The 99 High St. office building, left, sold late last month for almost 40 percent less than its city-assessed value. Gaps like that could open the city of Boston up to fiscal pain, a top tax attorney has warned city leaders. iStock photo
Could Boston be faced with a repeat of the Tregor decision, the decades-old state court ruling that upended city finances?
In 1979, a state court ruled that Mayor Kevin White’s administration had systematically overtaxed owners of struggling office buildings during that decade’s long-running economic doldrums.
The decision, named after the frustrated Boston office building owner who brought the case, put the city on the hook for $100 million in payments, or the equivalent of more than $400 million today.
Well, one top city real estate lawyer believes a Tregor repeat is a real possibility amid the big hits the Boston office market has taken as the spread of remote work has shrunk demand.
So much so that he has urged Boston Mayor Michelle Wu to take precautionary measures.
Henry Kara, the long-time dean of Boston’s tax appeal attorneys, recently urged the mayor to seek permission from the state Legislature to float bonds that could be used to pay for a flood of multimillion-dollar court judgments in favor of property tax appeals, sources say.
That is essentially what the city was forced to do back in the early 1980s to pay off the judgment in the Tregor case. The bonds were backed by a series of new taxes and fees, from a levy on local hotels to jet fuel used at Logan.
Both Kara and Wu’s press office didn’t return requests for comment.
However, Boston developers, their soaring office buildings partially emptied by the shift to remote work, are pushing for property tax abatements right and left. More than $1 billion in tax revenue is at stake in the coming years, the Boston Policy Institute has reported.
Equally as concerning, the state’s Appellate Tax Board has begun hearing a series of tax appeal cases filed by the owners of some of Boston’s biggest office towers.
Big-Name Buildings Appealing Assessments
The cases involve towers like 125 High St., 60 State St., One Federal and One Lincoln, the Boston Business Journal has reported.
The second-largest office building in Boston, 125 High St. pays more than $20 million in taxes alone each year, with the city having pegged its value at more than $890 million.
Whether that value is still realistic is another matter, given the crash in office tower occupancy.
For example, One Lincoln, the former State Street headquarters, recently sold at a foreclosure auction for $400 million, or less than half what it was refinanced for a couple years ago, Banker & Tradesman has reported.
Just last week, 99 High St. sold for $227 million – or $146 million less than its assessed value of more than $373 million.
Given the city and state appeals process takes years, this may be just the tip of the iceberg, with other potential appeals and cases in the pipeline.
In fact, it would be surprising if there weren’t, with city officials granting only 6 out of more than 200 abatement requests last year in downtown Boston, with just one involving a for-profit building owner.
Soft Market Drags Down Values
Now sale prices aren’t everything, with city assessors giving more weight to the rental income generated by office towers.
Still, sale prices of office towers, by their very nature, reflect the revenue capacity of the buildings themselves based on rents and leases.
More than 1 in every 5 square feet of office space citywide is currently up for grabs, or available for lease.
And companies sitting on additional space they are not using with the rise of hybrid work schedules but are still paying for under long-term lease obligations.
Scott Van Voorhis
Of the 39.16 million square feet of office space in the Financial District, for example, 19.8 percent was vacant as of March 31 according to CBRE. Another 7.6 percent, or nearly 3 million square feet, was available for sublease – the lion’s share of that in high-end, class A buildings that theoretically would be better able to attract what tenant demand there is.
These are the kinds of numbers typically seen in a bad recession.
All that said, Larry DiCara, president of the Boston City Council when the Tregor decision came down, thinks the city will be able to cover any property tax losses from a combination of reserves and money specifically set aside for appeals.
But he also acknowledges that making predictions can be tough given the distress in the office market.
“Nobody can predict anything at this point,” said DiCara, a top local real estate lawyer.
Scott Van Voorhis is Banker & Tradesman’s columnist and publisher of the Contrarian Boston newsletter; opinions expressed are his own. He may be reached at sbvanvoorhis@hotmail.com.
