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Why some landlords shouldn't gripe too much about the assessor's new math
Crain's research contradicts the popular narrative that Fritz Kaegi's office has overshot the market with its recent assessments. Here are the numbers to back it up.

Friday, January 03, 2020
Crain's Chicago Business
by Alby Gallun

Many landlords are grousing that Cook County Assessor Fritz Kaegi has jacked up their assessments this year, paving the way for big tax hikes in 2020. But some can't gripe too much.

It could have been worse for TGM Associates, a New York investor that paid $118 million for a 347-unit apartment building next to the Edens Expressway in Northbrook in September 2018. In 2019, the assessor valued the property, now known as TGM NorthShore, at just $92.3 million.

The assessor also spared Guardian Realty Management, a Brooklyn investment firm that paid $40.8 million in October 2018 for a 205,000-square-foot office building in northwest suburban Arlington Heights. Kaegi's office valued the property at $22.3 million, slightly more than half the sale price.

Then there's a nondescript data center in Northlake, just east of Interstate 294. One of the world's biggest data-center owners, San Francisco-based Digital Realty Trust, paid $315 million for the property in December 2017. But the assessor valued it last year at just $55.9 million, less than one-fifth that price. In residential terms, that's the equivalent of a house that recently sold for $1 million being valued at $178,000 by the assessor.

Yet those values still weren't low enough for the investors. They all filed appeals to chop their assessments down even more.

Step through the looking glass into the upside-down world of Cook County commercial real estate assessments, where what looks like a lucky break to the average person is an act of unfair government overreach to landlords and their tax appeals attorneys.

Kaegi has disrupted that world by hiking the assessed values used to calculate commercial property taxes. But an analysis of the 50 biggest recent commercial property sales in northern Cook County shows that the assessor's higher values for most of the properties still fell short of their sale price, sometimes by a lot.

The comparisons suggest that Kaegi's push to improve the accuracy of the county's assessment process is far from complete. Elected on a reform agenda last year, the former money manager replaced Joe Berrios, who was widely criticized for underassessing commercial properties and being too cozy with the property tax appeals attorneys who represent big landlords. Kaegi began the three-year reassessment process in 2019, starting with north Cook County suburbs, followed by the south suburbs in 2020 and the city of Chicago in 2021.

Kaegi is moving the office in the right direction, but "it's a lot like turning a battleship around," says Peter Davis, a property valuation official at the Kansas Department of Revenue.

The battleship has been taking a lot of fire since Kaegi's office started releasing north suburban assessments in early 2019. The total assessed value of all industrial and commercial real estate, including apartments, in north suburban Cook rose 74.4 percent from 2018, versus a 15.6 percent increase for residential property.

More of the property tax burden has shifted onto apartment, office and other landlords as a result, lightening the load for homeowners. Kaegi says that's not his goal, but many landlords don't believe him: He's a redistributionist disguised as a reformer, they say.

"He has an agenda," says Stuart Handler, CEO of Chicago-based TLC Management, an apartment owner.

Yet Crain's research contradicts the popular narrative among landlords that Kaegi's office has overshot the market with its recent assessments. The analysis began with a list of 50 commercial properties in northern Cook County that sold for the highest prices in the two years ended Dec. 13, based primarily on sales data gathered from the county recorder's office.

Crain's then compared those sale prices with their property's values as estimated by Kaegi's office, figures pulled from the assessor's website. Of the 50 properties, the assessor valued 31, or more than 60 percent, below their recent sale prices.

The assessed value of 11 properties exceeded their sales prices, while two, a Wheeling hotel and a Glenview apartment building, had assessed values almost identical to their sale prices. The comparison excluded six properties due to inadequate or difficult-to-analyze data. Of the remaining group, the median property was valued 19 percent below its sale price.

Assessors are not supposed to use recent sale prices when valuing commercial properties, a process known as "sales chasing," because it can insert bias into the process. Rather than using property-specific information, Kaegi conducts a "mass appraisal," assembling market data on occupancies, rents and other variables to estimate values for individual properties.

But assessors do use sale prices in the aggregate after completing their assessments, conducting what are called "ratio studies" to test how well they are hitting the mark. State law requires that assessors try to get as close as possible to a property's "fair cash value," or what it would sell for in an arm's-length, nondistressed transaction.

Still, many appeals that landlords file with the assessor contend that a property is worth far less than what it sold for, even a few months earlier. One example: Valley Lo Towers apartments in Glenview, which sold in early December 2018 for $34.1 million, almost exactly what the assessor valued it at.

But the property's new owner, a venture led by Marquette, a Naperville-based apartment developer, challenged the assessment. To support its appeal, Marquette submitted an appraisal showing Valley Lo was actually worth just $19.6 million as of Jan. 1, 2019—42 percent lower than what it paid for the property a month earlier.

Handler at TLC contends it's unfair and simplistic to compare a property's assessed value to its sales price, saying it's not unusual or wrong for there to be a big disparity between the two. In September, a TLC venture paid $57.5 million for Dunton Tower, a 216-unit apartment tower in downtown Arlington Heights. Kaegi's office valued the property at just $39.2 million, but Handler argues that's still too high. He's counting on the Cook County Board of Review, a second panel where property owners can appeal their assessments, to lower the value.

Handler says Dunton Tower's price and its assessed value don't reflect the property's true market value due to several factors. One, he qualifies for favorable financing, allowing him to pay more than a typical buyer. Two, Handler plans multiple capital improvements to boost the building's value, also allowing him to pay more. Three, the assessor has not properly accounted for a big expected jump in property taxes in 2020, which will reduce the building's value, he says.

"The sales prices have no relation to an assessed valuation," Handler says.

Landlords think Kaegi is missing the mark, but what do assessment pros think? It's hard to make broad judgments about the accuracy of assessments based on the small sample used in the Crain's analysis. But Davis, the Kansas official, conducted a ratio study using the Crain's data that found the assessor's estimates to fall slightly outside the bounds of widely accepted assessment standards.

"They're not in terrible shape, but there's certainly room for improvement," Davis says.

Kaegi agrees.

"We believe the office's current methods are more consistent with the current market than in the past, but an ideal state is still on the horizon," the assessor says in a statement. "The assessor's office continues to modernize its operations and improve its data integrity, which will get us much closer to the ideal."

Among multiple changes in the works, the assessor's office is installing a new computer software platform to replace a dated mainframe, which should make a big difference in improving its assessment process, Davis says.

"Taxpayers would expect to see improvement over the next two to four years," he says. "It's going to take that long" to get the system up and running.

In the meantime, landlords are anxious. Many argue that the prospect of higher property taxes in Cook County is scaring off investors, depressing prices and curbing development. A commercial property price index for the Chicago market fell 4.1 percent in the 12 months through early December, the worst performance among major metropolitan areas, according to New York research firm Real Capital Analytics.

For now, landlords in north Cook County are trying to guess how much their taxes will rise. Assessments are just one variable in the property tax equation—the tax rate and tax levy, or amount of money local governments need to collect to fund their operations, are two more—so it's unclear what they'll pay until they receive the second installment of their property tax bills this summer.

Property owners in the rest of Cook County will have to wait even longer. Kaegi's office won't reassess downtown Chicago, home to the county's most valuable properties, until 2021, and landlords there won't see the impact on their tax bills until mid-2022.

One thing is certain: Landlords and their attorneys will keep appealing their assessments, as they have for decades. Landlords, which typically only pay their attorneys if their appeals succeed, have little incentive not to.

"They know how the system has worked in the past, and there's no reason for them to stop pushing," Davis says.


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