As the state prepares to reassess property in downtown Baltimore, city budget planners are facing a harsh reality: The value of the city's prime office buildings has continued to plummet, further depleting Baltimore's dwindling tax base.
The city will have to refund $4 million this year because of successful appeals of assessments of downtown commercial buildings, budget officials said yesterday. That figure is more than double what was anticipated. In addition, property tax revenues for the current fiscal year are projected to be $3.1 million less than budgeted because of the lower assessments, they said.
"It's turning out to be worse than we anticipated," city financial analyst Doug Brown told a budget hearing of the City Council yesterday. "We hope it doesn't get any worse. . . . That's a hope."
The grim numbers reflect the state of the commercial real estate market in downtown Baltimore, which has failed to recover after the recession even as the suburban market has bounced back. The value of properties downtown has declined since 1992 from $1.82 billion to $1.58 billion, city officials said.
Although geographically small, the downtown business district is crucial to Baltimore's property tax revenues, accounting for 9.5 percent of the city's assessable base.
To help compensate for the lost revenue, Baltimore plans to continue the hiring freeze it imposed last spring, officials said. The city plans no layoffs or reduction in services. "We're going to have to maintain an expense level that's flat," budget director Edward J. Gallagher said.
Property tax revenue accounts for a little more than half of the city's $800 million general fund -- the principal operating budget of the city. Although the city sets its tax rate, property tax assessments are done by the state every three years.
Assessments of commercial properties are based on sale prices of comparable buildings and rental income, and the state assesses taxes on 40 percent of a property's market value. Commercial property owners, like homeowners, have the right to appeal their assessments.
Since the collapse of the local real estate market in 1990, which was brought about by overbuilding and the recession, virtually all major downtown property owners have attempted to reduce their tax bills through the appeal process.
Among the significant past reductions: Signet Tower at 7 St. Paul St., which was reduced from $65 million to $48 million; the Candler Building at 111 Market Place, which went from $33 million to $20 million; and One Charles Center at 100 N. Charles St., which dropped from $31.3 million to $11.7 million.
During yesterday's hearing, budget officials cited two more recent examples of devaluation of downtown office projects to illustrate the extent of the problem.
In one, the 28-story 100 E. Pratt St. office tower, formerly known as the IBM Building, had its valuation reduced on appeal by Maryland's Department of Assessments & Taxation from $98.3 million to $81 million. That reduction, which covers the past three tax years, will result in a $1.4 million tax refund to the building's owners and will cut their taxes through 1998.
"This was a natural correction," said Walter D. Pinkard Jr., president of Colliers Pinkard, 100 E. Pratt's asset manager, on behalf of owners IBM Corp. and construction magnate Willard Hackerman.
In the other, the 26-story 250 W. Pratt St. office building was devalued from $50.75 million to $28.25 million. That reduction also resulted in a $1.37 million tax refund and will reduce future tax payments.
The USF&G Building at 100 Light St., assessed with total value of $86.8 million, has an appeal pending, budget officials said. The building's current annual property tax bill is $2 million.
The new round of triennial assessments -- covering downtown and much of the northern part of the city -- are due to be released in the next two to three weeks. They include some of the city's most expensive residential areas, including Guilford, Roland Park and Mount Washington. Officials expect assessments there to be flat.
The decline in property tax revenue from reassessments for downtown buildings is being partially offset by increases in corporate personal property and utility taxes that will raise $4.1 million, budget officials said.
The hiring freeze is expected to save about $1.5 million, they said.
Despite the decline in revenues, council members at yesterday's hearing said they still want to shave another nickel off the city's property tax rate of $5.85 per $100 of assessed value next year. After the hearing, both City Council President Mary Pat Clarke and the Budget Committee's co-chair, Joseph J. DiBlasi, said they support the five-cent cut on top of the nickel reduction passed last year. Each five-cent reduction costs the city about $4 million in revenue.
"I'm not going to back away from that," said Mr. DiBlasi, a 6th District Democrat.
"What's our proactive response to these appeals?" asked Ms. Clarke, who plans to challenge Mayor Kurt L. Schmoke's bid for a third term next year. "We don't seem to have a game plan."