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How Cook County Takes the Benefit Out of Taxpayer Incentives

The Cook County Board of Commissioners may have dealt manufacturing districts in South and Southwest Cook County, Illinois, their final blow.

The use of property tax incentives has increased over the past several decades and has been a vital economic development tool in this manufacturing belt. The industrial corridor suffered a one-two punch during the Great Recession and is still hanging onto the ropes, trying to recover while the rest of Cook County thrives.

Cook County property tax incentives reduce assessed values used to determine a property's tax bill. Assessors normally set taxable value at 25 percent of a property's market value, while assessing real estate qualifying for the incentive at 10 percent of market value. This yields a taxable value 60 percent lower than the asset would carry under the standard calculation.

The recession gutted Cook County's manufacturing belt. Numerous manufacturing companies either closed their doors for good or relocated to nearby Indiana, recruited with the promise of a feather-weight tax burden. The migration left a glut of vacant facilities in its wake, driving market values and the assessment base into a downward spiral.

As the market and occupancy rates plummeted, local tax rates spiked, exceeding 35 percent in some suburban municipalities. Without reinvestment in their communities, these municipalities could never recover, and the tax rate would not recede. The most valuable economic development tool available to these municipalities was the property tax incentive.

Crossed purposes

Over the past several years, the Cook County Board of Commissioners has suffocated the utility of the incentive program by imposing wage and other labor requirements on owners and operators of incentivized real estate. Most recently in March, the Commissioners imposed a "prevailing wage requirement," which mandates that any property that receives an incentive after September of this year must" pay all laborers ,workers and mechanics engaged in construction work not less than the prevailing wage paid for public works."

The new rule is expected to increase construction costs by 30 percent. Additionally, the new ordinance mandates participation in federally approved apprenticeship programs. Moreover, the change adds burdensome administrative costs to the incentive holder, which must keep detailed records of employee wages, contractor wages and other minutia. They must make quarterly reports to municipal agencies, or else live under the threat of having the incentive taken away.

But why would the Cook County Board of Commissioners impose mandates that effectively eliminate any incentive benefit? The decision is even more remarkable given the strong opposition it drew from the affected communities. Thirty mayors from the south and south western suburban municipalities testified in front of the county commissioners against the most recent ordinance. Local news media, which typically refrains from dive deeps into nuanced economic development issues, came out against the proposed ordinance.

Cook County elections were March 20. Commissioners in thriving districts were not going to risk their re-election prospects on an issue that didn't affect their constituents. So, the ordinance passed.

Act now

For entities looking to take advantage of the incentive program in Cook County, the most important task is to file the incentive application with the municipality and/or Cook County Assessor's Office prior to Sept.1. Any taxpayer who is attempting to sell or lease their property should apply for an incentive now instead of waiting for a prospective tenant or buyer. If the application is filed prior to Sept. 1, the prevailing wage mandate will not apply to any construction.

It is critical to note that the expansion of a facility will also trigger the prevailing-wage mandate for the additional square footage, even if the property already has an incentive. The property owner must apply for an additional incentive for the new space. Thus, any property owner considering such an expansion should make the required filing before Sept.1.

Most property owners in manufacturing districts that rely heavily on incentives for economic development only protest tax assessments when the property is reassessed. They would be wise to appeal their taxes every year, however.

The unpredictability of the incentive program itself is enough to drive up cap rates by two basis points, which will lower market values across the board. That creates the opportunity to achieve a lower assessment on appeal. The ability to quantify these issues is critical in an appeal, and failure to do so further diminishes the value of the real estate.

Most likely, due to the unnecessary restrictions imposed on the current incentive programs, the entire existing incentive program for Cook County may be scrapped. It is unfair that certain municipalities struggling with economic development are now political carnage. Any new incentive program should put the authority in the local municipalities' hands, rather than leave it under the political machinations of the rest of Cook County.

Lifting the Veil on Chicago and Cook County Real Estate Taxes

It seems like politics watchers and the news media like to establish a veil of mystery around Cook County tax assessments. And although it sells papers and conjures an atmosphere of the unknown, the most important thing to know about tax relief in Cook County is the role of market value in assessments and how taxes are  calculated.

On June 13, taxing entities announced that tax rates in the City of Chicago would be going up approximately 10 percent. The second installment 2016 tax bills were scheduled to be published around July 1 with a very short payment deadline of Aug. 1, 2017. Those bills will reflect all changes to assessments, as well as the new tax  rates.

Tax increases make good headlines, but the increases were not a real surprise. The large anticipated property tax increases arise from a local ordinance designed to recapture a portion of the City of Chicago's and Chicago Public Schools' large budget deficits and pension plan deficits. This local real estate tax increase resulted from the absence any current resolution of the continuing budgetary stalemate between the general assembly and the governor's office in Springfield, Illinois.

The table below illustrates the potential real estate tax increase that could result from the projected 9.3 percent 2016 tax increase from the previous year's tax bills. It addresses a commercial property in Chicago which had a $10 million assessor's fair market value in 2015, considering the projected 2016 property tax increase of about 10  percent.

Projected Tax Bill
$10 million commercial property

 

2015

2016

Market value

10 million

10 million

x 25 percent assessment ratio

  

Assessed value

2.5 million

2.5 million

Equalization factor

2.6685

2.8032

Equalized assessment

$6,671,250

$7,008,000

Tax rate

6.867 percent

7.145 percent

Tax bill (increase 9.3 percent)

$458,114.74

$500,721.60

News outlets made a splash over the approximate 10 percent increase in the tax rate. However, to satisfy the needs associated with funding police, fire and schools, it is likely that there will be future tax increases over and above that initial 10 percent.

What to do? First, understand that a tax challenge is not surrounded by intrigue. Individuals can very easily appeal their assessments to the assessor. Taxpayers that present good facts and arguments following sound appraisal theory will often find some tax relief. Property owners can take a further appeal to the board of review and beyond. However, at the board level, corporate taxpayers require an attorney.

There are a number of practical arguments to consider. One is to pursue an argument based solely on the assessment as compared to the actual market value of the property, considering the contract rents in  place.

Another is taking what appears to be the opposite approach. When arguing about uniformity, taxpayers look toward the general market. In short, assessments should reflect current market rents and not necessarily the actual contract rent at the subject property.

Taxpayers should also consider market occupancy with an eye toward the limitations of the subject property. These arguments  work best when submitted to the board along with reliable appraisal evidence as supporting material.

From a practical standpoint, a uniformity argument hits close to the response that most taxpayers want, which is to be taxed in a similar manner as their neighbors or competitors in similarly situated  properties.

Most assessments are sub-arguments to the income, sales and cost approaches to determining value. The assessors and boards heavily favor the income approach for commercial properties.

Thus by understanding the limitations of the subject property, the taxpayer can argue his own case or be better able to assist tax professionals in establishing the most accurate assessment for the property. There are no smoke and mirrors required, just sound judgment.

 

jbrown kieran jennings

J. Kieran Jennings is a Partner at the law firm Siegel Jennings Co, L.P.A., which has offices in Cleveland and Pittsburgh.  The firm is the Ohio and Western Pennsylvania member of American Property Tax Counsel. Kieran can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..   Jeffrey Brown is an attorney at the law firm of Fisk Kart Katz and Regan LTD.  The firm is the Illinois member of American Property Tax Counsel.  Jeffrey can be reached at jbrown@proptax.

Illinois Property Tax Updates

Updated March 2015

The Story of Real Estate Taxes - 2015

Chicagoans should be wary about their 2015 Real Estate Tax Bills. Up to now, Chicago Taxpayers have fared much better than their suburban neighbors when it comes to real estate taxes. Tax Year 2015 may well mark the beginning of a “Perfect Tax Storm” in Chicago.

In 2015, all property lying within Chicago will be re-valued. It seems very clear that the Assessor has determined that the Great Recession has become an event of history and that most segments of the real estate market are well on the way to recovery.

Thus far, new valuation Notices have only been sent to the property owners in one of the eight townships that comprise the City of Chicago. We have been able to review the new values. On average, the assessed values in that township have increased approximately fifteen (15%) percent. Multi-family residential properties have increased beyond twenty (20%) percent, single family residences and condominiums have risen to triple digit increases in some cases. Based on what we have seen in the first townships, we have to forecast even greater increases for most of the other townships.

Real estate values are only one component in the calculation of real estate taxes. The other critical component is the Tax Rate. The Tax Rate is determined by dividing the total budgets of all the Municipal and County agencies which provide services to the public by the total taxable value of the service area. That will include school districts, police, fire, park districts and more.

In 2015 and 2016, the pension deficits of the City agencies are about to reach catastrophic proportions. The Mayor’s staff is looking to Real Estate Taxes to reduce these deficits.

A PERFECT TAX STORM!

James P. Regan
Fisk Kart Katz Regan & Levy, Ltd.
Telephone:  (312) 726-1833
American Property Tax Counsel (APTC)

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Annual Tax Hikes, Layoffs Threaten Chicago's Future

"According to the Cook County Clerk's office, the budgets for all Chicago agencies increased by nearly $75.5 million over the previous year. Practically all of the increase was concentrated in the levies of the Chicago Public Schools. The increase in the tax rate was due to the decline in property values and the increase in levies..."

Two seemingly unrelated events dominated Chicago news at midyear 2013 and underscored the deteriorated condition of local government and the economy. The first bombshell fell In early spring, when the Chicago Board of Education announced that it was closing 50 underutilized schools and furloughing 1,742 teachers and 1,387 other staff members.

The second shoe to drop — real estate tax bills — arrived in the mail at the end of June. Always a source of trauma, this year's notices delivered an unexpectedly heavy blow in the form of a 17 percent tax rate increase.

If Chicagoans fail to demand action from state lawmakers and municipal leaders to address the budget shortfalls driving these dire measures, economic recovery threatens to elude the city for years to come. But the first step toward change is to understand the funding crises behind the news.

Shrinking values, expanding budgets

Two factors that determine real estate taxes are the total value of all property within the boundaries of the taxing district, and the tax rate. In Chicago, declining property values mean taxing entities would need to increase the tax rate from previous years in order to generate the same amount of revenue collected in those years. Unfortunately, local government budgets have grown, requiring even more revenue and driving up the tax rate even further.

By law, all properties within the city of Chicago must be revalued once every three years. The most recent tax bills were based on the revaluation completed in April 2013. That revaluation determined that the aggregate value of real estate in downtown Chicago had declined 7.5 percent since the previous valuation, and values in the residential neighborhoods had dropped between 14 percent and 20 percent.

According to the Cook County Clerk's office, the budgets for all Chicago agencies increased by nearly $75.5 million over the previous year. Practically all of the increase was concentrated in the levies of the Chicago Public Schools. The increase in the tax rate was due to the decline in property values and the increase in levies.
An office building just west of the Loop's financial district illustrates a typical tax impact on a commercial property. The 10-year-old, 400,000-square-foot building was originally revalued at 20 percent more than the prior year's valuation. After appealing, the value was finally set at a 1 percent increase, but because of the increase in rate, the tax bill increased to approximately $3,196,900, up by $343,200 over the prior year's bill of approximately $2,852,700.

A study in schools

Why the increase in school district taxes? After a stormy negotiation period, the Board of Education and the Chicago Teachers Union agreed on a new three-year contract that was ratified by all parties in December 2012. A few months later, the board announced 50 school closures and faculty layoffs.

The schools scheduled for closing were almost exclusively located in the poorer sections of the city where gang activity and indiscriminate shootings have proliferated. Parents are concerned about the safety of their children, and they have mounted strong opposition to the closings. Some have filed a lawsuit attacking the legality of the closings.

The board is blaming a $1 billion budget deficit for the budget cuts and the personnel layoffs. Pension costs alone have increased by $400 million to a total of $612 million for this year, and along with the new teachers' contract have contributed mightily to the deficit.

In 2011, Moody's Investors Service calculated the unfunded liabilities for Illinois' three largest state-run pension plans to be $133 billion. There can be no doubt that that number has increased significantly over the last year and a half. Like the U.S. Congress, the Illinois Legislature has been unable to make the tough decisions necessary to fund the pension deficits. In desperation, the governor has ordered that the salaries of the Legislature be withheld until they can agree on a pension plan. The response of the Legislature was not to address pensions but to file a suit against the governor on the grounds that his order was unconstitutional.

In addition to the board of education's pension problems, according to a local newspaper, the City of Chicago must make a $600 million contribution to stabilize police and fire pension funds that now have assets to cover just 30.5 percent and 25 percent of their respective liabilities. Without an agreement with the state, the deficit could rise to $1.15 billion in 2016.

Chicago has suffered greatly from the recession. Over the last 25 years, the aggregate value of real estate in the Central Business District has never before declined in a revaluation. Since 2009, however, the vacancy rate for office buildings in the Loop has stubbornly hovered around 15 percent, squeezing property cash flows and asset values. These conditions will continue until the city's unemployment rate of 9.8 percent declines significantly.

The increased tax rates and the school closings have coalesced into tangible issues to which Chicagoans could respond, but they are only symptomatic of much deeper problems that must be addressed. If left unaddressed, tax rate increases and layoffs will become an annual occurrence.

JR90James P. Regan is President of Chicago law firm Fisk Kart Katz and Regan Ltd., the Illinois member of American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it..

What Revaluation Means for Chicago

"In Chicago specifically, the most telling statistic may be the lack of property sales. From an average of 50,000 to 55,000 Cook County sales per year in the boom years, sales in the last three years have not exceeded 5,500 per year..."

By James P. Regan, Esq., as published by National Real Estate Investor - Online, September 2012

Cook County, Ill. systematically revalues all properties for taxation every three years, and 2012 is the reassessment year for Chicago. The last revaluation took place in 2009, shortly after the collapse of Lehman Brothers and the beginning of the Great Recession. The county has already sent reassessment notices to real estate owners in the northern sections of Chicago and will notify those in the rest of the city of the proposed assessed value of their properties over the next six months. The 2012 assessment will be used to determine each Chicagoan's real estate taxes through 2014.

Homeowners and business owners alike should pay close attention to this year's revaluation. Real estate has undergone a significant value loss since 2008, and that alone makes the 2012 revaluation a defining event for Chicago's property owners.

Assessment officials strive to make the process as transparent as possible, and the notices contain a wealth of information about the property and its assessment history. At neighborhood meetings throughout the city, officials stress that the proposed 2012 assessment contained in the notice is only the first step in a process, and that every taxpayer has the opportunity to provide evidence which shows that the proposed assessment inaccurately reflects the property's value. The assessor calculates values using mass appraisal techniques applied to data amassed on all segments of the city's real estate markets, but recognizes that each property is unique and that market data can be made more precise by information provided by the property owner.

Despite the efforts at transparency, the process of producing a final tax bill is not restricted solely to valuation. The budgets of local agencies funded by real estate taxes affect the bill as well.

The assessment process

Real estate taxes are an ad valorem tax, or dependent upon how much the property is worth. Illinois relates taxes to the fair cash value of the property. Simply said, the assessor must determine how much the property would have sold for as of Jan. 1, 2012. The primary purpose for assessment valuation is to determine the fair share of taxes and to assure that each property is uniformly taxed in accord with its value.

Value loss must be considered in that context. The real estate markets—residential and commercial—were at the heart of the boom of the last decade. In the last three years real estate has, in turn, felt the full force of the burst bubble. According to the Moody's REAL Commercial Property Price Index, as of the first quarter 2011, office, industrial, apartments and retail properties had all fallen back to 2003 value levels.

regan reevaluationChicago

In Chicago specifically, the most telling statistic may be the lack of property sales. From an average of 50,000 to 55,000 Cook County sales per year in the boom years, sales in the last three years have not exceeded 5,500 per year.

Office vacancy rates in the Central Business District have gone from 11.5 percent in 2008 to more than 20 percent as of the first quarter of 2012, according to MB Real Estate Services. Concessions and rent abatements continue for new tenants.

Retail rents declined from $18 per sq. ft. in 2009 to $16 per sq. ft. by 2011, according to Colliers International. And the S&P/Case-Shiller Home Prices Indices show that Chicago condominium prices in 2010 had fallen to 2002 levels, and that home prices closely followed the downturn in condos. Home prices were down 18.7 percent on an annual basis.

One could strongly argue that the decline in value, together with the paucity of sales, demands new methods to arrive at fair cash value. Income data is available to determine values more accurately determine, even for the residential and condo markets, and extraordinary times require extraordinary solutions.

The budget process

The other contributor to the real estate taxpayer's bill is the aggregate budget requirement of local schools, police, fire, county, city governmental, park districts and libraries, which determines the dollars that must be collected from real estate taxes. The assessment determines the proportion of that aggregate amount the individual taxpayer owes, based on property value.

Chicago's usage classifications further obfuscate the process: Residential properties are assessed at 10 percent of value while commercial properties are assessed at 25 percent. That triggers a state equalization factor, which is included in the computation of every taxpayer's bill. Experienced tax counsel can help taxpayers evaluate all these factors and determine whether to protest their assessment.

reganJames Regan is the managing partner of the Chicago law firm of Fisk Kart Katz and Regan, the Illinois member of the American Property Tax Counsel. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

The Adventures of Valuation

The unique characteristics of a low-income housing tax credit project make it difficult for assessors to apply standard market value definitions and approaches in making a fair assessment.

By Stewart L. Mandell, Esq., as published by Commercial Property Executive, July 2011

Can you visualize how your tax appeal attorney would address an assessor's sales-comparison based property valuation? What if your attorney were Sherlock Holmes? Holmes sits at his desk as Watson enters. "Holmes, old boy, look at the assessor's valuation report on the Franklin Office Center, a multi-tenant office building. The assessor's fl awed cost approach is no surprise, but who would have expected a comparable-sales analysis with five sales to justify a sky-high value as of Jan. 1, 2010?"

Holmes chuckles as he quickly digests the report. "There is nothing here that should trouble you, my dear friend. Our evidence and my cross examination of the assessor will result in a compelling closing argument and a sizable assessment reduction."

"You already know how you'll address these sales?" asks Watson with astonishment.

"Why, of course," says Holmes, rising. "Here's how I'll summarize this in my closing statement: Your Honor, Sale No. 1 obviously is not a valid comparable, given the October 2007 date of sale. As our appraiser testified, from the market's peak in October of 2007 until January 2010, office building values in the area declined more than 40 percent. "You could make a market condition or time adjustment for that reason, and it would be something in excess of 40 percent. But the sale should be rejected because 2007 market conditions were so extremely different from what existed on Jan. 1, 2010. This sale is no more useful than one where the seller exercises an option to buy that was part of a lease agreement negotiated five years earlier."

Selecting his favorite meerschaum from the mantelpiece, Holmes continues: "Sale No. 2 must be rejected on the same grounds as Sale

1. Initially, the assessor made much of the fact that this sale closed on Sept. 16, 2008, which was after the start of the Great Recession, the Bear Stearns collapse and Lehman Brothers' bankruptcy filing.

"On cross examination, however, the assessor admitted that the parties executed the purchase agreement on March 7, 2008. That was well before both the valuation date and the point when the values of offi ce buildings plunged like Professor Moriarty descending the falls at Reichenbach." Having filled his pipe, Holmes turns toward the window.

"Sale No. 3 is irrelevant," he resumes. "Oh, it closed during the last quarter of 2009, near our valuation date, but there is one detail the assessor overlooked: This property was 100 percent leased to one of the 10 largest companies in the country, with 10 years remaining on the lease term. The assessor valued the landlord's interest, also known as the leased fee, and not the fee simple interest. The rent that produced this sizable sale price is well above Jan. 1, 2010, market rents. And in our state, valuation using a leased fee interest and above-market rents is unlawful." The strike of a match punctuates this last revelation.

"Sale No. 4 not only shares the fatal fl aw of Sale 3, but is even less defensible because it is a sale of a leased, built-to-suit property. Here, one of the country's most successful companies had arranged for construction of a facility to its exact specifications, and ultimately an investor acquired not just the property but also the tenant's 35-year lease.

"Of course, the rent is based on the contractor's cost and is unrelated to current market conditions. Not only was the transaction purely financial but as our appraiser's empirical data showed, built-to-suit properties such as this include significant costs that will not increase the property's sale price when subsequently sold." The atmosphere in the room begins to resemble the fog outside the window.

"Sale No. 5 is a sale-leaseback transaction. Town of Cunningham v. Property Tax Appeal Board, a 1992 Appellate Court of Illinois decision, is one of a number of decisions that confirm why this sale is irrelevant. "In the Cunningham case, the property owner initially listed the property with a sale price of $6 million, as well as a leaseback provision that would pay annual rent ranging from $200,000 to $250,000 for a term of 10 to 15 years. Ultimately, the property sold for $9.3 million plus a 15-year leaseback, with annual rent at $615,000. Obviously, the sale price and lease terms were directly related, with a higher rental stream producing a higher sale price. As the court concluded, this was a financing transaction, and the purchase price was unrelated to the property's market value."

Holmes bends to address his companion, seated beneath the swirling cloud. "In short, Your Honor, the assessor's sales-comparison approach is not worth the paper on which it is written."

Clearly, if owners are to achieve fair property tax valuations, they and their attorneys must dig deeply into comparables used by assessors. And that is elementary.

MandellPhoto90Stewart L. Mandell is a partner in the Michigan law firm Honigman Miller Schwartz and Cohn L.L.P., the Michigan member of the American Property Tax Counsel, the national affiliation of property tax attorneys. He can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

American Property Tax Counsel

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