Lightfoot And Kaegi Promise Even More Transparency In 2020
Kaegi began the morning by telling the crowd at Venue SIX10 at 610 South Michigan Ave. that the reforms he began after taking office late last year, which some blame for creating uncertainty and an investment decline, will eventually bring in buyers who had shied away from the region because they didn’t understand the county’s archaic assessment system.
“I don’t think investors are charmed by our idiosyncrasies,” Kaegi said.
He added that both he and the mayor want such meetings to become an annual event, so landlords and investors, both local and out-of-state, will better understand the city’s budget and how officials will calculate property taxes.
“As a former investment manager, I know how important predictability [is] to all of the things you do,” he said. “Unpredictability is the great destroyer of value.”
Over the course of the morning, which included tutorials on the city budget from top finance officials, along with a step-by-step analysis of how the assessment process will play out in the next few years, Kaegi said he wanted to bring the county’s assessment system in line with national best practices, making it fairer to local homeowners and familiar to pension fund managers from New York City or the West Coast.
“We want this to become predictable and boring, but we know we’re not there yet,” he said.
Lightfoot tied her rise earlier this year to the mayor’s office with Kaegi’s 2018 election, and said both illustrated that Chicago and Cook County residents were tired of corruption.
“That’s why we took on aldermanic prerogative, and we will continue to take on sacred cows,” she said.
Curtailing the ability of aldermen to control development in their wards was her first executive order, signed just hours after taking the oath of office in May, she pointed out.
“I heard over and over from residents that they did not want to ‘kiss the ring’ to get basic city services, which they had already paid for,” she said.
Such action also sent a message to investors, Lightfoot said. She believes the old assessment system, historically shrouded in secrecy, will give way to a more open process, blocking local insiders from manipulating the system in their favor, and giving new investors trust in the process.
“Nobody is trying to shock the system, or scare away investors from Chicago, but predictability cannot be about enshrining the status quo,” she said. “I am asking everyone in this room to be a part of the conversation.”
Lightfoot and Kaegi seemed to make progress with the crowd, especially when it came to the need to rebalance the tax burden between local homeowners and commercial property landlords, who were given breaks by former Assessor Joe Berrios, according to nonprofit news site ProPublica Illinois.
Kaegi said he saw evidence of that his first week in office. Higher cap rates translate to lower values, but he found records of Chicago’s 2018 reassessment showing the previous assessor estimated commercial properties in the city’s Lake Township, which includes struggling, lower-income neighborhoods like Englewood, to have cap rates between 9.25% and 10.5%, and in the Lakeview Township, which includes Lincoln Park, the range was 8.75% to 10%.
“Who would have guessed that Lake Township would have that much overlap with Lincoln Park?” Cook County Chief Valuations Officer Donald Meyer asked.
Meyer said this year’s scheduled reassessment of the northern suburbs resulted in the lowering of the median cap rates for properties in many sectors, and that resulted in much higher valuations. Some significant commercial properties, such as Evanston’s 80-unit Central Station apartment building, saw their assessed value more than double, although it won’t be clear until 2020 how much actual taxes will increase.
Meyer added, however, that although the estimated median cap rate for Schaumburg apartments went from 11.5% to 6%, and the median assessed value increased to $1.7M, a 91% boost, the median value for that town’s industrial properties decreased 2%.
That shows there is no agenda to increase the tax burden across the board on all classes of properties, he said.
“There is only one agenda: Get the numbers right.”
Still, Kaegi and Lightfoot didn’t allay all of the fears and concerns expressed by the real estate community over the past year, Svec said. For one thing, rebalancing the county tax burden will inevitably mean higher taxes for commercial owners.
“A tax increase lowers the value of commercial property, and it makes it more expensive for tenants to occupy space,” Svec said.
This concern will hang over the Chicago market for several more years, no matter what progress the mayor and assessor make in opening up their respective offices to scrutiny. The southern suburbs will undergo a scheduled reassessment next year, and in 2021, the assessor will tackle Chicago, including its valuable downtown real estate, which will not impact rates until property tax bills are mailed out in 2022.
Although there is little doubt commercial owners had it comparatively easy under the Berrios regime, Svec still contends their overall tax burden is too heavy. CoStar Group will soon release a study of 19 major U.S. metros showing Downtown Chicago property owners already see a relatively high proportion of their income go toward taxes.
On average, about 11% of the gross rent collected by landlords in these metros are earmarked for taxes, but for Downtown Chicago landlords, it is already 25%, more than double the national average, Svec said.
He suggests it may be time to start paying more attention to the city’s financial condition, rather than Kaegi’s adjustments, as that eventually determines the amount in property taxes needed to balance the budget.
Officials were on hand Wednesday morning to answer such concerns.
“We feel we are on the path toward long-term stability,” city of Chicago Chief Financial Officer Jennie Bennett said.
She outlined how, over the past seven months, her department closed Chicago’s massive $838M projected budget deficit, its largest ever, without proposing a significant property tax increase. About 60% of the gap was narrowed by structural solutions, including refinancing debt, department mergers and improved revenue collection, among other changes, which will persist in the coming years. The remainder came from increasing revenues, up to $352M in the next fiscal year alone.
In addition, recent state legislation, signed by former Gov. Bruce Rauner and meant to improve the financial condition of lower-income school districts, has boosted the bottom line of Chicago Public Schools, the source of much of the city’s long-term pension debt. Bennett, a former CFO of CPS, pointed out that in the last two years, the school system received a number of bond upgrades from agencies such as Moody’s and Fitch Ratings.
Svec found the presentation generally impressive, but isn’t fully convinced.
“I question whether some of the savings will actually come to fruition, but time will tell,” he said.
As the scheduled reassessments go forward next year, and property owners begin to file appeals over their 2019 assessments, Kaegi pledged to keep improving transparency, partly by modernizing the office.
Hopefully, that will include digitizing the many thousands of appeals received each year. When Kaegi first took office, he found so many stacked in boxes on a floor of the county building, it reminded him of the famous ending of Raiders of The Lost Ark, he said.
Officials also promised to talk more often with industry stakeholders.
Meyer said in 2020 the office will hold a weekly meeting for property owners with valuations staff and the assessor’s legal counsel.
“We will be there every Thursday morning. I look forward to improving the process each and every year.”