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That trophy tower isn't worth what you think it is. Or so says the assessor.

Friday, February 23, 2018
Crain's Chicago Business
by Alby Gallun

Prices of trophy buildings in Chicago have soared the last five years, but the properties are still a bargain—if you believe the Cook County assessor. 

Aon Center, the 83-story office tower overlooking Millennium Park, sold for $712 million in 2015. It's worth half that, $356.4 million, according to the assessor. 

That same year, a retail building on North Michigan Avenue, including the home of a Nike flagship store, traded for $295 million. The assessor values the properties at $56.8 million. Then there's the city's tallest skyscraper, the 110-story Willis Tower. It fetched $1.05 billion in 2015, a record for Chicago. 

But the assessor says it's worth just $580 million. The pattern holds for a sampling of 50 of Cook County's most expensive buildings, from Water Tower Place on the Magnificent Mile to the home of Google's Midwest headquarters in the trendy Fulton Market District. A Crain's analysis found that the assessor valued every single property well below what it sold for within the past five years. By the assessor's estimates, the average building was worth about 46 percent of its sale price, according to the analysis. 

 The data raise new questions about the accuracy and fairness of Cook County's assessment process, which determines how the property tax burden is distributed among the county's residents, commercial landlords and businesses. 

And it provides more fodder for critics who say the assessment process is broken and corrupt, their main argument to push Assessor Joseph Berrios out of office in the March 20 primary election. "I think the average person should be concerned" about the Crain's analysis, says consultant Richard Almy, former executive director at the International Association of Assessing Officers, a trade group.  

The data shine a light on a very narrow slice of the Chicago real estate market, but an important one because it represents so much in property value. And it matters to Cook ? County homeowners because they wind up shouldering more of the real estate tax burden if big commercial buildings are undervalued relative to residential properties. A series last year by Chicago Tribune and ProPublica found that the county assessment process favors wealthy homeowners and landlords over residential and commercial property owners in low-income neighborhoods. And a recent study commissioned by Cook County similarly concluded that poor homeowners bear too much of the tax burden. 

The reports have given ammunition to critics who contend Berrios is too cozy with property tax appeals lawyers—including Illinois House Speaker Michael Madigan's firm—who have donated to his campaign and who get paid by big landlords to challenge his assessments. Sale price was $1.3 million but included $250 million in personal property that is not taxable. **Joint-venture sale. Sources: Cook County records, Real Capital Analytics, Crain's reporting Crain's analysis examines the 50 biggest property sales in the county over the past five years and compares the sales prices with the values of the same properties as estimated by the assessor's office. The gap is stark: The prices of all 50 properties add up to $17.1 billion, while the assessor values them at only $7.8 billion. 

The difference—about $9.2 billion—equals the value of nearly 40,000 median-priced homes in the Chicago area. To most investment professionals, including the ones entrusted with billions of dollars to buy trophy buildings, a sale price reflects what a property is worth because it represents the collective wisdom of the market: what a pool of buyers and sellers says it's worth. Investors place risky bets that properties will increase in value, and sometimes overpay, but that's true for just about any asset that's bought and sold. Still, Tom Shaer, a spokesman for Berrios, says the Crain's study is flawed and based on "a bad premise" because it looks only at sales prices. Valuation professionals like appraisers, who are hired by investors and lenders to figure out how much a commercial property is worth, employ three primary methods to do their job. They calculate a building's replacement cost, or what a property owner would have to pay to build a replica of the structure. They also examine sales of comparable properties, adjusting for differences among them and extrapolating a value from there. Finally, they use income data from a property and apply a rate of return—typically a "capitalization rate," in industry parlance—to estimate a value. So if a property generates $5 million in annual net operating income and the accepted capitalization rate is 5 percent, then the property is worth $100 million. The assessor's office relies heavily on the income approach for commercial properties, the main reason its values are so much lower than the recent prices for the 50 trophy properties examined by Crain's, Shaer says.  

The assessor places less of an emphasis on sales prices because they often represent a buyer's expectations about the property's future income and value, he says. Prices may also include non-real estate assets, he says. "Sales prices don't indicate current value," Shaer says. "We can't speculate on the future." That logic doesn't make sense to Christopher Berry, a professor at the University of Chicago's Harris School of Public Policy. Speculation is why most investors buy property in the first place; you can't just ignore it during the valuation process, he says. "That is the most nonsensical argument," Berry says. Shaer also contends that the assessor's hands are tied by the courts. Resetting values at a recent sale price, a practice known as "sales chasing," runs afoul of state and federal constitutions, he says, citing a string of court cases going back to 1861. The courts favor the income approach that the assessor uses, he says, noting that Berrios and his predecessors have used the method for three decades. Still, that doesn't sufficiently explain the huge gap between the price of the 50 properties and their estimated value, says Peter Davis, a property valuation official at the Kansas Department of Revenue. Using a property's income to estimate its value may not produce the exact same figure, but it should be within a reasonable range of the sale price, he says. "There's no reason that the income approach should be 20 to 30 percent lower," Davis says. "Their arguments just don't make sense." 

Every building examined by Crain's was valued more than 20 percent below than its recent sale price. The closest the assessor came to the sale price was with the office tower at 311 S. Wacker Drive, which sold for $302.4 million in 2014. The assessor's value: $235.7 million, or 22 percent less. Underassessment is a problem with commercial properties all over the country, not just in Cook County, says Tim Wilmath, chief appraiser in the Palm Beach County (Fla.) Property Appraiser's Office. One reason: Big commercial landlords can afford to hire the most expensive attorneys to get their assessments lowered. Aiming to pre-empt an appeal, some assessors will value big properties conservatively, Wilmath says. "You get beat up enough and after a while, you reduce your assessments to fend off future appeals," he says. Property tax appeals lawyers are a busy bunch in Cook County, especially at the high end of the market. They will regularly contend that a property is worth a fraction of its recent sale price. A group that paid $652 million in 2010 for the office tower at 300 N. LaSalle St. produced an appraisal for the assessor in 2014 that valued the property at $380 million. That same year, the high-rise sold again for $850 million—the second-biggest deal in Cook County over the past five years. But it's worth just $392.3 million, according to the assessor. Property tax lawyers "come up with very creative ways" to value properties, says Wilmath. "There's an old saying in the appraisal world," he says. " 'Torture the data until it confesses the value that you want.' " Cook County Water Tower Place Willis Tower Finance More +

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