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March 13, 2024

Market Reset: Hartford landlords’ successful property tax assessment appeals will cut millions from city tax rolls; more office sector storm clouds hover

PHOTO | COSTAR The downtown Hartford office market had a 21% vacancy rate at the end of the third quarter, according to CBRE.

The city of Hartford is poised to lose millions of dollars in property tax revenues, after successful court challenges by two downtown landlords who accused the assessor’s office of overestimating the values of their struggling office towers following a recent revaluation.

And it could be just the start of a longer-term issue that plagues Hartford and other cities and towns that generate significant tax revenues from office buildings — a commercial real estate sector that has struggled significantly coming out of the pandemic as employers embrace more flexible work arrangements that require less office space.

Leasing demand in Hartford has been slow since the 2020 pandemic, leading to historically high vacancy rates that have negatively impacted commercial real estate values.

Amid those headwinds, the city of Hartford conducted a state-mandated revaluation in 2021, which prompted many downtown Class A office tower owners — who make up a significant portion of the city’s tax base — to challenge their tax bills in court.

A few cases recently came to fruition.

In November, the city settled a lawsuit brought by the owners of the State House Square office complex. The city agreed to return $2.9 million in property taxes and lower future tax obligations.

In January, a New Britain Superior Court judge agreed to nearly cut in half the city’s assessed value of the 23-story “Stilts Building” office tower, at 20 Church St. Shelbourne Global Solutions, the property’s owner, estimates that will result in a repayment of about $1.6 million in property taxes, as well as future savings.

It’s not clear exactly how many property assessment appeals were filed in the wake of the city’s revaluation. City officials didn’t provide that data as of press time.

Hartford Mayor Arunan Arulampalam, who took office at the start of this year, expressed faith in the city’s 2021 revaluation process, and said he expects other assessed property values to hold up to court challenges.

However, he also acknowledged that the declining value of major commercial office buildings downtown “could potentially have a really significant impact” on city tax revenues.

“We are factoring it into the budget we are developing (and going) to submit to the City Council later this month,” Arulampalam said. “I think this budget cycle will be tougher than some previous years, but, overall, our city is on much stronger fiscal footing than we were eight years ago,” when Hartford was facing insolvency before the state legislature came through with a more than $530 million bailout.

Arulampalam said the city is currently working with the MetroHartford Alliance to develop an inventory of available downtown office space. That will inform a renewed push to convert class B and C office buildings into apartments, with the aim of fueling downtown vibrancy and consolidating downtown office users into Class A buildings, Arulampalam said.

The study will also explore and potentially recommend creative uses of downtown office space, like fitness centers and golf simulators, Arulampalam said.

“I think we have to be really serious about filling up our downtown properties and making sure that we are able to bounce back post-COVID with a downtown building ecosystem that is full and thriving,” Arulampalam said.

State House Square

In November, the city settled a 2022 court tax appeal with the owners of two buildings in the State House Square office complex.

Under the settlement, the “fair market value” of the 15-story, 437,508-square-foot office building at 10 State House Square was reduced from $59.41 million to $32.65 million. And the value of a neighboring seven-story, 91,457-square-foot office building, at 50-58 State House Square, was reduced from $7.81 million to $4.29 million.

Based on the city’s current 68.95 mill rate, the lower valuations will save State House Square’s owners about $1.46 million in annual property taxes.

The city also agreed to $2.9 million in property tax reimbursements, and not to adjust the value of the properties until the next revaluation, barring any major changes to the buildings.

The State House Square complex is owned by MAC-State Square LLC and FBE-State House Square LLC, two New York City-based entities.

An attempt to reach Attorney Elliott B. Pollack, who represented the State House Square owners, was unsuccessful.

The Stilts Building

Shelbourne, Hartford’s largest downtown landlord, sounded an alarm in 2022 about what it called “grossly excessive” property assessments stemming from the city’s 2021 revaluation. The Brooklyn, New York-based real estate investment firm filed dozens of tax assessment appeals on properties it owns wholly or in part, including three major downtown office towers.

Shelbourne paid $44.4 million for the 23-story, 420,000-square-foot Stilts Building in 2014. The city’s 2021 revaluation placed the building’s fair market value at $33.13 million.

In January, New Britain Superior Court Judge Matthew Joseph Budzik agreed with Shelbourne’s $18 million assessment. Among other issues, Budzik’s ruling acknowledged the city’s assessment wrongly included a 153,598-square-foot garage at the base of the building. Shelbourne claimed the parking structure belongs to the city, which receives all the parking revenue.

Budzik agreed the city wrongly attributed $4.1 million in garage value to Shelbourne’s portion of the Stilts Building.

In addition to the $1.6 million refund, the lower valuation will save Shelbourne about $750,000 in annual property taxes, the firm said.

Despite the court victory, the Stilts Building is still facing foreclosure, a legal action that was filed by lenders in June 2022, after Shelbourne missed several mortgage payments.

Shelbourne said it has 20 additional pending property tax assessment appeals in Hartford, including:

  • 350 Church St. (Metro Center): A 293,639-square-foot, 12-story office tower, valued by the city at a fair market value of $30.77 million.
  • 755 Main St. (Gold Building): A 26-story, 626,786-square-foot office high-rise valued by the city at $55.77 million.
  • 100 Pearl St.: a 13-story, 217,336-square-foot glass office tower valued by the city at $24.44 million.

Shelbourne Chief Financial Officer Zach Feldberg said he expects a string of favorable court rulings in line with the Stilts Building decision.

“It’s indicative of the court’s understanding of value in a new world, but even more important because of the statute, the value as of October of 2021, which is when the assessment was based on,” Feldberg said. “I guess the judge was very reasonable and fair and understood COVID and working from home, which is a seismic change for both the office market in Hartford and across the country. You could have understood on Oct. 1, 2021, there were going to be significant vacancies created, and downsizing by other tenants.”

The Stilts Building was 95% occupied when Shelbourne bought it a decade ago, Feldberg said. As of early March, the building was 57% occupied, and faces the expiration of “major leases” in the coming three years, he said.

Feldberg said he hopes the city will recognize new values of commercial office buildings without protracted court cases, and find other ways to help beleaguered landlords.

“We would hope that the assessor’s office and corporation counsel would take a very good look at this decision and try and readjust their position to offer much more reasonable settlements based on the market,” Feldberg said.

‘Inventory constriction’

For at least three years, brokers, landlords and economic development professionals have warned of increasing strain on downtown Hartford’s office market. As hybrid and remote work became more established, some companies began ceding large portions of their office space as leases came up for renewal.

At the end of the fourth quarter of 2023, 32% of downtown Hartford’s 5.82 million square feet of Class A office space was vacant, according to real estate firm CBRE. That was up from an 18.1% vacancy rate recorded during the same period in 2019, before the pandemic took hold.

As Hartford boosters are quick to point out, other cities are facing similar impacts from a deflated office market.

Collapsing office values will cost the city of Boston up to $1.5 billion in property tax revenues over the coming five years, according to a new analysis by the Boston Policy Institute and Center for State Policy Analysis at Tufts University.

Offsetting revenue from sinking commercial values would require a 25% to 30% hike in residential property taxes, according to the Boston study.

A potentially significant tax burden shift from commercial property owners to homeowners is an issue Hartford will also have to address.

Chris Ostop, managing director of advisory and brokerage firm JLL, said he predicts a wave of office building foreclosures and refinancings will lead to lower commercial property values in Hartford and other major office markets.

That reset will offer new and existing landlords financial breathing room to refurbish buildings and attract new tenants. That will eventually help restore the office market’s health, Ostop said.

Philip Gagnon, principal of real estate broker and consultant Colliers in Hartford and New Haven, said he expects current trends will lead to “a lot” of Hartford’s Class B and C office buildings getting knocked down or converted to multifamily housing. It’s possible downtown office towers might have to come down as well, he said.

Gagnon predicts additional tax appeals will go against the city, requiring political leaders to redistribute the city tax burden against other property types. Citing the Boston-focused study, Gagnon noted Hartford is also in line for a big tax-revenue hit.

There will be a need for a significant state and federal investment to repurpose Hartford office buildings, in order to consolidate tenants into what office space remains, he said.

“It’s not going to be fun over the next couple of years to see those towers languish,” Gagnon said. “Some will get converted. In the end, you will need to have inventory constriction.”

Even so, Hartford’s mayor expressed general optimism about the improving state of Hartford’s downtown. Arulampalam said more workers are returning to the office. He pointed to the recent ribbon cutting for Global Atlantic Financial Group’s 11,500-square-foot expansion in the Gold Building as an example of forward momentum.

Construction of thousands of new apartments are also underway in downtown Hartford, Arulampalam said.

See related stories: Hartford’s struggling office sector shows cracks with new foreclosure, falling property values.

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