Stopping Boston’s ‘doom loop’ means it must face its tax woes

Stopping Boston’s ‘doom loop’ means it must face its tax woes

By The Editorial Board

Two prime pieces of Boston commercial real estate went for bargain basement prices in the past couple weeks.

A handsome building that takes up a city block at 179 Lincoln St. was acquired by the real estate firm Synergy, the Boston Business Journal reported, by assuming a $76.5 million mortgage on the property. That same building sold in January 2020 for $155.7 million.

This week Synergy also closed on 101 Arch St. in Downtown Crossing for $78 million. The 21-story tower last sold in 2005 for $121.7 million.

Deeply discounted sales of commercial real estate — particularly office buildings hard hit by the pandemic and its long-term work-from-home consequences — are taking their toll on the downtown office market.

Less valuable real estate means less in taxes paid to the city — and Boston is far more dependent on commercial property taxes than most other cities.

When a report detailed the pandemic’s gloomy — and lingering — consequences for Boston’s tax picture just last month, city officials remained firmly in denial. Today those problems are bubbling to the surface, in a way that Mayor Michelle Wu has finally acknowledged can no longer be ignored.

The urban doom loop prophecy of falling real estate values, falling tax revenues, and, therefore, cuts to essential city services like public safety can become a reality in a heartbeat if ignored.

The report by the Boston Policy Institute in partnership with Tufts University’s Center for State Policy Analysis predicted Boston will face a cumulative revenue shortfall from commercial real estate of between $1.2 billion and $1.5 billion in the next five years. “This is not a short-term challenge but the arrival of a new normal,” one in which annual tax collections in 2029 and beyond will be roughly $500 million a year below what they are today.

With few options to make up for that lost revenue, the report said, “Fully offsetting the decline in commercial real estate would require a 25 percent to 30 percent increase in residential property taxes.”

Nick Ariniello, commissioner of the city’s assessing department, put out a statement last month insisting, “We have not seen any indications from the real estate markets that would translate into a loss of revenue to the city.

“The system for valuing real estate and collecting property taxes in Massachusetts is established by state law and is a structure which provides municipal government with a level of stability that other jurisdictions throughout the country do not have,” Ariniello wrote.

Even as Ariniello was singing a happy tune, though, the requests for tax abatements from downtown building owners were pouring in the door. By the Feb. 1 deadline for filing tax abatements on all kinds of property, the city had received 1,715 applications, down slightly from last year. However, 322 applications were from Ward 3, which covers the Financial District, Government Center, the West and North Ends, and Chinatown. That was an increase of 27 percent over last year.

This week Wu admitted in the most tangible way possible that, yes, there is a problem. Her solution? A home rule petition that would give the city the ability to make changes — just for Boston and just for the next five years — to a 1978 state constitutional amendment that allows municipalities to tax residential and commercial property at different rates (within limits).

Boston’s current tax rate for residential property is $10.90 per thousand dollars of valuation (minus an exemption for owner-occupied dwellings) and $25.27 for commercial and industrial property.

Wu is proposing — as Mayor Tom Menino did in 2003 during a previous slump in the commercial real estate market — to go beyond the current maximum allowable differential in rates to ease that possible hike in residential taxes predicted in the Tufts study. But the mayor insisted at a briefing Thursday that wouldn’t necessarily mean larger tax bills for commercial building owners.

“It’s portrayed as we’re now asking commercial properties that are struggling to pay more,” Wu said. “If done right, they would still pay less in taxes, but not as low as they would have, so that residential taxes don’t go up dramatically.”

Others aren’t so sure and question whether Wu’s move would further exacerbate the problem.

“With the commercial sector facing extraordinary economic headwinds, this proposal may have long lasting repercussions that would impact the city’s competitiveness and long-term growth,” Tamara Small, CEO of NAIOP Massachusetts, the Commercial Real Estate Development Association, said in a statement. “Now is the time for the city to closely examine recent anti-growth policies that hinder new development, while also finding ways to diversify its revenue streams to ensure Boston does not rely on any one sector to meet its residents’ needs.”

Marty Walz, interim president of the Boston Municipal Research Bureau, said in a statement the bureau would be researching the proposal, including looking at the effects of that earlier temporary shift in rates beginning in 2004. But, she added, “With the City of Boston’s heavy dependence on commercial tax revenue to fund its operating budget, there is a risk of creating too great a burden on these taxpayers.”

This year, she noted, the city gets 58.3 percent of its property tax revenue from business properties, although they make up only 33.3 percent of property values in the city, with residential property making up 66.7 percent of property values.

And, of course, there are no guarantees the Legislature, which must approve the local option bill, will be favorably disposed toward shifting the tax burden in the state’s capital city.

But first the City Council, which filed an order of its own looking for “a clearer understanding of the future of its largest revenue base and how to best deal with commercial property tax relief,” will have to approve the home rule petition. They should view Wu’s proposal as an opportunity to take a hard look at all the city’s options, including the kind of revenue diversification that Small talked about.

Everyone is looking for answers, including commercial building owners and residential owners fearing they might have to pick up the slack for those empty buildings.

But one thing is certain — the time for denial is over.

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