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Are Commercial Properties In Cook County Underassessed? It's Complicated

Willis Tower sold for a record $1.05B in 2015, nearly three times what the County Assessor last valued the building. It has become the most obvious example of the disparity between assessments and sales prices, under fire now more than ever as the Cook County Assessor’s race March 20 primary nears.

The accuracy of commercial property assessments is one of the driving issues in the campaign, with reports of inaccurate assessments and accusations of favoritism to commercial real estate. Critics claim assessments for commercial properties are too low, and data bears out that valuations are well below what properties sell for.

Aon Center (center) sold for $712M in October 2015.

But local valuation experts counter there is not a large problem in how buildings are assessed. Chicago Association of Realtors Senior Director of Government Affairs and Public Policy Brian Bernardoni said reforming the assessment process is not something to be taken lightly.

“Businesses vote with their feet. If we start messing with the system in such a way where businesses leave, buildings will lose valuation,” Bernardoni said.

Assessments vs. Sales

Cook County reassesses properties on a rotating three-year cycle; the last time Chicago properties were reassessed was in 2015. Bisnow compared the top 10 downtown Chicago office sales of 2015 to their most recent assessments. The value of those buildings, according to the final assessments from the Cook County Board of Review, totaled $2.2B. Those buildings traded for $4.6B.

Fritz Kaegi, who is challenging incumbent Joe Berrios for the Assessor role, believes an overhaul of the assessment system emphasizing transparency and technology will make for more accurate assessments, lower cap rates on commercial properties across Cook County and spur investment. Kaegi also believes transparency in how assessments are conducted will encourage more property owners to get involved in the appeals process.

Valbridge Property Advisors Senior Managing Director Gary DeClark

Property tax attorney Gary Smith believes the reports of errors in Cook County assessments betray a fundamental misunderstanding of how commercial properties are valued by the Assessor’s office.

“I’m uncomfortable with the term ‘riddled with errors.’ There may be value differentials in commercial properties that are significant, but that does not automatically conclude an assessment is incorrect,” Smith said.

Valbridge Property Advisors Senior Managing Director Gary DeClark, a 40-year valuation expert, said it is the job of the Assessor’s office to ensure property assessments are uniform. If the Assessor revalued Willis Tower, as an example, based solely on its record 2015 sales price, it would create an outlier effect that would affect all comparable properties.

Assessor’s office spokesman Tom Shaer told Crain’s Chicago Business the office cannot value commercial properties based on a recent sales price. This practice is known as “sales chasing” and, Shaer contends, is a violation of state and federal law.

The Assessor’s office, instead, values commercial properties using comparable properties and adjusting for differences among them, determining what an owner would have to spend to build a replica of a building, and the income and expense reports of the property: rent rolls, occupancy rates and vacancies.

“The Assessor’s job is to value property to fair market value, defined as what a willing buyer will pay for a property, with no duress and no unusual circumstances,” Smith said.

Podolsky Circle CORFAC International Principal John Homsher and Managing Principal Alissa Adler

Smith said his first job valuing properties for appeal is determining the nature of a real estate sale. Is it strictly real estate, as with residential properties? Or is the transaction an investment property? Smith said Illinois commercial properties are valued primarily by the income they generate.

Podolsky Circle CORFAC International Managing Principal Alissa Adler said Podolsky Circle starts its valuation process for properties it sells for clients by looking at income and expenses and reviewing leases, and projecting a 10-year cash flow based on turnover and lease-ups. Then its team enters the model into a spreadsheet to determine price per SF, cap rates and internal rate of return.

The Assessor does not forecast that far ahead.

“The Assessor doesn’t care if a building has a Class-A tenant. They only see an income stream and they use that to determine a value on the property right now,” Adler said.

The John Buck Co. bought 333 South Wabash, "Big Red," for $108M in March 2016.

Smith lays some of the blame for the lower assessments on the volatile post-Great Recession period when real estate values bottomed out. Some commercial properties that traded as the market began its rebound were either bought out of bankruptcy or were part of portfolio sales, and Smith said it is unfair to use that sales price as a valuation for these assets.

“We need to assert that the portfolio payment is meaningless, in the case of a bankruptcy. Each property is valued separately. The sale was not relevant to the issue of value,” Smith said.

DeClark said it is tricky to assign a value for a building in a portfolio sale. A Loop office building may be packaged as part of a portfolio deal with other buildings in other markets, even other states.

“Some allocation will be made to determine the value of a single asset within the portfolio. But its assessment is truly a judgment call based on income and expense details,” DeClark said.

Chicago’s properties are due to be assessed this year, and DeClark said the initial assessments will be based on the properties’ values as of Jan. 1. Given the record trading volume of the past three years, he expects assessments to increase. But because property taxes are billed one year in arrears, owners will not feel the pinch on their tax bills until 2019. DeClark said owners did not feel the brunt of rising property values the past three years because values rose faster than the assessments could catch up.

Chicago Association of Realtors Senior Director of Government Affairs and Public Policy Brian Bernardoni and The Hanna Group owner David Hanna.

Bernardoni said he is more concerned about how the 2018 reassessments will affect commercial properties and small businesses in the outer neighborhoods and south suburbs, the latter of which are being hit hard by businesses moving to Indiana and the collar counties.

“If commercial assessments in these areas rise to the point where property taxes are higher than rents, small businesses will close and the tax burden will be absorbed by homeowners,” Bernardoni said.

Bernardoni said the debate over reforming how the Assessor’s office values properties is rooted in a lack of civic understanding of the tax process. He said the neighborhoods hardest hit by property tax increases are also the neighborhoods most likely to not appeal their assessments. Furthermore, the Assessor’s office only establishes property assessments; the tax rates are set by the state and local governments.

Bernardoni said the best check and balance property owners have to keep their assessments uniform is by appealing them.

“We want people to appeal their assessments. But we understand that owners cannot be compelled to appeal,” Bernardoni said.

Alissa Adler is a panelist at Bisnow's Chicago Capital Markets event, Thursday, March 15, at 2017 North Mendell.