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Prop 13: The Building-Sized Loopholes Corporations Exploit 

Wednesday, Jan 4 2012
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Federal and state filings Mendelson unearthed corroborated this, indicating Equitable and the IBM Pension Plan (the Plan) had executed an arcane financial transaction, obscuring the true ownership of One Market Plaza. When asked if the assessor could have obtained these documents, Mendelson grins. "Abso-fucking-loutely," he responds.

But that didn't happen. The Office of the Assessor-Recorder received an anonymous tip regarding One Market Plaza in late 1990 or early 1991, per court records. An appraiser asked an Equitable executive if a change of ownership had taken place. He was told no. This was the legal equivalent of shining a flashlight into the hen house and being told "Ain't nobody here but us chickens." But it was good enough for San Francisco's assessor.

After Lesser and Mendelson filed a legal writ in 1992, more substantive work was undertaken. Stephen Dunbar, then the chief assistant assessor for the city, overruled several underlings, who had made a few calls and insisted no change of ownership had occurred. Instead, Dunbar exercised his office's subpoena power; he still recalls the day UPS wheeled 26 boxes of documents from the Plan into his office. "They were hoping somebody who didn't give a damn would pick that case up," he says with a laugh. "Instead they got me." For four months, he waded through the documents in those boxes, connecting the dots Lesser and Mendelson had uncovered. Dunbar pieced together a scheme as brilliant as it was underhanded, which deprived the city of scores of millions of dollars. "I am still blown away," he says, "that someone would do what they did."


Decades later, Lesser and Mendelson still complain the City Attorney's office never truly grasped the complexity of the scheme behind One Market Plaza. Representatives of the City Attorney's office, meanwhile, portray the private lawyers as self-interested money-grubbers angling for a chunk of the millions the city stood to gain. Both points of view are compatible.

The ploy Equitable and the Plan pulled off was Byzantine even by the advanced standards of Prop. 13 property reassessments. The origin of the maneuver was amusingly simple, though. The Plan, looking to add to its real-estate portfolio, asked investment adviser Equitable for advice. Equitable found a solution seemingly beneficial to everyone — why not fob off its own building on the Plan? A simple transaction would have resulted in a giant reassessment. But this is where simplicity ends.

Equitable made its bones selling annuities — contracts providing a distribution of income over time. So it structured the transaction in the form of an annuity, largely backed by one gargantuan asset — One Market Plaza. In exchange for $185 million, Equitable put 90 percent of its 90 percent stake in the building into the annuity. But rather than a guaranteed income stream, the Plan stood to gain or lose based on the fortunes of One Market Plaza. The Plan collected tenants' rents, and assumed day-to-day control of the building. In Dunbar's eyes, this constituted a change of ownership. "What ironclad rights IBM had!" he recalls. "They dotted every I and crossed every T to ensure they had 100 percent complete control of the property, even though there was no deed in their name." As a later Appeals Court ruling quipped, "Apparently, the only right of ownership denied to the Plan was the right to record the deed." The Plan avoided a hefty reassessment, and Equitable could demand a higher "sale" price based on that fact.

Equitable, retaining ownership on paper, placed the annuity within a "separate account" it ostensibly maintained for the Plan. "Separate accounts" are segregated from insurance companies' general accounts; even if Equitable were to founder and be swarmed by creditors, the "assets" held for the Plan would be safe. They were also safe from the eyes of San Francisco's assessor, hidden beneath strata of paperwork in a place no one would have thought to look.

Again and again, Equitable and the Plan took pains to conceal their moves from the city. Equitable claimed no change of ownership had occurred on state tax forms, even after it subsequently sold its remaining interest to the Plan, had no ownership or management involvement whatsoever in the building, and canceled its property insurance coverage of One Market Plaza. The Plan denied it owned the building — to the city. But it represented itself as the owner to the Department of Labor, and also in its contract with the Yarmouth Group — which it brought in to "bury" tenants.

Following Dunbar's four-month archaeological expedition through company files, the skyscraper was reassessed at ranges between $257 million and $400 million for the years 1987 to 1994 — and also hit with a 25 percent fraud penalty. Litigation ensued. Following a nine-year sojourn in federal court, the companies' case against the city was dismissed. The Plan then took the matter before San Francisco's Assessment Appeals Board. The city, however, attempted to settle, twice negotiating deals that would lessen the burden on the Plan — and eliminate fraud penalties. Both times the Assessment Appeals Board (AAB) spurned the settlements. The case went before the AAB in 2001, and the city scored a total victory. The AAB affirmed a change of ownership most definitely took place — and was fraudulently concealed to boot. Litigation recommenced; at one point the assessor's office even took the AAB to court over the appraised value of One Market Plaza's garage.

It wasn't until 2009 that the case ran its course, and San Francisco had just shy of $23 million in additional taxes and fraud payments to show for it. That includes $12.6 million the city refunded the Plan — even after proving it committed fraud — as a concession that the initial assessment was too steep.

About The Author

Joe Eskenazi

Joe Eskenazi

Bio:
Joe Eskenazi was born in San Francisco, raised in the Bay Area, and attended U.C. Berkeley. He never left. "Your humble narrator" was a staff writer and columnist for SF Weekly from 2007 to 2015. He resides in the Excelsior with his wife, 4.3 miles from his birthplace and 5,474 from hers.

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