On Feb. 7, Philadelphia Court of Common Pleas Judge Gene D. Cohen issued a decision in a case of first impression related to a Philadelphia taxpayer's property assessment appeal. Cohen ordered that the land value of plaintiff Ruokai Chen's property be reduced from $113,150 to $79,000 for tax year 2017 and $82,000 for tax year 2018. While the decision may read like a moderate dollar figure adjustment to the value of one homeowner's property, the implications of Cohen's decision could lend weight to thousands of Philadelphia taxpayers' property assessment appeals.

In Philadelphia, a property's assessed value is determined by combining the value of the land with the value of the improvements (i.e., the building). The city uses the assessed values of property to determine the amount of real estate taxes a property owner must pay in connection with such property. Unless a property owner enjoys the benefit of an exemption or an abatement, the owner is taxed on the combined value of the land and improvements, known as the property's market value.

Philadelphia's tax abatement program began in 2000 as an initiative to encourage development and rehabilitation throughout the city. The program grants a 10-year tax abatement to owners of newly constructed or rehabilitated properties in Philadelphia. The abatement entitles the value of any new construction to go untaxed for the 10 -year period. Thus, the property owner is only obligated to pay taxes on the property's land value and the value of the building before construction of the new improvements. To date, over 20,000 properties in Philadelphia have been granted an abatement, including Chen's property.

Chen purchased his property—a brand new three-story rowhome located in the Kensington area of Philadelphia—in July 2015. Since the property was newly constructed, it qualified to be part of the city's abatement program. Chen applied and was approved for an abatement beginning in 2016 with the property's land assessed at $16,300 and the improvements assessed at $398,700, for a combined market value of $415,000. The market value mirrored Chen's 2015 purchase price. Chen's tax liability was based on the land value only, due to the abatement.

In 2016, Chen, along with the majority of Philadelphia property owners, received a notice from the Office of Property Assessment (OPA) that his property's assessed value had changed for purposes of the 2017 tax year. While the total market value of Chen's property was unchanged at $415,000, the value of the land portion of the assessment was increased to $113,150. As a result, the taxable portion of his property assessment increased by nearly 700 percent from the previous year. Chen was surprised at the significant increase to his land, but was even more taken aback when he learned through OPA's website that none of the neighboring properties experienced an increase in their land's assessed value. In fact, a property two doors down from his house had an assessed value half as much as Chen's property, even though his neighbor's property was two times the size as Chens. It did not, however, have a tax abatement. It seemed Chen's property was not an outlier—abated properties throughout Philadelphia were hit with land value increases, while neighboring properties saw marginal or no land value increases.

Chen's 2016 reassessment was part of a citywide reassessment. About 58 percent of the properties in Philadelphia were issued an increased land value, but the majority did not see increased total market values, as the land increase was offset by a reduction in the value of the improvements. Thus, tax liability did not generally increase. However, for the nearly 7,000 homeowners with abatements on their properties, the shift of value to the unabated land assessment resulted in an increased tax liability, often amounting to hundreds or thousands of dollars in a year. In spring of this year, homeowners were hit with another citywide reassessment and again most saw their assessed land values rise for tax year 2019.

Many frustrated homeowners, like Chen, looked to the city's tax appeal process for relief. The appeal consists of a multi-step process. Step one, termed the first level review, involves the submission of a one-page sheet to OPA. Property owners receive the appeal sheet upon notice of their reassessment. Appeal can be requested on one of three bases: the characteristics of the property that affect its value are substantially incorrect; the estimated market value of the property is too high or too low, and the estimated market value of the property is accurate, but inequitable. Of note, there is no option to request an appeal under the theory that the property's land value is over-assessed, there only exists an option to claim the total market value is too high or too low.

Chen received an unfavorable decision from the OPA and looked to step two of the appeals process, an appeal to the Philadelphia Board of Revision of Taxes (BRT). The BRT appeal process consists of a formal hearing before the board, where property owners are required to present documentation, evidence and witness testimony to support their position. Like almost everyone else who appealed at the BRT level, Chen again received an unfavorable decision. Chen claims he was told during the BRT appeal that the board did not have the authority to hear an appeal centered only on the argument that a property's land value was over assessed—it could only hear an appeal under the argument that a property's total market value was over-assessed. This was a somewhat impossible position for Chen to take, as he had just paid the total market value for the home when he purchased it in 2015.

While many other unsuccessful appellees stopped their appeals after unfavorable BRT decisions, Chen doggedly took his tax appeal to the next level, the Philadelphia Court of Common Pleas, on a pro se basis. When a new assessment was prepared in connection with the trial, the assessor's report appraised Chen's land at about 30 percent less than the value on Chen's tax bill. At trial, Judge Cohn reversed the decisions of the OPA and BRT and decreased Chen's property's value to $79,000 for tax year 2017 and $82,000 for tax year 2018, which was consistent with the appraisal of Chen's property. In early May, the city announced that it would not be appealing the decision.

Judge Cohen's ruling in Chen's case could lend support to thousands of other Philadelphia property owners looking to appeal their property assessments, particularly those who saw their abated properties experience large increases in their land values. Request for first level reviews with the OPA must be submitted by May 25. Appeals to the BRT for tax year 2019 must be filed by Oct. 1.

Martin J. Doyle is a partner in Saul Ewing Arnstein & Lehr's real estate environmental and energy department focusing on all aspects of transactional real estate law. Contact him at [email protected].

Megan E. Albright is an associate in the firm's real estate, environmental and energy department focusing on all aspects of transactional real estate law. Contact her at [email protected].