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What Evanston's assessments tell us about the new assessor's new math

Friday, April 12, 2019
Crain's Chicago Business
by Alby Gallun

What Evanston's assessments tell us about the new assessor's new math

If local landlords are wondering what new Cook County Assessor Fritz Kaegi has in store for them, they can look to Evanston, where commercial properties have been walloped with soaring assessments.

If local landlords are wondering what new Cook County Assessor Fritz Kaegihas in store for them, they can look to Evanston, where commercial properties have been walloped with soaring assessments.

The assessor's estimated value of some apartment buildings in the northern suburb have doubled or even tripled, fueling fears that a massive property tax increase is coming next year. Some spooked landlords predict they'll have to hike rents to account for the higher costs. Others foresee a decline in property values and development as investors steer clear of the Chicago market. And don't rule out a fight

"It's just such a major change that I'm not sure what it's going to accomplish other than a hell of a lot of litigation," says Tony Rossi Sr., an apartment developer and chairman of Chicago-based RMK Management.

Rossi is a partner in Central Station, an 80-unit apartment building near Ryan Field in Evanston that was recently reassessed at $31.6 million, more than double its prior value of $14.9 million. It could have been worse: The assessor's office valued Amli Evanston, a 214-unit building in southeast Evanston, at $74.5 million, nearly triple its 2018 value of $25.7 million.

Landlords have been bracing for big hikes since Kaegi was elected assessor last year, promising to reform the office and improve the accuracy of its assessments. Kaegi replaced Joe Berrios, who was harshly criticized for undervaluing commercial properties and being too cozy with property tax appeals attorneys who represent some of the biggest landlords in town. The result: Cook County homeowners bear more of the tax burden than they should, and commercial landlords bear less, said Berrios' critics.

As landlords in Evanston are learning, that is almost certain to change under Kaegi, who says Cook County has "the least accurate assessment system of any major jurisdiction of the U.S." Fixing that is his top priority—not worrying about how the tax burden is distributed.

"This is really necessary to building accuracy and trust in the system," he says.

Kaegi plays a key role in a larger political story unfolding that worries commercial real estate investors. Not only are their assessments likely to rise, but fiscal crises, caused chiefly by ballooning unfunded pension obligations, guarantee tax hikes by city and state governments led by Mayor-elect Lori Lightfoot and Gov. J.B. Pritzker. Illinois could fall into a "fiscal death spiral," with rising taxes pushing people out of Illinois and depressing property values, an especially dire scenario but a "very real possibility," according to real estate research firm Green Street Advisors.

If there is a silver lining, at least in the near term, it's that higher assessments on commercial properties in Cook County are likely to result in lower taxes for many homeowners. In Evanston, for instance, the assessed value of all residential property rose 25 percent from 2018 to 2019, while the assessed value of all commercial and industrial property rose 125 percent. The wide gap suggests that taxes will rise for commercial and industrial landlords in the suburb when property tax bills come out next year but drop for Evanston homeowners.

The math is complicated. While some property owners assume that their tax bill will double after their assessment doubles, it doesn't work that way. A taxpayer's final bill depends on the relative change in assessed values among properties and a process known as equalization that was created to ensure fairness in the system. It also hinges on the tax levy, or how much local governments decide to collect in property taxes in a given year.


Evanston offers a preview of what Cook County property owners could face under Kaegi because it's one of the first municipalities in the county to be assessed by his office. Under the county's triennial assessment process, Kaegi's staff will assess northern Cook County suburbs this year, followed by the south suburbs next year and Chicago in 2021. It's a big job, with all county property valued at nearly $67 billion last year.

But the changes are creating something investors hate: uncertainty. Unable to forecast what will happen to property taxes, many will have a hard time figuring out what to pay for an apartment, hotel or office building here. Some will steer clear of the Chicago market and invest their money elsewhere, investors say. Nervous lenders may limit the amount of money they will lend to a landlord, and developers could have trouble raising equity for new projects.

"This is going to stop investment sales and new development until it all gets sorted out," says Greg Mutz, chairman and CEO of Chicago-based Amli Residential, which built and owns Amli Evanston.

A change in property taxes, typically the largest cost for apartment landlords, can have a direct, meaningful impact on property values. Take North Harbor Tower, a 600-unit apartment building near Maggie Daley Park that sold last summer for $240 million. That price represented a 4.4 percent initial return, or capitalization rate, according to Real Capital Analytics, a New York-based research firm. Capitalization, or "cap," rates are a simple but widely used valuation metric employed by commercial real estate investors, representing a property's net operating income divided by price.

Why did Evanston values rise so much?

The assessor, like most investors, uses a valuation metric known as a capitalization, or “cap,” rate to estimate the value of commercial properties. A cap rate represents a property’s net operating income, or NOI, divided by its price. The lower the cap rate, the higher the value. Using rental, vacancy and other data, the assessor estimates a property’s NOI and then divides the NOI by an estimated market cap rate to calculate a value. New Assessor Fritz Kaegi says that his predecessor Joseph Berrios used inexplicably high cap rates, resulting in unreasonably low property values. He believes his lower cap rates, which have resulted in much higher assessments, are more accurate.

Given a 4.4 percent cap rate at North Harbor Tower, it's easy to calculate the impact of a change in its property taxes, which totaled $1.9 million in 2018. A 20 percent increase in taxes would knock $8.7 million off the property's value. A 40 percent increase would reduce its value by $17.5 million.

Kaegi, like Berrios before him, also uses cap rates to calculate property values for assessment purposes. Evanston's commercial property assessments jumped so much largely because Kaegi uses lower cap rates than Berrios did, resulting in higher values. He says his cap rates are closer to true rates used by investors, making his estimates more accurate.

Commercial property owners probably won't receive much sympathy if they get slapped with higher taxes, especially in a prolonged real estate boom that has enriched them. But a significant increase in property taxes for them could inflict collateral damage by making housing even less affordable in Cook County, according to Stuart Handler, CEO of TLC Management, a Chicago-based apartment owner with properties in Evanston.

"The unintended consequences of the significantly higher assessed valuations we see in Evanston and likely elsewhere in the next two years is to put greater pressure on affordability while landlords try to pass on these higher taxes in higher rents," he writes in an email. "If the market won't bear higher rents to cover the increased taxes, many landlords will cut back on maintenance and repairs, which will reduce the quality of housing in the county."

Kaegi isn't likely to be swayed by that argument—housing affordability isn't his problem, after all—but some Chicago politicians may.


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