Tax break errors cost Baltimore millions, Sun investigation finds

The city of Baltimore has failed to collect millions of dollars in potential revenue because of chronic errors and miscalculations in a program offering tax breaks for historic renovations, a Baltimore Sun investigation has found.

The Sun documented mistakes in the historic tax credit program that in some cases span nearly a decade. Time and time again, errors originating at the state assessments agency got past city officials charged with overseeing Baltimore's finances, even though the officials were alerted to similar problems in 1999.

Two downtown apartment buildings, the Atrium at Market Center and The Munsey, together have been underbilled for property taxes by more than $1 million because of the errors, state officials confirmed after being presented with The Sun's findings. Several other commercial properties have gotten excessive windfalls that reach as high as six figures.

The owners of nearly 1,200 buildings in Baltimore benefit from the historic credit program, which aims to boost preservation by forgiving a portion of property taxes on rehabs for 10 years. In addition to several downtown apartment complexes, beneficiaries of the credit range from affordable-housing buyers in modest rowhouses to well-known former athletes living in luxury condos.

The Sun's findings are the latest sign that the sloppy handling of property taxes is depriving the city of much-needed cash — money that could pay for already underfunded services or help reduce the city's high property tax rate.

Government officials said they don't know how widespread the errors are among historic credits. But within the program's 10 largest tax breaks alone, The Sun found seven with errors totaling around $2 million in uncollected city taxes.

When asked to comment on The Sun's conclusions, Owen C. Charles, deputy director of the state Department of Assessments and Taxation, conceded that his agency has made repeated errors in administering some aspects of the program. "The computations are incorrect," he said.

"Certainly it's unfortunate that this has occurred," he added. "We'll do everything in our power to make sure the rectification does occur, and to ensure going forward that the values on which the credits are computed are done in a manner they should be."

Asked why the city had not been not more vigilant to ensure credits were correct, Baltimore's deputy finance director, Henry J. Raymond, said only that his department performs periodic audits "when resources permit and corrects erroneous credits when identified." He also acknowledged that the city itself has contributed to errors over the past three years.

Raymond said the city would bill property owners for any unwarranted tax breaks from prior years.

Both he and Charles played down the extent of the problems, insisting that most historic credits have been processed correctly. Yet neither could offer detailed evidence to support that assertion.

Earlier articles in The Sun's "Taxing Baltimore" series examined other tax breaks, finding various problems that have also cost the city treasury. For example, lax oversight of the homestead credit program allowed hundreds of homeowners to get multiple tax breaks not allowed under the law.

Problems aren't limited to tax break programs: Artificially low values set by the state for unsold waterfront condos have cost the city more than $10 million in lost taxes.

The Sun also previously documented other troubles with the historic credit: At least five city homeowners received the tax discount without even applying for it. Charles attributed those mistakes to "coding errors," and the city has since worked with the affected owners to set up repayment plans.

The city's historic credit is one of several subsidies available for preservation projects. The state of Maryland offers an income tax credit, and the federal government has a similar program for income-producing properties like apartments.

With its program, the city sought to capitalize on one of Baltimore's obvious assets: the vast stock of decades-old buildings that define the city's character, from the popular waterfront areas of Canton and Fells Point to far less affluent parts of town.

Since 1997 the city credit has helped encourage more than $500 million in investment, said Kathleen Kotarba, executive director of the city's Commission for Historic and Architectural Preservation. The agency determines whether a property is eligible for the historic credit and forwards the information to the state.

From the beginning, the tax breaks have been concentrated in places like Fells Point, Federal Hill and Mount Vernon. But Kotarba said recent applications have come from struggling parts of East Baltimore, many involving vacant buildings. Among the more familiar recipients of Baltimore's program are the American Can Co. retail complex in Canton, and the Stieff Silver building in Hampden.

To qualify for the credit, a property must contribute to a historic district or be a landmark. More than 55,000 properties — nearly one in four citywide — are eligible. Other requirements include a minimum rehab investment equal to 25 percent of the property's present value.

The incentive was crucial to Brent Reynolds when he oversaw the Canal Street Malt House project, which turned a vacant warehouse at the edge of Little Italy into luxury condos.

Reynolds said the tax break made possible a high-quality conversion, as well as the construction of new units nearby. Because buyers knew they would pay minimal property tax for a decade, he says, he could demand higher prices for the condos.

Buyers of the loft-style condos include Hall of Fame pitcher Jim Palmer, Orioles radio announcer Joe Angel and former pro basketball player Sam Cassell. Cassell bought his condo in 2006 for $899,000, property records show. The credit has saved him $105,000, legitimately erasing more than 90 percent of the city taxes he would have owed without the subsidy.

Yes, Reynolds said, the city gave up a lot of tax money. "But what this project did for the area and future income for the city far outweighed the loss for 10 years," he said.

The tax bills for the Canal Street Malt House were calculated correctly, The Sun found after reviewing work sheets used by the state assessments agency to calculate historic credits. Work sheets for some other properties, however, contained multiple, repeated errors that translated to uncollected taxes.

Under city regulations, the credit applies only to the value of improvements. For example, if a rehab lifts a building's worth from $200,000 to $250,000, the city would forego tax on the additional $50,000 for a decade.

If market forces later lift the value to, say, $350,000, that additional $100,000 would be taxed, but in some cases the state exempted that additional market-driven value along with the rehab value.

The Sun's analysis found that mistakes in calculating the tax discounts occurred year after year. For instance:

• The state allowed some owners to avoid taxes not just on the rehab but on subsequent gains in the full market value of their homes, a mistake with negative financial consequences for the city during last decade's real estate boom.

• On projects costing $3.5 million and up, city law says owners are entitled to only a portion of the credit — 80 percent initially, then a declining percentage in later years. Yet for some properties the state neglected to reduce the credit, giving them a far larger tax break than the law allows.

• In a number of cases, owners received the tax break longer than the maximum 10 years, the state confirmed.

After being shown calculation mistakes going back eight years, Charles acknowledged his state agency's missteps but could not explain why they happened, attributing them to "clerical error."

He also volunteered that some problems resulted from a "glitch" that began in 2009. That's when the city and state began using computerized spreadsheets to speed processing of the credits. Because officials omitted safeguards that would have prevented overly large credits, the move accidentally caused even more errors, he said.

The biggest cumulative error identified by The Sun involved the Atrium apartments at Howard and Lexington streets, once the Hecht Co. department store. The city underbilled its owner by $576,000 going back to 2004, according to The Sun's analysis, which Charles confirmed.

Even without the errors, the Atrium would have had a generous tax discount under the program — 42 percent over seven years. Because of the errors, that discount ballooned to over 70 percent.

David Hillman, president of Southern Management Corp., which developed and owns the Atrium, said he was unaware of problems with the tax bills. But he said in his mind the property "shouldn't pay any taxes" at all, because the ballyhooed west side redevelopment that the Atrium helped launch has largely fizzled.

"The rents are no more than when the building opened — and they weren't high enough when the building opened," Hillman said. "That building loses several hundred thousand dollars a year."

Errors caused the city to underbill owners of The Munsey, an 18-story former office building at Calvert and Fayette streets, by $518,000 beginning in 2007, The Sun found and Charles confirmed. Federal Capital Partners, the Chevy Chase real estate firm that bought the building in 2010, is still reviewing the bills, its spokeswoman said.

In addition to the errors, The Sun found evidence that state and city officials had been alerted to problems with the historic credit program on at least two occasions more than a decade ago.

As early as 1999, the city complained to the state assessments agency, or SDAT, that it was not properly computing credits. Two years later, the city realized errors were continuing.

"To our surprise, we recently discovered that the problem has not been corrected," wrote Douglas Brown, then the city's public policy analysis supervisor, in a 2001 memo to Edward J. Gallagher, who was deputy finance director and later department chief.

A city lawyer advised finance officials to "leave the mistakes of the past in the past," Brown wrote, and to focus instead on ensuring "correct credit calculations going forward."

Key players from the era remain deeply involved in tax credit programs. The memo said that city officials had pointed out the errors to Charles, who at the time ran the SDAT city office and is now the agency's No. 2 official. The memo was copied to Raymond, then an official in the city Finance Department and now its deputy chief.

Raymond declined to be interviewed, insisting on written questions. As of July 1, he said in an email, the city will take over the job of annually computing the historic credits. Charles said the city should have done that all along, because the historic credit is a city program, but that it lacked resources to do so.

Looking ahead, Raymond said the department's "billing integrity unit," set up last year to ferret out tax credit violations, will "consistently" monitor the credits.

Charles maintains that, in a majority of cases, the credits were computed correctly. But he acknowledged that his agency has yet to do a detailed analysis.

He said the state is in the process of fixing the incorrect credits and will send that information to city officials "so they can present revised bills to the property owners where necessary."

As for the spreadsheet glitch, Charles said, "That's something being worked on currently and will be corrected for the upcoming tax year" — which starts next month.

Baltimore Sun reporter Jamie Smith Hopkins contributed to this report.



About this series

The Baltimore Sun's series about taxes began with the creation of a comprehensive database of more than 230,000 tax bills, compiled using a computer program that "scraped" the information off the city's website one record at a time. For this article, The Sun also examined work sheets used by state assessors to calculate tax credits, which revealed millions of dollars in potential taxes lost through chronic errors and miscalculations.

Other findings of The Sun's "Taxing Baltimore" series:

•Lax city and state oversight of the homestead credit — a tax break enjoyed by most city homeowners — allowed hundreds of owners to get multiple discounts not allowed by law, costing the city and state hundreds of thousands of dollars.

•Hundreds of houses listed in city records as vacant also got the homestead credit, which is supposed to be granted only to people who live in their homes.

•A tax discount for low-income homeowners has been granted to a doctor, a lawyer and others who bought homes worth $300,000 or more, while thousands of lower-income homeowners get no discount.

•Below-market tax assessments for unsold waterfront condos at the Ritz-Carlton Residences and Silo Point developments have cost the city more than $10 million in lost taxes.