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Cook County’s property tax burden is shifting in the suburbs: Businesses could be hit hard, but homeowners might catch a break

Thursday, December 12, 2019
Chicago Tribune
by Hal Dardick

As he took over a system riddled with errors and inequity, Assessor Fritz Kaegi vowed to change the way commercial properties are valued in Cook County.

Now his initial assessments are in, covering the north and northwest suburbs, and they show valuations for commercial, industrial and larger apartment properties increased by more than 74%, compared with less than 16% for homes, a Tribune analysis found.

The result may be a significant shift in how the property tax burden is divided up — with homeowners paying less and business owners paying more. A Tribune analysis shows that if Kaegi’s initial property values stand, businesses would pick up 44% of the combined taxes in those suburbs next year, up from 34% this year. That would shift 10 percent of the property tax burden from homeowners to businesses.

Those new, higher assessments on commercial properties triggered a backlash from the business community. They’re not only concerned about paying more, but they also say the uncertainty his assessments has caused is contributing to a slowdown in commercial property sales throughout the county.

Still, there are multiple opportunities to appeal the assessments, so those numbers could change and dampen the effects of the property tax shift to businesses.

There’s already some evidence of that. The Board of Review, which considers tax appeals, has been scaling back Kaegi’s commercial assessment increases. So far, that’s reduced the shift from homeowners to businesses by a half-percentage point, the Tribune analysis found.

Take the case of the Autobarn in Evanston.

Kaegi’s office increased the total market value of the dealerships’ properties along Chicago Avenue by 145%, from $14.1 million to $34.6 million, assessor’s records show. Autobarn owner Richard Fisher expressed his displeasure at a public forum.

“If these assessments stay, and these tax rates stay, I’m out. And me and thousands of other small business owners, we’re outta here," Fisher told Kaegi’s staff at the April event.

The assessor’s office rejected Fisher’s appeal, but he got substantial relief from the Board of Review, which scaled back the values of the dealership’s properties to $17.9 million, documents show. That’s still an increase of 27%. Fisher did not respond to requests for comment on those results.

While the shift indicates that business property owners in the north and northwest suburbs can expect larger-than-normal tax hikes on bills that go out next year and many homeowners will pay less, there are some caveats. Individual bills can defy the trends when the assessor figures in other factors, like neighborhood real estate sale prices or individual property tax exemptions.

It’s also important to noe that property tax bills rarely rise as much as the assessment itself. If assessments go up for everybody, the tax rate goes down, unless a school district or other unit of government has approved a big property tax hike.

Even as business owners experience assessment sticker shock, Kaegi explained that it’s his job to accurately determine the current market value of properties so each owner is facing his or her fair share of taxes, under rules set by the state and county.

“We are doing what we’re supposed to do, and being accountable for it, and showing how we get to these numbers,” Kaegi said in a recent interview. “That’s the best way I know how to run this office and be a good steward of it. Anytime I deviate from that, especially for one narrow group, (it) comes at other people’s expense in an unaccountable way.”

But the new assessments are causing great anxiety among city and south suburban business owners, who also could face bigger tax bills when their areas are reassessed in the coming years.

“I think all this uncertainty is freezing investment, which is going to hurt developers, general contractors, building trades members,” said Jack Lavin, president and CEO of the Greater Chicagoland Chamber of Commerce, who also pointed to a possible change to a graduated system for state income taxes and city real estate sales taxes, among several other pressures on business.

"All this is going to slow job growth, stunt expansion, stunt business growth. And it’s not just downtown. It’s in the neighborhoods too. And so we really need to step back and look at this.”

On Wednesday, Mayor Lori Lightfoot defended the changes at an investors’ conference put on by the assessor’s office, saying she applauds “the transparency, stability and predictability” that Kaegi is trying to put in place.

“Nobody is trying to shock the system. Nobody is trying to scare away investment from Chicago,” she said. “I recognize that change isn’t easy, but change has to come."

Fixing a broken system

In March 2018, Kaegi defeated incumbent Joe Berrios in the Democratic primary for the assessor’s office, in part by pledging to fix inequities identified in “The Tax Divide,” an investigation published by the Tribune and ProPublica Illinois.

The series looked closely at how properties were assessed, or valued for tax purposes. Although local taxing agencies, such as the city and Chicago Public Schools, determine how much in property taxes will be collected each year, the assessor essentially decides how that overall burden is divided up by placing values on each property. Owners of higher-valued properties pay more, and those with lower-valued properties pay less.

The series found that county assessors had significantly undervalued commercial and industrial properties. As a result, owners of high-value business properties got a break, which shifted some of the property tax burden to homeowners and small businesses.

The investigation also concluded that less expensive homes were valued too high, while higher priced ones were valued too low, resulting in an unfair shift of the tax burden from wealthier homeowners to those who are less affluent.

County Board President Toni Preckwinkle commissioned a study that substantiated what the series found on residential assessments.

In the waning months of his tenure, Berrios last year made changes to his residential valuation model that shifted a bigger portion of the tax burden to owners of more expensive city homes.

This year, Kaegi has made further revisions to the residential assessment model, but he had to start from scratch when it came to commercial valuations. That’s because Preckwinkle’s study did not address that issue, and Berrios continued to assert commercial assessments were fine.

Assessing commercial properties is more complicated than valuing residential ones.

Homes are assessed based on sales of similar properties in their immediate area. But that type of analysis can’t be done for most business properties, because there aren’t enough sales to draw broad conclusions about prevailing market values. There also are more business properties that are unique — think Willis Tower, Medieval Times and Wrigley Field — making comparisons in those cases all but impossible.

As a result, there’s a heavy reliance when assessing business properties on what are known as capitalization rates. Assessors try to determine how much annual revenue can be generated from investment properties like stores, offices, apartments and factories. And the figure they come up with is counterintuitive: The lower the so-called cap rate, the higher the value of the property.

Kaegi determined that Berrios’ cap rates were for the most part too high. Kaegi contends that the rates were mysteriously set by a top deputy to Berrios and that his predecessor left behind no documentation to show how they were arrived at.

So, using statistics drawn from public documents and several databases, Kaegi came up with new rates that were lower in nearly all cases. That pushed up the value of business properties when he ran them through his new assessment formula.

For example, in Evanston the median cap rate for apartments was decreased from nearly 12 to six. That helped fuel a 281% increase in median apartment assessments.

It wasn’t just the new cap rate that pushed up apartment values, however. A lot of new, more costly, high-rise apartment buildings were constructed.

Kaegi points to a recent nationwide survey of known cap rates by the CBRE real estate services firm. It shows that Kaegi’s rates are in line with those that businesses and real estate brokers used when evaluating and making purchases.

Government finance expert Christopher Berry gives Kaegi credit for being clear about how he’s determining the cap rates and what data he’s using in the process.

 

Under Berrios, "I don’t think anybody has given or could give an explanation of how they came up with those numbers. ... It seemed like they were almost literally made up,” said Berry, a professor at the University of Chicago’s Harris School of Public Policy’s Center for Municipal Finance.

“I think it’s more transparent (under Kaegi), and it’s more accurate,” added Berry, a longtime critic of Berrios’ methods. “I’m sure in some cases, it’s gone too high, and in other cases it’s gone too low. We’ll just have to see, and we’ll see on appeal.”

Avenues of appeal

Kaegi completed his first round of assessments for the north and northwest suburbs in September, but they’re not the final word.

Property owners can first ask the assessor’s office to take another look. If they don’t get satisfaction, they can go to the county Board of Review, which is made up of three members elected from districts. Tens of thousands of people take advantage of this option each year.

The review board has completed its work in two of the 13 townships assessed by Kaegi. The board is handing business property owners victories that reduce their valuations, sometimes significantly.

In Evanston Township, Kaegi’s assessments raised business’ share of the tax burden from 27% this year to 40% next year — a 13 percentage point increase.

The Board of Review, however, later reduced assessments on hundreds of Evanston business properties. Businesses now stand to pick up 31% of the tax tab next year. While that’s 4% more than this year, it’s also 9% less than where Kaegi had it.

In much smaller Norwood Park Township, which includes Norridge and Park Ridge, Kaegi’s assessments would have left business picking up 35% of the entire township tax tab next year compared with 27% this year — an 8 percentage point increase. When the Board of Review finished its work, the burden on businesses was reduced to less than 29 percent of the tax tab, which amounted to an increase of just 1.3 percentage points.

Appeals are still pending in Barrington Township, where Kaegi’s new assessments brought the biggest shift. Businesses would pick up about 50 percent of the total tax burden next year. This year, they paid 33 percent.

Other townships saw less dramatic shifts. In Hanover Township, which includes Streamwood, and New Trier Township along the North Shore, business owners would shoulder about 4% more of the tax tab next year under Kaegi’s assessments.

Top officials in Kaegi’s office concede they might not get every property right the first time — they are using a mass assessment model without always knowing all the characteristics of a specific piece of property. These are things like the property’s age, size, condition and amenities.

“Cook County has less-than-perfect property characteristic data,” Don Meyer, Kaegi’s chief valuation officer, said at a public forum in Evanston. “Part of the appeals process is to give us factual information.”

Kaegi said it’s particularly hard for his office to be sure when it assesses smaller commercial properties because there’s less publicly available data to determine their operational costs, which can be much higher in old buildings.

Still, business property owners didn’t have much success when they appealed to Kaegi’s office.

In the 13 townships that were reassessed this year, just 13% of the appeals resulted in lower assessments. That compares with 78% three years ago when Berrios conducted the last major reassessment in the north and northwest suburbs.

The Board of Review appears to be more receptive to commercial property appeals than Kaegi’s office, according to early results. In Evanston, Kaegi granted lower assessments to 26 percent of business property owners who appealed. The appeals board lowered assessments for 92 percent of the properties whose owners asked for review.

Business beefs

Even if the Board of Review continues to scale back commercial assessments, business owners still likely will pick up a bigger chunk of the overall tax burden in 2020 than they did this year due to the shift Kaegi’s changes brought.

The Building Owners and Managers Association of Suburban Chicago said paying more in taxes will lower commercial properties’ market values and make them “less attractive to investors.”

The Chicagoland Chamber’s Lavin points to declines this year in the sale of commercial buildings. Statistics from the Jones Lang LaSalle real estate services company show that total commercial property sales, including office and large apartment buildings, tallied about $3.9 billion in the first nine months of the year. That makes it very unlikely Chicago will reach last year’s sales mark of $12 billion.

Jim Costello, senior vice president at Real Capital Analytics, a commercial sales data firm, also noted the downward trend and declining commercial sales prices and blamed it in part on the city and state’s uncertain tax future. “Investors hate uncertainty,” he said.

Kaegi, however, points to a robust city leasing market for industrial and retail space, noting that businesses that lease those properties are typically responsible for their share of the property tax bill sent to their landlords.

He does concede that uncertainty about his new assessments may be contributing to hesitation among commercial property investors but suggested the market may simply be cooling after several particularly strong years. And he maintains that his data-driven approach will ultimately result in more predictability and a stronger commercial real estate marketplace.

“We know there are lots of challenges facing the Chicago region," Kaegi said. “We talk about — that property taxes in general are high here, the levies are high, that we have the pension overhang that faces a lot of taxing bodies. So that creates a layer of risk that is always there. But we don’t want to have an uncertain assessment system adding a whole new layer of risk on top of it.”

Lavin suggested that if the assessments turn out to be accurate, perhaps the increases should be phased in, so businesses can adjust.

But Kaegi has said state law doesn’t give him the leeway to phase them in, and that because properties in Cook County are generally reassessed once every three years, there’s already a lag in the system.

As he enters his second year in office, the assessor continues to push for passage of a new state law that would require all but the very smallest commercial property owners in the county to disclose income and expenses. That would allow his office to use the data to improve accuracy of the valuations on which property taxes are based. His effort stalled in Springfield, though, and its prospects remain uncertain amid opposition from the building owners group and the Chicagoland Chamber.

In the meantime, Kaegi is planning to roll out new voluntary income and expense reporting by the owners of commercials properties early next year.

“We’re trying to encourage people to say it’s only in your interest to do this,” Kaegi said. "It will make the assessment more predictable and accurate at the outset and reduce your costs and uncertainty.”

 

 



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