Cook County Assessor Fritz Kaegi took office on December 3, 2018 and close to six months into his four-year term, we are beginning to see the effects of his new policies. In the five townships that he has reassessed in 2019 including Norwood Park, Evanston, New Trier, Elk Grove and Maine Townships, we are seeing significant assessment increases particularly with commercial, industrial and multi-family properties. Kaegi has stated publicly his policies are to remedy the fact that Cook County homeowners bear more of the tax burden than they should while commercial, industrial and apartment building owners bear less of a burden. Kaegi’s skyrocketing assessments are primarily based on his manipulation of capitalization rates. Capitalization rates represent a property’s net operating income (NOI) divided by its purchase price. Capitalization rates are also used by appraisers in valuing income producing properties in what is known as an Income Capitalization Approach to Value. In valuing properties by this approach, if you lower the capitalization rates, the value of your property increases. In prior Assessor’s regimes, higher capitalization rates were used in valuation of properties and as a result, lower market values, assessments and real estate taxes resulted.
For example, in Kaegi’s regime, the capitalization rates for apartments in Evanston have decreased 49.79% from 11.95% in 2016 (the last triennial assessment year) to 6.00% in 2019. For commercial properties, the capitalization rates have declined from 9.25% in 2016 to 7.00% in 2019 and for industrial properties the capitalization rates have declined from 9.00% in 2016 to 8.50% in 2019. [1] Kaegi has stated publicly that his intent is to use his capitalization rates to value property more in line with the banking and mortgage industries. Kaegi has also stated that his office uses data sources such as “Trepp” which is more widely relied on in the mortgage industry to justify his use of lower capitalization rates. The problem is the average loan size in the Trepp system is $22,655,826 which implies an average appraised value of $36,000,000.[2] To appraise individual properties (most of which are not Class A investment grade properties) using data from the largest securitized loan transactions in the region is like valuing your child’s third grade art project using the same guidelines or parameters as a Van Gogh painting would be valued.
The real-life effects of these significant increases in capitalization rates are that the average assessed value increases for apartment buildings in Evanston has increased 281%, with 92% increases for Evanston commercial/retail properties, 71% increases for Evanston office properties and 46% increases for Evanston industrial properties. Using specific examples, the Assessor’s Office valued Amli Evanston (737 Chicago Avenue, Evanston), a 214-unit apartment building in southeast Evanston at $74.5 million nearly triple its 2018 value of $25.7 million. For the Central Station Apartment Building (1620 Central Street, Evanston), its assessment was reassessed at $31.6 million more than double its prior value of $14.9 million.[3] The other effect of higher assessments, market values and much higher taxes are that values on these properties on the open market are less. As a result, there will be a chilling effect for real estate investors considering whether to buy new properties in Cook County. However, Kaegi tries to buttress his new policies by stating that his new capitalization rates and higher market values for commercial and multi-family properties will result in a more accurate and transparent assessment that will stand up to scrutiny on appeal. He has replied to questions about the impact of enormous assessment increases by implying that the equalization process used to calculate tax bills may cause reductions in the local tax rates and/or the Cook County Equalization Factor. However, Kaegi is downplaying the actual effects of his drastic increases in market valuations and the resulting higher real estate taxes by overlooking the obvious fact that apartment building owners and commercial property owners will likely be forced to increase monthly rents for all tenants in order to “pass through” these tax increases. If the market does not allow for higher rents to cover the increased taxes, many landlords will cut back on maintenance and repairs which will reduce the quality of housing in Cook County. Some commercial property owners might also consider leaving the Chicago market altogether. Also, Kaegi’s focus on market vacancy and expense data overlooks the specific issues that a property might be experiencing in terms of increased vacancy, higher operating expenses and/or declining rents.
Lastly, Kaegi has been pushing legislation (SB 1379) for mandatory disclosure of a property owner’s income and expenses prior to his setting of the assessments. He has pushed for monetary penalties for those property owners who do not comply with this disclosure. This mandatory disclosure will even apply for those property owners who do not plan to file tax appeals. Kaegi has also requested disclosure of business income on his new forms (Real Property Income and Expense Worksheet) which is not pertinent in real estate tax valuations. In conclusion, Kaegi’s new policies are causing great uncertainty among real estate investors and developers and as a result, could very well lead to reductions in the number of purchases intended for new development projects or existing buildings and might cause property owners in Chicago to reconsider their future intentions of staying in the Chicagoland area.
[1] Cook County Assessor’s Office: 2019 North Triad Assessment – Evanston Commercial/Industrial Assessment Narrative – March 25, 2019, p. 10.
[2] “Surveys Understate Capitalization & Occupancy Rates for Smaller Properties,” by Gary Peterson, MAI, MBA of Chicago Commercial Appraisal Group
[3] ”What Evanston’s Assessments Tell Us About the New Assessor’s New Math,” by Alby Gallun, Crain’s Chicago Business, April 12, 2019, p. 1