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Debate Between Kaegi And Commercial Real Estate May Be Missing The Point

A contentious debate blew up in 2019 after new Cook County Assessor Fritz Kaegi claimed commercial property owners got breaks for years under his predecessor. Many of those landlords cried foul, and countered that high tax rates were already hampering new investment and development. But squabbling over whether commercial real estate is undertaxed or overtaxed may miss the point, according to a new study by CoStar Group.

“I think both are right,” CoStar Group Director of Market Analytics Brandon Svec said.

River North
River North

He said there is no doubt the former assessor undervalued commercial properties like apartments and offices, a system that shifted much of the county’s tax burden to homeowners, who then rebelled, giving Kaegi their votes, and a mandate for change.

“Residents had to bear more than they should have, so I understand what Fritz is doing, and although commercial real estate may not like it, he’s on the right path,” Svec said.

Still, the owners of downtown office buildings and luxury multifamily communities aren’t a bunch of fat cats sitting around complaining because they don’t want to pay their fair share, he said.

Both Kaegi and Svec will speak at Bisnow’s Chicago 2020 Forecast event on Jan. 15.

A new CoStar analysis shows that even under the old method, Chicago commercial owners already paid one of the highest tax rates per SF in the country, and the percentage of gross rents attributed to taxes was, at 19%, the highest among major markets.

“To say commercial property owners don’t pay a lot in taxes is a complete fallacy, and we can’t act as if they have been getting off easy,” Svec said.   

According to CoStar, although Chicago commercial owners’ tax rate stood at $4.61 per SF, compared to $4.87 and $5.60 in Washington, D.C., and New York City, respectively, they were charging tenants just $24.72 per SF, while rents in the other two cities were more than $37, making the percentage of gross rents attributed to taxes in each 15% or less.

The disparity in tax burden was even greater for Class-A office properties in Central Business Districts. Chicago landlords in this sector enjoy healthy rental rates that average $35.17 per SF, CoStar found, but they pay $8.81 in taxes, or roughly 25%. That is twice the national average, and roughly 40% above Minneapolis, the  second-most-burdened CBD studied by CoStar. In Washington and New York City, these landlords’ tax burden is just a bit more than 15%.

Costar charts
Tax burdens per SF in U.S. cities

Svec hopes the war of words and statistics between Kaegi and commercial real estate will give way to what he sees as more productive conversation.

“The tax levy itself needs to be the point of contention,” he said.

After nearly doubling in the last 10 years and helping fuel a steep rise in property taxes, Chicago’s tax levy was $1.6B for 2020, according to CoStar. Although Mayor Lori Lightfoot and the City Council did manage to craft a 2020 budget that filled a more than $800M budget hole without significant property tax increases, Chicago’s budget woes are far from over.

Many of the bandages used by Lightfoot were one-time windfalls, and pension contributions will increase by more than $600M over the next three years. Overall, Chicago will need nearly $1B in additional revenue or budget cuts by 2023, Svec said.

Cutting pension outlays would be walking into a political minefield, and may also violate the state’s constitution, but a universal deal that brings long-term revenue and expenses into line is a must, no matter what the new assessor does, he added.  

“The details are way above my pay grade, and I understand the delicate political conversations regarding pensions, but we need to reverse this tide. Taxes are already choking out our residential sector, and there isn’t as easy answer that doesn’t involve cannibalizing our commercial property sector.”

See Glenstar Properties' Michael Klein, Cook County Board President Toni Preckwinkle, Cook County Assessor Fritz Kaegi and many other industry players at Bisnow's Chicago 2020 Forecast event Jan. 15.