Tax fight brews at USF&G building Baltimore could lose millions in revenue if assessment is cut

January 23, 1996|By Kevin L. McQuaid | Kevin L. McQuaid,SUN STAFF

The owners of the USF&G tower and the state are preparing to battle in court over the value of the 35-story downtown skyscraper, a showdown that could cost the city millions in lost property taxes.

As a result, the city has taken the unprecedented step of joining a lawsuit with the state in Maryland Tax Court to avoid having to refund at least $4 million to USF&G Corp. and the building's owner, according to court documents.

If Marbax Associates Ltd. Partnership, a New York-based syndicate that purchased the building from the insurer for $100 million in 1984, should win its assessment fight, the victory would affect not only taxes paid to the city for the three-year tax cycle beginning in 1992 but also the period through January 1998.

"The tax ramifications to the city are unbelievable," said Jeffrey G. Comen, a state's assistant attorney general involved with the case. "If they get their figure, it means there will be millions in tax revenues lost."

At issue is a $50 million difference between the state's assessment of the value of the 100 Light St. building and Marbax's appraisal. Marbax contends that the state should ignore the value of a long-term office lease USF&G Corp. signed in conjunction with the sale, while the state contends the deal was a market transaction typically used to estimate property values.

The state's assessment for both the 1992 and 1995 tax cycles was $86.8 million, according to state records. A Marbax appraisal puts the value of the building at $37.5 million.

"The tax court will have to rule whether or not the sale/leaseback transaction USF&G executed is a market transaction or simply a financing tool," said Owen C. Charles, superintendent of assessments for Baltimore with the state's Department of Assessments and Taxation, the agency that determines building values.

For the city, a Marbax victory in the trial, which is set to begin May 1, would cause a financial hit equal to all of property tax refunds the city was forced to pay to downtown property owners who successfully appealed in 1994.

The loss of property tax revenue was underscored earlier this month, when Mayor Kurt L. Schmoke cited a $9.2 million revenue shortfall to the city's main operating budget as the prime reason for eliminating 400 positions from the city's payroll.

A decision to cut the USF&G tower's assessment by the court -- which would slash the building's existing $2 million-per-year tax bill by half -- would also affect future tax bills as well, since state assessments are updated based on previous figures. The value of the assessment is significant because it directly relates to the amount in property taxes a property owner must pay to the city.

"The value of the assessments in 1992 did not take the decline in downtown property values resulting from the early 1990s' downturn of the real estate industry into account," said Mark J. Friedman, a Piper & Marbury attorney representing Marbax. "Many appeals, however, did require the declines be taken into account, but not at the USF&G tower. We simply feel there's been a mistake."

In the wake of the local real estate market's crash in 1990, virtually every downtown office building owner successfully appealed their state assessments and subsequently shaved millions off their city property tax bills.

Since 1992, for instance, the value of downtown commercial properties declined from $1.82 billion to $1.58 billion, city records show.

"All we're seeking is that USF&G tower be treated like all other downtown properties," said Mark Holtschneider, a USF&G attorney.

Mr. Charles added that since the transaction occurred in 1984, USF&G has regularly appealed its assessments, but the two sides have been unable to come to terms.

In 1986, Marbax's appeal cut the state's assessment to $70 million, from $105 million. Three years later, the state's $93.5 million assessment was cut to $80 million after appeal. Neither case went to tax court, however.

The city became involved with the current case in September, successfully intervening to have the trial postponed, court records show. Since then, it, too, has hired an independent appraiser to determine the value of the 22-year-old tower.

Michael Doxzen, a city attorney involved with the case, could not be reached for comment.

Ironically, USF&G officials said the case has nothing to do with its decision last January to abandon the 530,000-square-foot tower and consolidate operations in Mount Washington, a move that caused the company to take a $190 million charge against earnings to cover its $53-per-square-foot rental expenses, more than double the current market rate for top-quality downtown buildings.

"They're totally independent issues," said John A. Dellavecchia, a USF&G attorney.

That decision will no doubt factor into future assessments, however, both company and state officials said. In fact, USF&G has also filed an appeal of its 1995 assessment, which was also $86.8 million.

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