors are legally barred from rushing to change a single property’s assessed value solely based on that property’s latest sales price, and must instead model out that property’s and all other properties’ worth by considering income, sales, and cost.

Nevertheless, if all these investors are ​“overpaying,” do those ​“overpayments” become the real ​“value” of the property? If not, why should the city’s homeowners, whose assessments are based on comparable real-life sales, end up paying more? Those complicated questions have expensive implications for a city like New Haven.

Each City Has Discretion When Balancing Reval Formula

Pullen emphasized in his comments to the Independent that ​“all Connecticut assessors value commercial property based on a combination of the sales, cost and income approaches, with the income approach being weighted most heavily as commercial investors rely on this; every revaluation model will be slightly different so there is no ​‘set weighted percentage’ or allocation of income vs. cost. It is rather that cost and income values are both considered in the formation of the revaluation model, with the overall figures falling within OPM’s [state Office of Policy and Management] acceptable guidelines.”

How much discretion does state law give New Haven to come up with its own version of such a revaluation formula?

“If by discretion you mean can assessors change the revaluation model, I would say yes as long as the numbers still fall within OPMs ratio guidelines in each category, however, once we start doing this we would have to explain and justify each change we made,” Pullen said. ​“Our goal is to assess property at its fair market value. Once we start manipulating formulas of a particular end, we get away from our goal of equitable property tax distribution based on fair market value. Also, please keep in mind that we can only look at sales up until the reval date of 10/1/21 and oftentimes things are sold after a revaluation.”

Groton Assessor Mary Gardner, who is the president of the Connecticut Association of Assessing Officers, affirmed Pullen’s explanations of how New Haven handles property assessments and why so many high-value properties have sold for so far above their tax-appraised values in the city this year.

“As assessors we all abide by the same set of statutes for guidance and I think Alex has answered your questions thoroughly and professionally,” she told the Independent.

Gardner also confirmed that municipal assessors do have quite a bit of discretion when balancing out the required sales, income, and cost approaches in their own revaluation formulas. 

“We’re tasked by statute to determine true & actual value by considering all three approaches to value,” she wrote in an email comment. ​“There is no requirement for municipalities to follow any ​‘exact same balance’ when appraising property.”

"Valuing Commercial Property Is Notoriously Complicated"

2022’s pattern of high-end properties selling for way above city-appraised value points to a widely recognized conundrum: Just how difficult it is for the government to guess how much the most expensive real estate in town is really worth at a time of rampant speculation and a flood of out-of-town cash.

“What we found in studies we’ve conducted is that, in the very extremes of the market, high or low, there is very little data on market transactions,” International Association of Assessing Officers (IAAO) Director of Strategic Initiatives Larry Clark told the Independent. ​“And some of that data tends to be questionable. That handicaps the assessor in accurately determining where to set values.”

Clark said his organization recommends that government assessors prioritize using the income approach when trying to determine a large high-end apartment building’s value for tax purposes. That approach seeks to estimate a property’s fair market value by relying on analysis of the property’s rental income. And that approach is exactly what New Haven does lean on when valuing so-called commercial real estate.

There are, however, some serious drawbacks to that method, especially in times of a potential real estate bubble when investors may not honestly own up to how much rental income they’re earning from a property, Clark said.

“If there’s a great deal of speculation going on in a given market segment, it may be difficult to get accurate income and expense information,” he said. That’s because real estate investors can be ​“reluctant to give [accurate] income and expense” information to local governments.

Yale Law School Professor Schleicher agreed. 

“Valuing commercial property is notoriously complicated,” he said. The two biggest reasons are: 1) large high-end apartment buildings don’t sell nearly as often as smaller single-family and multi-family residential properties, and so it’s more difficult to use the comparable sales approach, and 2) when these properties do sell, they usually do so at notably high prices because a buyer with an ​“idiosyncratic preference” for a property is willing to way overpay. 

“The purchaser of a big, expensive building is going to be a unique character with a higher valuation than the market generally, because if the market generally had it, then the [current owner] would hold it” and continue collecting income from such a property, Schleicher said.

He referred to this phenomenon as falling in line with what auction theory describes as the ​“winner’s curse.” That’s when the person who bids the most wins an auction — not necessarily because they most accurately guessed the true worth of what they’re bidding on, but simply because they paid the most. ​“The result is that the winner of a sale-price auction almost always wildly overpays. … In the context of a commercial property, the person who convinces someone to sell has an idiosyncratically high valuation” for what they’re looking to buy.

Nevertheless, Schleicher said, ​“the facts of this differential” of the under-assessment of high-value properties ​“is hugely consequential.” 

That’s because ​“any one person’s property tax going down is another person’s going up.” And when every high-end large apartment building is selling in the same direction — that is, well above city-appraised value — city government should consider doing full revaluations more frequently or advocating for changes to state laws that may be exacerbating these under-assessments. 

He also stressed that government assessors often over-index for the quality of buildings and under-index for location, location, location, thereby missing out on how one property’s placement in a pricey neighborhood drives up its value in the open market while another identical property’s placement in a less desirable area drives its market value down.

Doug Losty, the president of the Greater New Haven Property Owners Association and a member of New Haven’s Fair Rent Commission, was more sanguine about 2022’s pattern of large commercial properties selling for way over tax-appraisal value.

“I see the rapid rise of real estate [values] for commercial and high-rise properties as a bubble,” he told the Independent. ​“I don’t think it’s going to last. I think there’s going to be a decline … Should the assessment by the town assessor be at the peak of a value or at a more average value over the lifecycle of an assessment?” he asked. Losty said he’s not sure.

He noted with sympathy that all comparable sales the assessor had to go on for the 2021 revaluation were sales that took place prior to Oct. 1, 2021. 

While indeed some large apartment buildings have sold for well over appraised value prior to that date, Losty continued, this latest rush of out-of-town, overpaying investors has picked up in the months following the new property values taking effect. 

Asked if he’s concerned about other smaller property owners and renters picking up the tab for de facto tax cuts for large apartment building owners, Losty said, ​“The whole thing is a Catch 22. I sit on the Fair Rent Commission. Tenants are complaining about the rapid rise of rents, but the single driving force lately has been an increase in property taxes. Sure, you could tax these apartments a lot more, but then the rents would go up a lot more. … I’m kind of negative about increasing the tax burden for anyone.”

Top 2022 Sales, By $

A closer look at the most expensive local real estate transactions of the year reveals just how concentrated this sale-appraisal gap — also known as a property’s sales ratio — was at the highest end of the market:

• On Nov. 8, a New York City-based real estate company called Beachwold Residential purchased the 500-unit luxury apartment complex, parking garage, and groundfloor grocery store at 360 State St. for a total of $160 million. The city most recently appraised the four parcels that make up that address as worth just over $115 million.

Difference between sale price and tax appraisal: $45 million.

• On July 29, a Lakewood, N.J.-based real estate company called Avalair Group purchased Frontier Communications’ 14-story, 400,000 square-foot downtown office building at 310 Orange St. for a total of $73.8 million. The city most recently appraised that property as worth $26.8 million.

Difference between sale price and tax appraisal: nearly $47 million.

• On April 14, an Elmsford, N.Y.-based real estate company called Paredim Communities purchased the 198-unit Taft apartment building at 265 College St. for $52.5 million. The city most recently appraised that property as worth $26.3 million.

Difference between sale price and tax appraisal: $26 million.

• On June 15, a Lakewood, N.J.-based real estate company called Cue Residential bought the 124-unit Liberty apartment building at 148 Temple St. for $29.15 million. The city most recently appraised that property as worth just over $18 million.

Difference between sale price and tax appraisal: $11 million.

• On Nov. 3, the local real estate company MOD Equities run by New York-based brothers Jacob and Josef Feldman bought a total of 145 apartments across six residential properties on Edgewood Avenue and Howe Street for a total of $34.6 million. The city most recently appraised those six properties, which include the brand new ​“The Elm” luxury apartment building, as worth a total of $20.3 million.

Difference between sale price and tax appraisal: $14 million.

A glaring sales ratio was also on full display in the largest industrial property transaction of the year. On Jan. 21, the Queens-based real estate company Criterion Group purchased three waterfront warehouse and office properties at 100 Wheeler St., 102 Wheeler St., and 238 Fairmont Ave. for $21.4 million. The city most recently appraised those properties as worth $9.1 million. 

Difference between sale price and tax appraisal: $12.3 million.

And at a long-vacant, prime-location commercial property downtown, on Aug. 10, the New York City-based real estate company The Hakimian Organization bought the former Harold’s Bridal Shop property at 19 Elm St. for $4.85 million with intentions to follow through on MOD Equities’ never-realized plans to build 96 new apartments on that site. The city most recently appraised that property as worth $1.275 million. 

Difference between sale price and tax appraisal: $3.5 million.

Time and again over the course of 2022, high-end real estate buyers and sellers weighed in on why they think there is such a gap between what they and their investor colleagues are willing to pay on the open market, and what the city can and does appraise properties as worth for tax purposes. 

“The city’s looking at it as the value today,” Beachwold Residential’s Gideon Friedman said at the time when asked about why his company paid nearly $45 million more for 360 State than its city-appraised value.​“And we’re looking at it as the long-term value for us and the return we can get on a building like this” given the improvements his company plans to make. ​“The city has to value it as a snapshot,” he added.​“We take a much longer look. We’re going to be a long-term holder of this property.”

“Cities, they do the best they can” in trying to appraise a property as close to its true market worth as possible, Larry Link of the New York City-based real estate brokerage Level Group said at the time when asked why his company sold the new 42-unit Whitney Modern luxury apartment complex for more than double its city-appraised value. 

But the city can’t ​“squeeze” a property for every dollar it’s worth, Link cautioned, or else a municipality might become less attractive of a place for developers to build and invest. He also said that when the city appraised the Whitney Avenue property, it was working off only a year’s worth of rental data — a relatively limited dataset given how profitable the property should be in the years to come.

“I think we see significant future value” in the property, David Parisier of the New York-based real estate company Paredim Communities said at the time when asked why his company bought the 198-unit Taft apartment building for nearly double its city-appraised value.​“And that doesn’t necessarily have a correlation to current value” as defined by the city tax assessor, he added. ​“We have to take multiple things into account.”

In his email comments to the Independent for this article, city Acting Assessor Pullen also pointed to comments that former state legislative staffer Kevin McCarthy has left under this ​“News from the Compost Heap” video opinion piece about this very topic of the gap between high-end real estate sales prices and tax appraisals. In one of those comments under the article cited by Pullen, McCarthy wrote in part: ​“Assessors primarily rely on the income method to value small and large commercial properties. But small commercial properties, e.g., three-flats, are sold all the time. As a result, it is straightforward to derive a capitalization ratio that converts a building’s income stream into a market value. (And most of their recent sales have been fairly close to their appraised values.) Speculative value plays a much larger role for larger buildings (and lots). Their sales prices have consistently been well above their appraised value.” Read that comment thread in full here.

Also in his email comments to the Independent for this article, Pullen mentioned that the previous owners of 360 State St. had claimed to the Board of Assessment Appeals that that luxury apartment tower property was actually worth just over $77 million. He said they were planning on filing an appeal with the state court pursuing that valuation before selling the property for a total of $160 million. 

“This paradox whereby the Assessor values a property, it is appealed by the owner and claimed to be worth much less, and then subsequently sells for much more is not uncommon,” he wrote. 

"A Huge, Huge American Problem"

In separate interviews for this article, Larry Clark of the International Association of Assessing Officers (IAAO) organization and David Schleicher of Yale Law School offered further insight on what may drive such yawning gaps in sales prices and tax appraisals. Schleicher also explained how such disparities fit in with a serious nationwide problem of inequitable real estate assessments. 

Clark stressed that ​“the appraiser is relying on historical data to project a value into the future.” Since the past two years have seen ​“some pretty dramatic increases across the board in residential and commercial” real estate, that can make it particularly difficult for assessors to project how much a property might sell for — especially for the uniquely situated properties at the higher and lower ends of the market that do not sell as frequently as those closer to the middle.

He referenced his time some years ago working as a government assessor in the Kansas City metropolitan area. ​“We had a situation where a small town was experiencing tremendous growth and selling prices were way beyond what had been anticipated,” he said. He said that investors and homebuyers from other parts of the country were moving to the area and were willing to pay much more for homes than what the area was used to, because that was the normal price range for housing where they were coming from.

“When local sellers found that pattern, they took advantage of it,” Clark said. 

He said such speculative behavior ​“usually normalizes over a period of time. Someone may come in with a great deal of speculation and pay higher prices.” Eventually, he said, ​“the market may prove their speculation” right or wrong.

How does the IAAO recommend assessors balance the comparable sales, income, and cost approaches when determining the values of high-end commercial properties like luxury apartment buildings?

“Assuming the local assessor has sufficient good quality data to support all three approaches, we lean more heavily on the income approach when valuing property that is primarily purchased for its income-producing capabilities. We try to match the motivation of the buyers and sellers in the market.” 

For single-family residential properties, he said, ​“we rely most heavily on the comparable sales approach.” But for larger apartment buildings where ​“there is sufficient income and expense information,” the IAAO recommends the income method.

While Schleicher sympathized with the challenges assessors faced figuring out the fair market values for the most expensive and unique commercial properties, he said the problem of under-assessment of high value properties is ​“bigger than commercial property.”

This is a ​“big policy problem,” he said, and it often turns on the theory that ​“assessors care too much about the quality of houses and too little about neighborhood. When assessors are trying to figure out what is comparable, they over-index on the number of bedrooms and under-index on neighborhood.”

The effect of this approach is that higher-value properties tend to be under-assessed and lower-value properties tend to be over-assessed, making the property tax a ​“less efficient tax” — and a weightier burden for poorer residents who already overpay for shelter in comparison to their means.

Circling back to New Haven’s year of high-end apartment buildings selling for way over city-appraised value, Schleicher said, ​“It’s not clear to me that the assessor is doing anything wrong, but that the tools given to the assessor are not sufficient to capturing this type of problem.”

One such driver of sales-appraisals faps is likely the ​“backwards looking nature of property tax assessment.” Another is the problem of ​“idiosyncratic purchases for unique properties.”

How to fix these issues?

For one, the city should see if it can undertake more frequent assessments, especially for high-end properties. State lawmakers may also want to consider changing the prohibition on using acquisition values as new baselines for assessment. 

And he urged state and local policymakers and assessors to ​“pay closer attention to things that see greater degrees of undervalue.” That may mean looking at comparable sales ​“in jurisdictions like New Haven around the country.”

“The broader problem is a huge, huge American problem,” Schleicher said, ​“about undervaluing expensive properties, whether they’re commercial or residential.”