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Downtown small-business owners brace for the Kaegi effect
Entrepreneurs in the city are anticipating property tax sticker shock as the buildings they lease see assessed values skyrocket.

Thursday, November 18, 2021
Crain's Chicago Business
by Danny Ecker

As the longtime owner of a catering company, Ted Grady had a fitting response when his landlord called him late last month to explain that their Near West Side building had been reassessed for almost three times its previous value, and that property taxes might be going way up.

"I took a big gulp," recalls Grady, whose kitchen and event venue has been located for the past four years in a revamped industrial building at 1639 W. Walnut St. Next year's tax bill, he was told, might double from this year, a hike that would tack an extra $60,000 per year onto a few hundred thousand dollars of COVID-era deferred rent to Grady's J&L Catering.

"I didn't even know how to react, because the numbers were something that I just don't know that we could absorb, given where we've come from the last 18 months," he says. "It couldn't come at a worse time."

Grady is one of many small-business owners around Chicago bracing for impact from the latest round of property valuations by Cook County Assessor Fritz Kaegi, which have been rolling out in tranches this fall. Their fear: After Kaegi's suburban reassessments over the past two years shifted more of the local property tax burden onto commercial properties and away from homeowners, his work downtown will likely follow suit—and office landlords typically pass those costs along to tenants.

Getting socked with a dramatically higher tax bill might not make a difference to larger companies in the central business district, but they have the potential to devastate smaller and mid-sized businesses—many of which can ill-afford the sticker shock as they labor to recover from the COVID-19 pandemic and grapple with inflation and crippling shipping delays. At stake in some cases is the survival of businesses like Grady's and those of other entrepreneurs, and the myriad, often blue-collar jobs they support.

With about 35,000 square feet, J&L Catering is one of the largest tenants in a complex that Kaegi's office recently valued at nearly 170% more than the county's 2020 estimate, public records show. While it's still far from clear what that will mean for Grady's tax bill, the building's owner told him it's realistic he'll be on the hook for an extra $5,000 per month. Grady equates that to paying an extra month's worth of rent each year for his 32-year-old business, which employs nearly 100 people and has about three years left on its lease in space it spent around $1 million customizing when it moved there from Goose Island. "It's significant in the fact that we're already dealing with increased product costs and supply chain issues—everything is more expensive."

Kaegi's downtown assessments are only a valuation starting point, and things might not be as bad as some commercial landlords and tenants fear. Some of the assessments could be knocked down dramatically in the coming weeks and months through appeals with Kaegi's office or by the Cook County Board of Review. The latter diminished the reassessment sting by cutting the aggregate assessed value of commercial and industrial properties in 2019 and 2020 in the northern suburbs by 32% from Kaegi's total.

Higher assessments also don't automatically mean higher tax bills. Assessments only determine how the property tax pie will be split among residential and nonresidential owners, meaning increases only matter relative to how all properties have increased. Kaegi says that the overall base of downtown property assessments this year is up 50% compared with final 2018 valuations.

But none of that is soothing the nerves of small-business owners that are trying to prepare for their real estate costs to spike. The increases have been especially sharp for Grady and his peers in the Kinzie Industrial Corridor, a district reserved primarily for light manufacturing uses immediately west of the trendy Fulton Market District. The area is one of the city's largest hubs of small businesses, with nearly 28,000 jobs as of 2017, according to research from the city.

Paul Goyette

Joe Wein

Joe Wein, who has 18 employees across his Hampden watch and Posh Mommy jewelry companies at 1552 W. Carroll Ave., figures Kaegi's office applied skyrocketing Fulton Market property values to his revamped, 100-year-old industrial building to estimate its market value this year at more than $8.9 million—an eye-popping 441% jump from a year ago.

Wein, who also owns his building and has 10 small-business tenants—"It's scaring the crap out of everybody," he says—expects the assessment will come down through an appeal, but notes that a portion of the savings will go to a tax attorney handling it.

"I dream about our taxes only doubling," Wein says, noting businesses like his are caught between the city's priority of allowing small businesses with blue-collar workers to thrive and the county's reassessment effort that he says might price many of them out. If property assessments translate to big tax bill jumps for commercial properties in the neighborhood, "the county is implicitly making a decision to abandon the industrial character of the West Side."

At the Industrial Council of Nearwest Chicago's four-building, 416,000-square-foot complex at 320 N. Damen Ave. that serves as an incubator for more than 100 small businesses, the assessor's recent estimated market value soared to $46.6 million from $10.1 million last year.

That's a troubling sign for ICNC tenants like Modern Sprout co-founder Nick Behr, whose 50-person company designs and makes indoor and urban gardening products and leases 25,000 square feet in the complex. Behr says his business has outgrown its space and needs to stay in the neighborhood for the sake of its employees, but is afraid to leave in part because the new tax bills might be even worse at other buildings nearby. "We'd sacrifice efficiency a little to stay at the ICNC because of some of the unknowns out there," he says.

Tax hikes were expected as downtown property values surged in recent years, but the pace at which the numbers have shot up have gone far beyond what some tenants thought they'd go, says Peter Hammes, who opened a dental practice in 2016 at 1229 W. Washington Blvd., along the southern edge of the Fulton Market District. His share of the property's tax bill already jumped by 45% over the past three years alone to nearly $26,000 this year. His landlord told him to expect that to rise again, based on the assessor's initial estimate that the building is worth almost $8.6 million—67% more than last year's number.

"When you have this variable that you've budgeted for and, for several years in a row now, the taxes have come back significantly higher than even your highest estimate, that starts to make things challenging and it makes you have to change your business model some," Hammes says. He has been seeking more out-of-network patients that generate higher margins for the practice to try to offset the new costs.

Kaegi stresses his mandate is to value properties as accurately as possible using the resources he has—"we are about 230 people trying to value close to 2 million properties," he says—and that it can be more difficult to find nuances of smaller properties that often house small businesses without a modern data collection system, like the one he has unsuccessfully pushed for through a bill in Springfield.

But while vacancy and zoning limitations factor into a property's value, so do sales of comparable properties. Among Kinzie Industrial Corridor buildings that may house small businesses, for example, Kaegi says some have sold for relatively high prices to buyers that may be speculating Fulton Market's momentum will eventually help them drive up rents.

"It's hard for us to read the intention when someone makes a purchase," Kaegi says, adding that comparable sales should factor into assessments "unless there's a really good reason to exclude them."



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