Recently, homeowners may have received a notice from the Philadelphia Office of Property Assessment (OPA) regarding a change in their property market values. OPA changed its methodology for valuing land, and while many who received this notice won’t experience any differences in their property taxes, owners of abated properties were likely surprised with extreme sticker shock: in the 19125 zip code, I estimate 75 percent of these owners saw their taxes at least quadruple.

I’m glad the city is attempting to refine land assessments. However, I believe the new methodology they’ve implemented is too complex to be executed successfully.

It appears that OPA is deriving the value of the land as a percentage of the overall property value. I’ll call this the allocation method, using appraisal terminology, because a certain percentage of the overall property value is allocated to the land. For 19125, 85 percent of residential properties had a land value ratio between 20-30 percent. Derivation of land value is a vastly different concept than valuation of it – the latter values land directly and independently, while the former values it indirectly as a function of something else, and is completely reliant on the accuracy of the total property value.

OPA has made determining the “contributory value of land” a focal point. While it’s true that land contributes a certain amount of value to the overall property, I’ll suggest this value is fairly fixed and not dependent on what improvements are made on it, and direct valuation of land is a superior technique.

Let’s examine the methodology from a common sense perspective. Consider two adjacent properties (“A” and “B”) with the same lot size and frontage; A is valued at $400,000 and B at $175,000. Using the allocation methodology and applying a 20 percent land allocation to A and 30 percent to B, A’s land value would be $80,000 and B’s would be $52,500. Make sense? Aside from what’s built on it, are there any fundamental differences between A’s land and B’s land that would cause B’s land to be worth more than 50 percent of A’s? In a different scenario, suppose you’re considering buying an empty lot for $X, and envision developing it into a $400,000 property or a $300,000 property. Using the allocation ratio of 25 percent, the land would either be assessed at $100,000 or $75,000. Of course, the allocation ratio might shift a little bit depending on how the OPA’s models are engineered, but wouldn’t an easier method to be assess the land at $X, adjusted for appreciation?

A wider range of land allocation ratios would yield more accurate results. But there’s another roadblock – the difficult technical aspects required for the allocation methodology to produce sensible results. The first issue to address is the accuracy of the “basis” to which the land ratio is applied – in this case, the accuracy overall property value. Although OPA has made strides since the implementation of the Actual Value Initiative, its goal of accurate property valuation has been elusive. Zip codes in the Riverwards still have high coefficient of dispersion ratios, which indicate non-uniformity between a property’s assessed value, versus its sold price. You can have the perfect land ratio, down to the nth decimal, but if the overall property value is incorrect, the land will be incorrectly valued.

The question then shifts to how the ratio itself is calculated. OPA’s comments suggest depreciation is heavily factored in the modeling, stating that we would expect the overall value to shift more to the land over time. While OPA’s comments are correct, calculating ratios directly like this (with precision) would require it to model a depreciation curve, which is difficult to capture in homes. Accurately modeling it would require the following information, at a minimum: the precise age of the building, materials used (interior and exterior), quality of the finishes, current condition, renovation/restoration performed, and an individual inspection of exterior and interior depreciation (since every property depreciates differently). If this sounds incredibly complex, that’s because it is!

Separate conversations regarding how this change will impact potential buyers of new construction homes and existing homeowners of abated properties in the Riverwards (who have suddenly, without warning, seen the value of their abatements heavily slashed) are warranted. Instead, I’ll end with a one-sentence proposal for the OPA for an easier and more accurate approach: value land directly, using recent and historical sales of vacant lots, and adjust for lot size differences, price appreciation, geographic “area factors”, frontage, and zoning.