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North suburban landlords slapped with big assessment hikes
With Cook County Assessor Fritz Kaegi more than halfway through the process of reassessing properties in the northern suburbs, the trend is clear: More of the property tax burden is shifting to commercial and industrial landlords

Monday, July 08, 2019
Crain's Chicago Business
by Alby Gallun

If you own a house in Northbrook or Park Ridge and were taken aback by how much your assessment just jumped, just be happy that you don’t own that apartment building around the corner.

The office of new Cook County Assessor Fritz Kaegi has delivered unwelcome news to many homeowners across northern Cook County over the past several months, notifying them that their assessments went up. But assessments jumped a lot more for commercial and industrial landlords, the result of a new—and more accurate, in Kaegi’s view—method for valuing everything from office buildings to self-storage facilities.

That’s good news for homeowners because it means that owners of commercial and industrial properties will shoulder a bigger share of the property tax burden, potentially even leading to lower residential tax bills next year. But real estate investors worry that it could depress demand for commercial properties here. Some say it already has.

“A big piece of the total taxes will get picked up by the business community rather than the homeowner,” said Carol Portman, president of the Taxpayers Federation of Illinois, a tax watchdog group. “There are going to be a lot of nervous folks in the business community.”

Elected on a reform agenda in 2018, Kaegi began reassessing properties in Cook County earlier this year, a process that takes three years and covers about 1.8 million parcels. He started with the northern suburbs; so far, he has completed the assessment process for eight of 13 townships stretching from Evanston to Barrington Hills.

The trend is unambiguous. Assessment hikes for commercial and industrial properties dwarfed increases for homes in every township. The total assessed value for all commercial and industrial properties in the eight townships rose 89.9 percent, to $5.89 billion, versus a 16.7 percent increase, to $8.0 billion, for residential, according to an analysis of data from the Assessor’s Office.

The big disparity has shifted the tax burden from homeowners to commercial landlords. Residential properties now account for 58 percent of total assessed values in the eight townships, versus 69 percent last year, according to the analysis. Commercial and industrial properties account for 42 percent, up from 31 percent previously.

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The data provide an early glimpse of what the future may hold. If the trend continues, the owners of Chicago’s biggest buildings could be facing major assessment hikes a couple years from now. Kaegi’s office reassesses the south Cook suburbs next year and Chicago proper in 2021.

Assessments—or what the county assessor estimates properties are worth—are just one variable in the property-tax equation, but an often misunderstood one. A 15 percent increase in assessed value doesn’t automatically translated into a 15 percent tax hike. If assessed values of other properties rise by even more, a taxpayer could possibly receive a tax cut.

Tax bills also depend on how much money local governments—mainly municipalities and school districts—decide they need to balance their budgets and on an equalization factor, or a multiplier determined by the state to achieve uniform property assessment.

But assessed values are critical because they determine how the tax burden is distributed among property owners. The assessor’s job is like an appraiser’s: to estimate a property’s worth that comes as close as possible to its true market value.

Kaegi contends that his predecessor, Joseph Berrios, whom he defeated in the 2018 election, used faulty assumptions to calculate assessed values for office buildings, warehouses and other income-generating buildings. Berrios undervalued commercial and industrial properties mainly by using wrong capitalization rates, a widely used real estate valuation metric, according to Kaegi.

A capitalization rate, or “cap rate,” is an investment yield, representing a property’s net operating income divided by its price, or value. Cap rates vary by property type and location, but can be estimated by analyzing recent sales of comparable properties. An investor can determine what a building is worth by dividing its net operating income by an estimated cap rate.

Berrios used inexplicably high cap rates, which resulted in especially low commercial and industrial property values, Kaegi said. Kaegi’s cap rates are more aligned with the private market, which makes his commercial assessments more accurate—and higher, he said.

“We don’t have a pre-conceived outcome in mind,” he said. “We’re just following the data as it exists.”

In the Northfield Township, which includes Northbrook, Glenview and Northfield, Kaegi used a 6 percent cap rate for apartments. Berrios used a 10.5 percent rate. Kaegi calculated the value of retail properties using a 7 percent rate, versus 9 percent for Berrios.

The change has resulted in soaring assessments for properties like the Glen View, a 298-unit apartment complex at 2600 Golf Road in Glenview. Kaegi’s office valued the property at $41.5 million, more than double its $16.9 million value under Berrios.

Landlords and brokers grouse that the big hikes are spooking investors, who are wary of buying here because they don’t know how much their property taxes, often a landlord’s biggest expense, will rise in the coming years. It doesn’t help that the city and state are facing pension crises that only add to the uncertainty for investors.

Kaegi counters that his approach should make Cook County more appealing to real estate investors because it’s more transparent and less arbitrary than his predecessor’s.

“We will come out with a system that is less risky and more predictable” for investors,” Kaegi said. “In a globalized real estate investment market, we don’t want to be out of step with what our peers are doing.”



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