While property taxes are not always a compelling topic of conversation, the current tax situation in Illinois has pushed commercial real estate professionals to focus more intently on the subject. This was particularly evident during a recent Building Owners and Managers Association (BOMA) breakfast meeting in Chicago, which drew a crowd of nearly 200 people.
Given the turmoil in the property tax system now—and Assessor Fritz Kaegi’s ongoing plans to revamp the system even further—many commercial real estate practitioners are focused on how those plans will impact their operational expenses and ability to buy, sell and lease properties.
“Property taxes are at the heart of our concerns in the real estate community,” said Kent Swanson, a partner at Riverside Investment & Development, noting that taxes represent the firm’s largest expense item, as they do for most property owners.
Steve Sise, senior vice president at Golub and Company, moderated a panel comprising Swanson and two property tax attorneys—Elizabeth Gracie, an equity member of O’Keefe Lyons & Hynes, and Patrick McNerney, a founding member of the tax practice at Mayer Brown.
The panel noted that investment volume has declined, with studies showing that transaction volume is down from 50 to 70 percent, which is hurting capital formation for investment in Chicago. McNerney said that investment committees are advising to “put your pencils down in Chicago.”
That’s not good news for Chicago because once a ship turns away, it takes time to reverse course. Because the full implication on tax liability won’t be known until later this year for northern Cook County and until 2022 for the city of Chicago, Swanson said the situation is “like watching a slow-motion train wreck.”
The uncertainty of the tax situation creates a trickle-down effect, with the most visible impact being seen by property owners, though others are feeling the effect. Multifamily developers, for example, are finding it more difficult to secure funding and move forward with projects because of the uncertainty.
The pursuit of a fair and equitable property tax system is a long-term battle. The panel agreed that the overarching goal of Assessor Kaegi, to create a consistent and fair methodology for assessing property, is appropriate. But the means for achieving that—including efforts to collect data long considered to be confidential—are both difficult and controversial.
“No one is opposed to the Assessor doing his job as accurately as possible, and we would never say the Assessor should be deprived of good data,” Gracie said. “Instead, as a community we need to ensure that the system be refined to guarantee confidentiality of the data submitted and the right to review the Assessor’s use of data.”
It is a foregone conclusion that commercial property taxes are going up. Many see the 2019 triennial reassessment of Evanston as a bellwether for the 2021 triennial reassessment of Chicago. After all appeals, Evanston’s assessment base increased 26 percent from 2018 to 2019.
All else being equal, those buildings whose assessment increased more than 26 percent will see an increase in taxes. Gracie cited 500 Davis as an example. Its assessed valuation increased 57 percent. She estimates that its taxes will increase at least 20 percent.