Assessed out

An underfunded, understaffed Assessor's Office is fighting well-oiled teams of corporate experts over almost $10 billion worth of tax appeals on massive commercial properties - all on a shortened time frame. At least $39 million in city money is at stake.

By Tali Woodward

The San Francisco Assessor's Office determined that the jukebox-shaped Marriott hotel building on Fourth Street was worth $367 million in 2002. Marriott challenged the assessment, claiming that the hotel, where the cheapest of the 1,498 rooms rent for $229 a night, was worth only $221 million. The case was referred to the Assessment Appeals Board, a five-member panel empowered to settle such disputes.

But that board has yet to hear the case, and if it doesn't before Sept. 16, state law requires the city to set the value of the property at the lower, owner-requested number on the tax roll. That would force the city to refund $1.68 million in taxes to Marriott Corp. during one of the worst budget years in memory.

And that’s only one of the 36 appeals concerning a property worth more than $85 million that’s still pending from 2002.

Alec Lambie, who's been on the Assessment Appeals Board for 10 years, describes it as an “unprecedented challenge”: large numbers of complicated cases, involving commercial properties collectively valued at more than $9.6 billion, are pushing up against the legal deadline - and the understaffed Assessor's Office is scrambling to avoid a fiscal disaster. If all the requested reductions are granted, the city's tax rolls will lose $3.4 billion, resulting in a $38.9 million tax loss.

The stakes, in other words, are huge. No one the Bay Guardian spoke to could remember another year when the city had to grapple with so many high-valued appeals in such a short period. Even if every single hearing occurs before the deadline, a lot of money is essentially up for grabs. A few city appraisers must argue for each and every contested dollar - and they're up against sophisticated teams of high-paid lawyers and experts. It's an unprecedented challenge that exemplifies the annual tax fight between the city bureaucracy and many of the wealthiest and most powerful city interests.

Requesting reductions

In an effort to shave down their tax bills, most owners of large commercial properties routinely appeal the city's valuation of their buildings, arguing that the market value of the property is lower. Initially the pleas are handled by the Assessor's Office, now run by Mabel Teng. But when a particular owner cannot reach a compromise with Teng's office, the case is forwarded to the Assessment Appeals Board, which settles on a value somewhere between the two estimates.

Under former assessor Doris Ward, many of these cases were settled quickly - often in favor of the property owner. But Teng is taking a harder line, refusing quick deals and forcing the cases to the appeals board.

It's a principled approach, but it carries a risk. Because if an appeal case is not heard within two years, the property value is set where the owner priced it on the application for reduction. And this year many of the properties that are most valuable - and, therefore, most relevant to city revenue - are running up against the deadline, meaning an already overextended assessment team is stretched even thinner.

There's been much talk of Shorenstein Co.'s bid to reduce the 2002 value placed on the Bank of America building at 555 California St. from $967 million to $475 million. The request is certainly brash - if successful, the city will be out $5.65 million on that property alone. But Shorenstein is hardly the only high-profile property owner asking for a large financial reprieve.

Other landmark office buildings whose owners are asking for a big cut include the Transamerica building, 101 Spear St., 120 Montgomery St., and 333 Bush St. Notable for the sheer size of their requested reductions are 185 Berry St., a sprawling building in China Basin that's seeking a $1.48 million tax break and 345 California St., which is occupied by numerous law and finance offices, as well as the Mandarin Oriental Hotel, and is looking to get a $1.29 million refund.

More big hotels are also in line for a hearing with the appeals board. BREL St. Francis Corp., which routinely appeals the assessment on the Westin St. Francis, asked for $76.38 million to be lopped off its 2002 value. The Hyatt Regency - a 20-story hotel with more than 800 rooms - is asking for a more than $60 million reduction. Appeals are also pending on the Stanford Court Hotel, the Hilton, and the Clift Hotel.

Smaller reduction requests can also add up quickly.

For instance, not a single one of the appeals on the four towers that make up the Embarcadero Center is worth more than $40 million. Combined, however, the requests amount to $82.25 million, and the city stands to lose close to $1 million. (Owner Boston Properties has also asked for a much larger reduction of $246 million on the 2003 values. Those cases, however, have another year to be settled.)

Hearst Corp., parent company of the San Francisco Chronicle, has a number of big appeals pending but has at least waived the deadline for most of them, meaning the city gets extra time without risking tax dollars. Still, appeals in which Hearst is asking for personal property valued at $33.6 million to be knocked down to $6.8 million must be heard by Sept. 16 - and the hearings have yet to be scheduled.

When it rains ...

A confluence of factors made this year's appeals situation so dire.

San Francisco saw a huge surge in the number of applications for reduction during the early ’90s, when the economy was shaky. But the appeals dropped off during the boom years, only to rebound this decade. The number of applications went from 1,210 in 2001 to 2,427 in 2002.

Plus, processing those appeals has coincided with Teng's takeover of the Assessor's Office in 2003. First the new assessor asked for some extra time to scrutinize the biggest cases. Then she decided to send every application involving a parcel valued at more than $50 million to the Assessment Appeals Board. That's a lot more work for a small number of city appraisers, who must spend countless hours poring over data preparing to defend their valuations before the appeals board.

At the end of February this year, there were still 234 open applications for 2002, all of which needed to be heard and decided - at least preliminarily - by the end of the year. Board administrator Dawn Duran and her two clerks have worked hard to get the hearings scheduled and the 45-day notifications sent to all the owners and agents. Duran is optimistic that the hearings will happen on time, but right now it looks like a gargantuan feat for the board and the Assessor's Office. When we asked Duran how many hearings were scheduled last month, she said, looking over her calendar, "I have hearings scheduled Monday through Friday every day in March except ... well, except none." The board will be “cramming through March, April, and May," until June, when the Assessor's Office needs a few weeks to get this year's tax roll finalized.

Duran fully understands Teng's need for more time: "We have to give them time to adjust," she said simply. "But it's a large volume of work in a condensed period."

It's a particularly alarming situation when you consider who's sent into these hearings. The property owners have an extensive cadre of helpers: attorneys, tax experts, and their office backup. The professional tax trimmers don't appear to have any problems meeting deadlines, board member Lambie said. "We ask a question, and then we get a Xerox copy of the document after lunch. That's how they are," he said.

The city, on the other hand, basically has one man - chief assessor Alex Tharayil, who supervises the entire tax roll and is personally involved in almost all the biggest cases. (The office also lost four experienced appraisers during the past year.)

“This is a David-Goliath situation,” Lambie said. “Except David doesn’t have a rock in his sling.”

Plus, it's not uncommon for property owners to closely guard relevant documents and information, sometimes even refusing to offer a well-researched estimate until the first hearing day (see “Assessing Blame," page 16).

The hearings this year are complicated by the fact that there have been almost no huge buildings sold in San Francisco during the past couple of years. According to state law, one of the most accurate ways to assess a building's value is to look at "comparable sales," or the prices paid for similar structures. But during 2002 and 2003, the biggest downtown real estate sales involved two parking garages. The most expensive downtown building that sold was one at 10th and Bryant Streets that went for $33.9 million. It's hard to compare that to 555 California St., which even the owners acknowledge would fetch close to half a billion dollars on the open market.

Teng is asking Mayor Gavin Newsom for more staff, but in a tight budget year, that's a hard sell. But having an underresourced Assessor's Office is penny-wise and pound-foolish - without the extra money, the office is going to have a very difficult time defending its property assessments. And all the city departments will bear the burden of lost tax money.

Research assistance by Sitara Nieves and Becky Wildman-Tobriller.

E-mail Tali Woodward