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For Hartford's Commercial Landlords, A Long Awaited Tax Break In 2012

Kenneth R. Gosselin

December 04, 2011

For years, Kelly D'Aprile has struggled with rising property taxes on his commercial properties in Hartford's South End, including a building at 288 Franklin Ave. which houses his liquor store and space leased to a bank.

It's a constant juggle: Charging low enough rents that his tenants don't flee, while setting aside enough to pay the city's high taxes, maintenance and other costs, and still clear a profit.

For D'Aprile and thousands of commercial property owners across Hartford, a break is on the way in 2012, when dollar values assigned to each property as of Oct. 1 replace values from 2006 for the city's tax calculations.

When bills arrive July 1, owners of most retail, industrial and especially office buildings — who have long paid among the highest property taxes in Connecticut — will see decreases ranging from a few percent to 35 percent, or in some cases even more.

"I certainly hope so," said D'Aprile, as he opened his liquor store for business Saturday morning. "Taxes are a big consideration in everything."

Owners of houses and apartments, on the other hand, may not be so happy. They can expect to see tax hikes — especially buildings with four or more units, which are not protected by a longstanding cap in the increase.

But city officials are using the decline in commercial property taxes as the cornerstone of a push to reshape Hartford's image as an attractive place for businesses to expand and a strong option for relocation. They are pairing the tax cuts with a dramatic rollback in permit and demolition fees, improved parking management and other moves.

"Downtown office building owners have been paying taxes as though it were 2006," said David B. Panagore, the city's chief operating officer. "For the next five years, they will be paying as though it was 2011."

It's a two-fold benefit. First, the city's revaluation revealed that the values of most commercial buildings — though not all — fell further than residential properties.

Second, the city in 2012 is eliminating a decades-old surcharge applied to the city tax bills of all commercial real estate and to the equipment and fixtures owned by the firms at each address. The surcharge, which was once as high as 15 percent, is 7.5 percent this year. High-profile office buildings are among the biggest decliners, and will see tax cuts of $1 million or more in a few cases.

The relief comes as Hartford faces a nagging real estate slump that has hit many commercial properties especially hard. Vacancy rates have soared as businesses have pulled back on leasing, uncertain about the direction of the economic recovery.

City officials, understanding that higher taxes on apartment buildings and some single- and multi-family houses will be a burden, hope that a stronger and larger business community will increase the city's overall tax base, leading to lower taxes for everyone.

It is too soon to tell how many individual commercial property owners will see lower tax bills next July, and what the average decrease will be. Some properties will see increases if, for example, they're fortunate enough to have tenants paying higher than average rents.

"If I was going to make an educated estimate, the vast majority of them are going to go down by five to 15 percent," Hartford City Assessor John Philip said. "The downtown office stuff is going to go down the most, more than 20 percent."

The city began giving property owners an indication on Wednesday, launching the first wave of letters revealing new property values. The big question that won't be answered for months is the size of the city's budget for the 2012-2013 fiscal year and whether the tax rate will rise.

Business groups praised the move to ease the taxes on commercial property owners, a cost that's often passed on directly to tenants.

"The surcharge being removed is both a real and psychological boost for the city," Michael Zaleski, executive director of the Downtown Business Improvement District, said. "Continued changes will keep the momentum going."

Zaleski said lower taxes and the elimination of the surcharge will make Hartford more competitive in attracting new businesses or persuading ones in the city to expand — critical to whittling away at soaring vacancies, particularly downtown, where nearly a third of all office space in the central business district was vacant at the end of last year.

The next step will be bringing down the city's tax rate — 71.79 mills — is more than twice what is imposed in surrounding suburban towns.

"The largest mill rate in the state makes it hard to recruit new businesses," Zaleski said.

Downtown property owner Michael Grunberg, a frequent critic of the cost of doing business in Hartford, said commercial property owners and their tenants have long shouldered the heaviest tax burden.

"This is actually is a very business-friendly move," said Grunberg, the owner of two downtown towers. "It's justified. It should have been done before the drop in values. But the results by valuation or otherwise, the environment for business has gone up. It's a plus."

Three Tiers For Hartford

Unlike the smaller towns around it, which base all property taxes on an assessment of 70 percent of market value, Hartford has a three-tiered structure. For nearly 20 years, the heaviest burden has fallen on commercial properties, whose real estate and equipment taxes have been calculated based on the 70-percent figure — with the surcharge on top of that.

By contrast, residential property has been assessed at much lower rates — 26 percent of market value this year for houses and buildings with four or fewer units, and 37.6 percent for apartment buildings.

Tinkering with the assessment ratio requires a change in state law because Connecticut municipalities are required to use 70 percent in their real estate tax calculations. The tiered system, going back at least two decades, along with the surcharges, was intended to keep property taxes on residential and apartment properties lower, thus encouraging home ownership in a city where the median income is less than half that of the Metro Hartford region as a whole.

This spring, changes in state law allowed for increases in the assessment percentages for houses and apartments, with the biggest change coming for apartments, which will rise to 50 percent in the next tax year — making for soaring tax bills in some cases. Four-unit buildings, 160 in all, will be reclassified as apartments, so their assessments will jump to 50 percent of market value from 26 percent.

Philip, the assessor, said the city has not yet analyzed how the new numbers will affect each class of property overall, and he cautioned that each building is unique.

For instance, the fair market value of the 20 Church Street tower in downtown Hartford was $30.4 million in 2006, but fell to $19 million in the latest revaluation. The current, $1.6 million tax bill for the 23-story tower — once dubbed the "Stilts Building" — could fall by 38 percent to $1 million, according to an analysis by The Courant, assuming there no changes in city services or state and federal grants.

The increased vacancy in the city's central business district was a key factor because a commercial property's value rests heavily on how much income it generates from its tenants — in addition to improvements that are made in the structure.

Not all commercial properties will see a decline in value or taxes. A random sampling by The Courant showed some increases in the West End and in the Parkville sections of the city. And some mixed-use properties, with stores on the first floor and apartments above, are classified as apartments — meaning they'll see an increase in taxes despite a drop in their market values.

D'Aprile, whose family has run businesses in Hartford since 1932 including D&D Market, said lower taxes help both tenant- and owner-occupied space such his liquor store.

"It would be wonderful for tenants, encouraging them to stay in the city," D'Aprile said. "You want to make sure your tenants thrive, if they thrive they pay their rent and their taxes."

He adds: "We're not going to put [the difference] in our pocket. We're going to make improvements and make the properties even better."

D'Aprile said taxes are the foremost in his mind as he considers the future of a property he bought last year that is next door to his liquor store. He purchased the now-vacant 1920s house, which had been converted into an office, for $150,000. He estimates that it will take at least $100,000 to renovate it. Right now, the taxes are $13,000.

Improving the property would increase it value, but given the cost and taxes, D'Aprile wonders whether he can build taxes into the rent so it would still be affordable and attract a strong tenant.

If the numbers don't work, D'Aprile said, "I could also leave it empty, or knock it down and pay $4,000 a year in taxes, just for the land."

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