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The story behind those commercial assessment hikes everyone's mad about
There's some reason to believe Cook County Assessor Fritz Kaegi is reversing favoritism shown to well-lawyered business folks by predecessor Joe Berrios. Check out the handwritten evidence.

Friday, July 19, 2019
Crain's Chicago Business
by Greg Hinz

Much of Cook County's business community has been absolutely terrified by reports that Fritz Kaegi—the county's new, reform-minded assessor—is in the process of ratcheting up assessments on commercial property. Just like a homeowner, those who own office towers, rental apartments and the like are wondering how they're going to pay taxes that might leap 50 percent or more.

That concern is legit. But so is an increasing amount of evidence that Kaegi may be merely reversing some distinct favoritism shown to well-lawyered business folks by Joe Berrios, whom Kaegi unseated in last year's Democratic primary.

Berrios, if you'll recall, famously accepted hundreds of thousands of dollars in campaign donations from property tax appeals lawyers, who generally represent commercial rather than residential tenants. He always insisted such gifts made absolutely no difference. But the new data suggests that, well, maybe they did.

One source of data is a list of capitalization, or "cap," rates that reportedly were employed in the Berrios years to determine how much income a property is likely to spin off and therefore how high its value ought to be for tax purposes. Cap rates are an inverse measure. The higher the cap, the lower the assumed return and tax assessment.

According to Kaegi's spokesman, this particular cap rate list was handwritten and signed by Tom Jaconetty, Berrios' chief aide, and covers the period 2016 to 2018. Office property analysts were given the list and told to pretty much follow it in setting individual assessments, according to the spokesman. Kaegi obtained the list from a staffer who remained with the office after Berrios left last winter.

Kaegi declines to make the analyst available for an interview. And Berrios and Jaconetty, who now are in private life, failed to return phone calls. But on their face, the rates on the list appear quite generous to business. They're too high.

For instance, the list says that, in 2018, cap rates for commercial property in the central business district should run between 7.5 and 8.75. But according to CBRE Research, the actual range in Chicago's CBD in the second quarter of last year was 5.13 percent to 8.25 percent, and averaged 6.59. Hmm. And according to the American Council of Life Insurers, office building cap rates in Midwest states averaged 5.74 percent. Hmm hmm.

Now, I have some questions on that. For instance, Berrios predecessor Jim Houlihan and Kaegi also gave their staff ranges of cap rates to generally follow, though both insist their lists were developed after full staff input and not handed down as a diktat. Beyond that, from my experience, deciphering Cook County's property tax system makes advanced nuclear physics look like a subject you'd master in kindergarten.

But other data appears to support the notion that Berrios was too generous to the tax appeals bar and its clients. Like state assessment ratio studies, which show that Cook County was close to where it legally is supposed to be in 2011 but moved in the wrong direction in the Berrios years.

For instance, by county ordinance, commercial properties are supposed to be taxed at 25 percent of their market value. Cook County was at a median 24.04 percent to 24.85 percent in 2011, depending on the type of commercial property, but by 2017 the figures were at 19.41, according to the state—less accurate, with greater tax savings for owners. The percentage drop for rental apartment properties was even bigger, plummeting from 12.71 percent in 2011 to 6.81 percent in 2017. They're supposed to be 10 percent.

That's not good, says Steve Friedman, president of SB Friedman Development Advisors, a consulting firm that advises investors on where to put their money. The state data "shows we moved away from the goals of the (county) ordinance in terms of assessment values over the past seven or eight years."

The question is how to get back to where we were without causing too much disruption, a big concern of Friedman and others. Perhaps a transition period is needed. But Kaegi is right to try, and it appears he has reason to do so.



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