Attention Businesses

Telegram: Questions remain over Worcester's commercial property valuations

By Thomas Caywood TELEGRAM & GAZETTE STAFF

WORCESTER —  In the 2008 property tax revaluation, city assessors rated a four-story office building near Lincoln Square to be largely obsolete by the construction standards of the day, a decision that contributed to reducing the value of the building for tax purposes by millions of dollars.

It was a curious move, however, given that construction on the building, the Life Sciences and Bioengineering Center at Gateway Park, had only been completed the year before.

City officials said this past week they could find no explanation or justification on file as to why assessors would judge a new, state-of-the-art office building to be so outdated that it qualified for a significantly reduced property tax assessment.

The situation also has produced some head scratching at Worcester Polytechnic Institute, which owns the building through a subsidiary corporation.

“I have no idea how that transpired, frankly,” said WPI Chief Financial Officer Jeffrey S. Solomon, who added that he wasn't aware that the city had rated the building largely obsolete until he was contacted for this report.

The life sciences center is just one of hundreds of commercial structures across the city for which obsolescence ratings were set unusually high, which has the result of reducing the taxable values of those buildings, according to city records and independent assessing experts.

Most of the questionably high obsolescence ratings have been dialed back in this year's revaluation, but serious questions remain about how so many commercial buildings in productive use came to be assessed as mostly obsolete and whether the cash-strapped city lost untold millions in commercial property taxes as a result.

The functional and economic obsolescence ratings for WPI's life sciences center were reset to zero in this year's revaluation, which contributed to more than doubling the building's assessed value from just under $8 million last year to $17.1 million this year.

That was one of many jaw-dropping jumps in commercial property valuations unveiled as City Assessor William J. Ford combed through the property tax rolls slashing or eliminating high functional obsolescence rates set under his predecessor, Robert J. Allard Jr.

In one method of placing a value on a commercial building for tax purposes, known as the “cost approach,” assessors start with the replacement cost of a building. That amount is then reduced based on several factors, including the condition of the building and how well it suits the needs of modern business tenants. In assessing terms, that is, the value of the building is depreciated based in part on the degree to which it is functionally obsolete.

A moderately outmoded building might be judged to be 5 percent functionally obsolete. A completely outdated structure, such as a brick mill building from the 19th century, typically would be capped at 25 percent functionally obsolete, according to Mr. Ford and other assessing experts.

But hundreds of commercial and industrial buildings in Worcester were rated far more than 25 percent functionally obsolete as of the previous revaluation four years ago.

The functional obsolescence of 552 buildings was judged to be between 25 percent and 40 percent, while another 135 buildings were rated at between 41 percent and 70 percent, and 27 buildings were rated between 71 percent and 100 percent, according to a Telegram & Gazette review of city assessing records. All told, a quarter of the city's inventory of 2,900 commercial and industrial buildings was judged to be 25 percent or more functionally obsolete.

Massachusetts Association of Assessing Officers President Ronald Keohan said he couldn't recall ever having seen a functional obsolescence percentage higher than 25 percent in his work as the deputy assessor in Saugus. Larry Clark, the director of professional development for the International Association of Assessing Officers based in St. Louis, said he occasionally has seen them as high as 50 percent but only for long-disused industrial plants in the Midwest.

Mr. Ford, the city assessor who inherited the high commercial obsolescence figures when he took over the office three years ago, said he couldn't speak to how things were done before his appointment because the old software didn't provide a space for comments explaining unusual depreciation calculations and he couldn't find any written records justifying the high percentages. He has since overseen the installation of a new assessment software package.

“If my guys put something down as 15 percent obsolete, I'm not going to question that, but if it's 80 percent, you better have an explanation why,” Mr. Ford said.

After he took over, with the city manager's backing, Mr. Ford set about hacking away at what he considered to be questionably high obsolescence rates applied to commercial and industrial properties throughout the city.

The resulting spike in commercial property valuations incited an uproar among building owners fearful that the new assessed values would send their tax bills skyrocketing. Under intense pressure from the business community, the City Council last month approved a lower commercial tax rate, negating the financial impact of the higher valuations for some properties, and thus, quieting the tumult.

In defending the new higher values from strong business community pushback, City Manager Michael V. O'Brien initially seemed to cast doubt on the propriety of the former valuations. But Mr. O'Brien later backpedaled, assuring councilors that the previous values had been calculated in accordance with state regulations.

That puts Mr. O'Brien in the contorted position of publicly accepting the validity of the previous valuations, which were set on his watch, while at the same time systematically undoing them. He did not respond to several interview requests over the last two weeks.

The previous assessor, Mr. Allard, now retired and living in California, again defended the appropriateness of his valuations in a recent telephone interview. His position is backed up by the state Department of Revenue, which certified Mr. Allard's valuations in 2008 and continues to stand by that certification today.

Mr. Allard maintained that the high obsolescence percentages under his tenure had no impact on commercial property taxes because his assessors analyzed the rents earned by comparable buildings to arrive at an initial valuation, known as the “income approach” to assessments. The resulting valuations are then depreciated based on factors such vacancy rates and expenses.

The Department of Revenue requires assessors to calculate commercial valuations using at least two assessment approaches and further mandates that the resulting values must be within 15 percent of each other.

“The assessors were essentially matching the cost approach to the income approach by adjusting the obsolescence percentages. But it's meaningless,” Mr. Allard said. “We used the income approach. That's really the only way to value these commercial properties.”

But Mr. Ford said he also found many unusually high depreciation percentages in the income approach assessments calculated by his predecessor.

Late last month, the Department of Revenue certified the new, sharply higher commercial property values calculated under Mr. Ford's supervision.

Department spokesman Robert Bliss said he sees no inconsistency in signing off on a set of valuations that all but wipes out an important factor in arriving at the previously certified values.

“All I can say is that in our sampling of the values the city proposed, we looked at them, conducted a sort of audit. We felt it passed muster, and we approved it,” Mr. Bliss said. “I think what we've seen four years later is a conversion to a new data system, and the new assessor having the ability to exercise his own judgment.”