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Commercial Landlords: Brace for Big Tax Hikes

By Gary Smith
11/11/2019
Commercial Landlords: Brace for Big Tax Hikes

In Cook County, the property tax burden has shifted to commercial and industrial properties and away from homeowners.

The new Cook County assessor, Fritz Kaegi, began the process of reassessing properties in Cook County when he took office in January. The process started in the northern suburbs and has been completed for eight of 13 townships that stretch from Evanston to Barrington Hills.

According to the Cook County Assessor’s office, the total assessed value of all residential property increased 16.7%, to $8 billion. The total assessed value of commercial and industrial property rose to 89.9%, to $5,80 billion.

How Capitalization Rate Impacts Assessments

At a meeting in Evanston in April, the new Cook County Assessor Fritz Kaegi attributed the increase in commercial assessments to a decision by his office to reduce the capitalization rate assumptions for commercial and industrial properties. During the last assessment in 2016, the capitalization rate assumption used was 11.95%. For the 2019 assessment, they used 6%.

The capitalization rate refers to a property’s net operating income divided by its price, which is its value. This rate varies by property type, but generally can be estimated by analyzing recent sales of comparable properties. Kaegi claims the 6% cap rate is more aligned with the private market.

Landlords and brokers have expressed concern that these tax hikes are scaring away investors, who are wary because they don’t know how much the property taxes will rise in some of these areas. Property taxes are often a landlord’s biggest expense.

How the Whole Tax Bill Is Calculated

The property assessment, which is what the county assessor estimates the property is worth, is just one in a number of variables on the property tax bill. Just because a property’s assessed value increases by 8%, doesn’t mean the property owner will see an automatic 8% tax hike.

For instance, if the assessed values of other properties in the area rise by more, a property’s taxes might go down.

How much money local governments, including municipalities and school districts, need also goes into the tax bill, and then there’s the equalization factor, which is a multiplier determined by the state to achieve uniform property assessment. The assessed values are important because they determine how the tax burden is distributed among property owners.

The Cook County Assessor’s office will reassess the south Cook suburbs in 2020 and Chicago proper in 2021.

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