Real estate investors are downright scared of Chicago property taxes.
Almost everyone agrees Cook County’s real estate tax system is in need of major reforms, and at least some believe Assessor Fritz Kaegi is to blame for its issues.
Those issues: Commercial landlords in Chicago and homeowners in the south suburbs are both experiencing sticker shock each time they get their tax bills and have been for the past few years.
Properties are assessed triennially in one of three horizontally divided portions of the county: the southern, central and northern triads. That means every year, people in one slice of the county see jumps in value while the rest wait their turn, not sure what to expect.
The assessor’s current valuation methods are difficult to understand. To complicate matters further, the Cook County Board of review, which hears appeals from property owners, relies on its own data and often approves significant slashes to values. For investors, the uncertainty is too much to bear.
All kinds of solutions were on the table at an April 2 event billed as the assessor’s annual investor day. There, veteran developer Mike Reschke suggested changes to how commercial property is evaluated, while Elizabeth Holland, CEO of real estate investment firm Abbell Associates, said data sharing among all entities — including the tax assessor and the Board of Review — would be key. Micahel Fassnacht, the former head of World Business Chicago who’s now leading marketing for Clayco, also chimed in from a panel.
Their ideas aren’t the first potential reforms. A December analysis published by Cook County Board President Toni Preckwinkle had dozens of improvements to the system from independent consultants.
Kaegi sought Wednesday to make investors more confident in the county, telling the audience that his office “embraces 100 percent” of the reforms.
In an exclusive interview with The Real Deal, he expanded on his plans.
Editor’s note: this interview has been edited and condensed for clarity.
The Real Deal: What is your reaction to Mike Reschke’s idea to create a simplified property tax estimation formula that would allow property owners to plug in data like rental rates and vacancies and submit their estimated assessment for consideration and approval?
Fritz Kaegi: The first principle is accuracy. We all share a property tax system together and any commercial assessment needs to be accurate so that it’s fair to all the other taxpayers. But the way I think about it, and I think the way Mike thinks about it is, “how could we make it more simple while still being accurate?”
What I’m trying to encourage with Mike is talking to a lot of other industry participants in the hospitality industry and in the office industry, to say, “Hey, it would be worth our while, even if we paid a little bit more, if we had more certainty and more predictability. That would allow us to attract more capital, maybe get better value for our investments and cause more projects to happen that aren’t happening because there’s too much uncertainty.”
The commercial assessment report that President Preckwinkle oversaw, that was prepared in December, has several good steps to get us on the road there because it talks about coming to consensus on capitalization rates, on tax rates and on common data.
TRD: And when you’re talking about cap rates, you mean more agreement between your office and the Board of Review?
FK: That’s right. The report released in December was the most comprehensive look at commercial assessments ever done by the county. … One [recommendation] is before going into an appraisal [to start] by looking at transactions that have happened and come up with recommended cap rates that we’re all using, rather than having multiple different appraisers picking these out of thin air and arguing for them.
TRD: How many of the report’s recommendations can be done from your office and how many would need to be done at the state level or outside of your purview? What are some of the first things that you can implement?
FK: Most of the recommendations in that report can be adopted through countywide policy, so it does require us to be working together, but countywide policy doesn’t require a change in law. The plan advocates for the passage of a state commercial data collection law — we have been pursuing this for years.
The good news is … the physical descriptions bill, which is adapted from our data modernization bill a few years ago, has no opponents today.
TRD: Tell me more about that bill. What issues would it address?
FK: The physical descriptions bill would create a one-time snapshot and physical description of all commercial properties above a certain size that are rent-earning properties with more rich detail and more up-to-date detail than we have now. So if you have a warehouse, this is square footage, cubic space and information about features like loading docks that can give us a sense of whether it is a Class A, B or C building.
This allows us to sort things into better categories,… and it would only be required to be updated if there was major permit activity.
That would help improve the physical data that we’re using significantly.
TRD: You also said that the mass appraisal system, which groups properties together, leads to some of that uncertainty. Would this bill address that?
FK: Having more commonly agreed upon data makes it easier. It’s always going to be a mass appraisal system because there are 1.9 million properties that all have to be valued. And many other places in America do this just fine.
TRD: Any cities you look to as models?
FK: Maricopa County, Arizona, has a great IT platform that everyone works off of. It can handle a rich amount of data and detail. Maricopa is also very good at defending their assessments before appeals boards. That’s something that we can learn from.
Harris County in Texas, is also very, very good at that. So I talked to assessors there to draw upon what they do. One of the recommendations is that we staff up for assessment defense. While he was still alive, I asked Sam Zell, one of the most legendary real estate investors nationwide, which places should we draw from? He said these places don’t have the lowest taxes but they are predictable: Washington, D.C., Boston and the state of Virginia.
TRD: A report from the Chicago Tribune and the Illinois Answers Project found $444 million in missed value last year. A lot of that was addressed recently. What can be done to prevent that from happening again? What changes are in the works, if any?
FK: There have always been some properties in the county that were not being picked up through the imperfections of the permit system but we, during our administration, have more than doubled the rate of omitted assessments than the previous two administrations had achieved.
We’ve updated the technology, we have more field people going out and inspecting properties than ever before, and we will keep getting better at this. While $400 million sounds like a lot, that’s $400 million out of $700 billion in market value. We also want to allocate resources to the board review to defend our appraisals.That’s gonna make a bigger impact for the average taxpayer.
TRD: You mentioned that the Gold Coast was the one neighborhood where values actually went down in the central triad but looking ahead to the northern triad, the wealthier areas are seeing growth in value, both on the residential and commercial side. Can you speak to those trends and what might be emerging here?
FK: I’m reluctant to read into that. That might speak to the fact that a lot of people paid high prices in the Gold Coast in the 2000 to 2010 time period and a lot of people have not had great returns since then. … What’s going on at the very highest realms of the wealthiest people in the Chicago region is very different from what’s happening with average homeowners in the rest of the region. In most of the rest of Cook County, people are looking for homes they can afford with their incomes. … If you see homes below $400,000 or $350,000, they’re performing strongly in the market because there are not enough new homes being built. Up at the high end, in the Gold Coast, people may be choosing incrementally to go into the suburbs. I don’t know if I want to make that call yet but certainly in New Trier, we’re seeing strong performance in the highest end homes there. … I think that reflects inequity in our economy.
TRD: Are there any other early observations from the Northern triad?
FK: We expect commercial to be up more than residential, partly because that commercial assessment report showed that initial commercial assessments were too low coming out of the Board of Review in 2022 and those need to be trued up. We’re seeing healthy conditions in industrial, data science, multifamily, storage and data centers. Vacancy rates and apartments are setting records for transactions. … But some offices are still encountering a lot of vacancies.
TRD: Anything to add?
FK: We 100 percent embrace the recommendations from that study in December. We’re following through on the recommendations. There are work streams that are being overseen by the Civic Consulting Alliance for each of those recommendations and we’re already delivering some of them to the Board of Review and working with them.
TRD: How far along do you think you could be with implementing those recommendations for the next triad?
FK: Already for the end of the Chicago triennial, we’re acting on some of those recommendations: providing the Board of Review our estimates on tax rates, and we’re also going to be providing suggested estimates for cap rates, and we’ll be sharing more data. We’re working off of most of the recommendations in the report already in the Northern Triennial and then for the Southern Triennial there’s no good reason why we couldn’t be working off them all.