High property taxes have been discussed for years as the reason why Illinois residents are fleeing the state. And reports are showing the monetary shortfall from commercial building sales as well.
Investors Look Elsewhere for Property
High property taxes are depressing property prices and that is not just in the residential market. Single-property sales of commercial buildings in metropolitan Chicago fell 33 percent in the first nine months of 2019, and that slump in demand is now depressing property values in the commercial market.
While sales prices have declined in Chicago-area properties, in other major cities such as Boston, Houston, Los Angeles, and San Francisco had sales prices rise 10 people or more.
The other consideration by investors is the recent change in Cook County Assessors. Fritz Kaegi was voted in on a platform of reform and has since raised assessed valuations on commercial real estate, leaving landlords to assume that the increased assessments will lead to higher property tax bills.
The assessor’s office uses a mass appraisal system, which is different from an investment appraisal. The mass appraisal system looks at similar properties, market vacancy, rent, and expenses, determining the average levels for the inputs whereas investment appraisal is looking at the unique characteristics of the property to determine a specific value.
In addition, the assessor’s office uses an unloaded cap rate when assessing commercial properties, which means net income after real estate taxes are capitalized by the market cap rate. Other jurisdictions use a loaded cap rate, which is net income before real estate taxes are capitalized. This means that Cook County’s tax rates are not fixed and instead change based on local levies and equalized assessed value.
This makes it difficult for landlords to plan for rent increases to help cover the cost of owning the building, especially since Illinois property taxes are for the year prior to payment.
Illinois Gov. Pritzker created a task force at the end of last year to study why Illinois ranks second highest on property tax rates in the nation, trailing just New Jersey by five one-hundredths of a percentage point. The task force is also charged with providing recommendations; however, their report was due Dec. 31, 2019, and it has yet to be released.