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Battle lines drawn on ADU tax


TRIBUNE PHOTO: JONATHAN HOUSE - Steve Anderson is representing more than two dozen property owners who are appealing Multnomah Countys property tax increases for adding detached ADUs last year. Shortly after Anne-Louise Vernon moved here to retire last September, she heard about a flap over Multnomah County levying huge property tax hikes on Portlanders who added granny flats on their lots last year.

Multnomah County Assessor Randy Walruff had just mailed 2016 tax bills to more than 100 Portlanders who recently added the small cottages, known as accessory dwelling units or ADUs, and their property taxes doubled, tripled or even quadrupled.

“I didn’t even know what an ADU was,” Vernon says. But the developer who sold Vernon her house in the Brentwood-Darlington neighborhood had converted a 200-square-foot garage into a tiny cottage, so she dialed the county assessor’s office to see how much her property taxes might rise.

A county staffer told her taxes would shoot up from $3,695 to more than $6,000 on next year’s tax bill, she says. “It’s a huge amount of money for a person who’s retired and not expecting to make any more income,” says Vernon, 61. “If I live here another 20 years, it’ll be another $60,000 out of what I have to live on the rest of my life.”

She asked if she could simply remove the tiny kitchen in the converted garage to avoid the tax increase, and was told that would require a permit, and it wouldn’t forestall the tax increase.

After widespread complaints, including from Multnomah County Commissioner Loretta Smith, Walruff retracted the tax bills mailed to more than 100 property owners and substituted new tax assessments that were somewhat lower, but still much higher than the ADU owners expected.

That doesn’t seem to have mollified many people.

A host of critics, from ADU advocates to lawyers to City Commissioner Dan Saltzman, say the county’s new taxation policy is poorly conceived, vague, and could open the door to major property tax increases on other unsuspecting homeowners, diluting the impact of Oregon tax limitations.

“I’m still fighting this, because it’s terrible government policy, it’s intolerably arbitrary, it’s an administrative nightmare and it creates uncertainty for all kinds of property owners,” says Ross Kevlin, a former urban planner who’s part of a Google group of 50 to 75 people mobilizing to oppose the county policy.

Walruff declined an interview request because he doesn’t think his views will be accurately portrayed, says county spokesman Dave Austin. Nor would County Chair Deborah Kafoury comment on this issue. “She’s not going to talk about it because she doesn’t have any say; it’s a (state Department of Revenue) thing,” Austin says. “We sent out letters to the 103 people who are affected.”

Under the Measure 47 and 50 property tax limitations passed by Oregon voters in 1996 and 1997, property tax assessments can rise no more than 3 percent a year, no matter how fast the actual market value rises. Since then, when Portlanders added a new ADU on their lot, Multnomah County added the value of the cottage to the tax assessment, treated like other new construction.

PHOTO COURTESY OF ANNE-LOUISE VERNON  - This tiny garage converted to an apartment could cost Anne-Louise Vernon upwards of $3,000 a year more in property taxes for her home in Brentwood-Darlington, under a new Multnomah County policy, she was told. That was a shock to the retiree, who is living on fixed income. But in 2015, word got out that Walruff’s staff would also start reassessing the main house as well when someone added an ADU, essentially valuing the old house as if it were new construction. In an interview, Walruff said those reassessments were allowed by an exemption to Measure 50 written into the Oregon Constitution, for properties that are “rezoned and used consistently with the rezoning.” Walruff argued that Portland was, in effect, rezoning land by permitting two dwelling units on a single-family lot, and therefore people would lose some of the protection from Measure 50.

State attorneys weighed in, and the Oregon Department of Revenue suggested an alternate approach: Reassess the value of the underlaying land when someone adds a detached ADU, but not the original house. Walruff initially insisted the state Department of Revenue was entitled to its opinion, but it wasn’t binding on him, and department officials concurred.

But after a backlash ensued, Walruff backed down and sent ADU owners new tax bills using the Department of Revenue’s recommended method. That reduced some tax bills by several hundred dollars, but ADU owners say they still are socked with much-larger tax bills than they would have under pre-2015 policies.

Now critics are aiming their fire at Walruff, the county and the state Department of Revenue.

ADU owners filing appeals

Steve Anderson, who operates First Class Property Tax Appeals in Clackamas, says about 50 ADU owners appealed their new tax assessments to the Board of Property Tax Appeals, and he’s representing half of them.

“These people are very, very, very mad,” Anderson says.

The county has already sent new, reduce d bills to at least two people after they appealed, he says, sending them their third tax statements in the space of three or four months.

“For some reason, we’ve got this opaqueness from Multnomah County this year on detached ADUs,” Anderson says. “I don’t think they know what they’re doing; they’re running scared.”

The Department of Revenue is now studying the issue, and expects to hold hearings this spring on new regulations that might resolve the dispute, says agency spokesman Bob Estabrook. If the state adopts new regulations, its guidance on how to tax ADUs would then become binding on Multnomah County and other counties.

But the state revenue department will proceed carefully, because it realizes it’s a much broader issue than ADUs, Estabrook says. It may boil down to how the constitutional language about Measure 50 exemptions is interpreted, particularly the one about zone changes.

The state Department of Justice attorneys who advised his agency concluded that the city of Portland, by allowing detached ADUs on most single-family lots, effectively rezoned those lots, triggering a Measure 50 exemption. But to become binding, that interpretation may need to be spelled out not just in regulations, but upheld in court.

Opening a Pandora’s Box?

Portland and other cities have made numerous land use changes that might be interpreted as rezoning since Measure 50 was placed in the Constitution.

“If this is a rezoning, then so are hundreds of thousands of development code changes in Portland and all around the state,” Kevlin argues.

City planners say about 2,000 Portlanders have added two-car garages within their home’s setback since the city code legalized that after Measure’s 50 passage, says Kol Peterson, an ADU consultant who has been leading the charge against the county taxation policy. Portlanders also gained a new right to put solar panels on their rooftops. There’ve also been changes in allowable building heights.

In a more recent change, Portland allowed most homeowners, condo owners and even apartment tenants to rent out rooms for the night using Airbnb and similar short-term lodging services. Though he’d oppose it,

Peterson says there’s more

rationale to consider a zone change than merely converting a garage to an ADU.

At a Multnomah County Board of Commissioners meeting on Jan. 17, Walruff testified that he wouldn’t see raising someone’s property tax assessment for merely adding a garden shed in their yard. However, Walruff said his staff would think differently if a homeowner can make more money from renting out a new ADU on his or her property.

“What we look to is, did you increase the financial viability, the return on investment to the property?” Walruff said.

That same logic could apply to more than 2,000 Portland Airbnb hosts. There are some people, including on Walruff’s own staff, who say privately that the increasing use of ADUs as Airbnb rentals was one reason he raised their tax assessments so much.

Kevlin and others fear the ADU issue sets a precedent whereby the county then seeks to reassess homeowners who took advantage of other city code changes since Measure 50’s passage.

“It sounds like a can of worms,” says City Commissioner Dan Saltzman. “That is alarming if this interpretation is correct.”

It also would be an administrative nightmare for the county to determine which homeowners have taken advantage of a variety of code changes, Kevlin says.

Lawyers disagree

The county’s interpretation of Measure 50 is “understandable,” says Eric Kodesch, a partner at Stoel Rives law firm who specializes in taxation.

“If you’re taking advantage of a new zoning rule, then everything gets revalued (for property tax purposes); that’s consistent with Measure 50,” Kodesch says.

But it probably will revolve around whether the city’s ADU policies amount to a zone change or not. He predicts it will have to be sorted out by the Oregon Supreme Court. That could take another two years.

Two tax specialists at the Garvey Schubert Barer law firm in Portland had a different take on the county’s position.

“We question whether it’s constitutional,” says Cynthia Fraser.

Her colleague Michael Mangan says the city of Portland’s liberal allowance for ADUs is akin to an “overlay,” which guides different uses on certain lands within zones. “The question is does an overlay constitute a rezoning and we would say ‘no.’ ” Mangan says.

“It’s an expansion of the allowed uses under the zone, but it’s not rezoning. That stuff happens all the time.”

Some say the county has made matters worse by not being forthright about its policy changes and its interpretations of the Constitution and state regulations.

“Nobody at the county is able to give a straightforward answer and they won’t put this in writing,” Peterson says.

“Kafoury has not been willing to make any public statements about this issue,” Peterson says. “The county is punting and saying the Department of Revenue said ‘we had to do it this way.’ ”

Saltzman, who champions more ADUs in Portland, says he has spoken to Kafoury and she maintains the issue is out of her control, up to Walruff and the Department of Revenue.

“I do think our assessor can fix the problem,” says Saltzman, a former county commissioner. And, he notes, the county chair does hire the assessor.

Oregon’s wacky tax assessments

A series of voter-approved property tax limitations have caused widespread inequities in property tax assessments.

Most Portland properties west of 82nd Avenue are assessed at far below their real market values, while assessments on properties east of 82nd tend to be closer to the actual market values of those homes.

Tax bills generally can’t rise more than 3 percent a year, except for new construction.

New construction gets some of the benefits of those property tax limitations, with assessments pegged to the average rate of tax relief countywide.

When Multnomah County Assessor Randy Walruff initially sought to reassess people’s main homes when a detached ADU was added, those people lost much of the relief they were enjoying from tax limitations. That’s especially so for those living in closer-in neighborhoods that had the lowest tax assessments — the very neighborhoods where most of the ADUs are being added.

If Walruff had reassessed the homes of new ADU owners in East Portland and Gresham, it might have actually lowered their overall taxes. But few ADUs are being added there.