Are Cook County Owners Prepared For Massive Property Tax Increases?

When commercial property owners in Cook County receive their next property valuations, they may be in for a shock. Proposals made by Fritz Kaegi, the county’s new tax assessor, could raise the valuation of some properties by 200%, massively increasing taxes.

These increases won't go into effect until next year, but as owners wait for their new valuations, the uncertainty surrounding what 2020 tax bills will look like in Cook County is impacting real estate investing in the area. 

“The uncertainty is real,” said Peter Verros, partner at Chicago law firm Verros Berkshire. “We have already seen a few deals postponed or canceled because of the uncertainty around the assessment process. When potential owners don’t know how much they will have to pay in property taxes, a potential asset becomes far less desirable.”

With the future of commercial real estate in the county hanging in the balance, Cook County’s CRE professionals need to prepare for new valuations. Bisnow spoke to property tax lawyers Verros and Ellen Berkshire to find out the steps owners and investors can take to adjust to the new normal in Cook County. 

Bisnow: Why did the tax assessment system need changes?

Berkshire: When valuations are issued, some owners choose to appeal their valuations to reduce their tax burdens. Because individuals and entities with more resources and income were more aggressively pursuing tax appeals, the disparity between pre-appeal and post-appeal assessments negatively impacted certain asset classes. The exact methodology applied by the Assessor’s Office was sometimes shrouded in mystery.

Verros: Property taxes are essentially a “regressive tax,” placing higher proportional tax burdens on lower earners. There was a perception that the tax appeal process worsened this regressive nature in Cook County. 

The previous system was perceived to have a lack of transparency from both sides when it came to the issuance of assessments and the processing of appeals.

Bisnow: What are the key changes Kaegi has proposed? 

Berkshire: Assessor Kaegi established a “100-Day Initiative and Objective” vision, a strategic plan to improve efficiency and assessment methodologies, as well as increase transparency. 

Verros: He has made the appeals process somewhat more stringent by increasing the disclosure requirements on income-producing properties and requiring appraisals for appeals related to owner-occupied commercial properties with a market value above $500K.  

Assessor Kaegi has been active in advancing legislation in Springfield that will require mandatory disclosure of income and expense information for income-producing properties and penalizing those that don’t comply.

In areas that have already been reassessed, valuations for commercial and industrial properties have increased at a much higher rate year over year compared to single-family homes and condominium values. 

Bisnow: How could this impact the future of CRE in Cook County? 

Berkshire: Some of the new proposed assessments for properties have raised valuations from 20% to 200%, which could result in significantly higher property tax bills. These increases are not quite predictable, so commercial property owners may have difficulty projecting future tax burdens related to property taxes and may need to make significant adjustments to their operational budgets.  

This could also put a freeze on investment in Cook County real estate. As property owners evaluate whether to add assets to their Cook County portfolios, they may be wary of entering an arena of rapidly increasing values and unpredictability.

Verros: CRE owners and taxpayers will likely bear more of the overall tax burden as assessments for CRE assets are increasing disproportionately to residential assessments. Tax appeals will require a higher level of planning, analysis and disclosure.

To complete effective reviews and appeals, taxpayers will need to prioritize communication with their tax appeal teams and be open to creative deal structures that clearly address property tax implications while balancing accounting, federal tax and other concerns. The good news is that a thoughtful property tax strategy can provide a competitive advantage while the market reacts and ultimately adjusts to the new changes.

Bisnow: What steps can property owners take to lessen the impact?

Verros: Owners should involve a property tax team as soon as possible and keep the lines of communication open throughout a deal. The more intimately a property tax team is involved in the deal planning process, the better the team can advise. Strategies that address real estate tax implications can help minimize risk and uncertainty. 

Berkshire: We also recommend that commercial property owners reach out to county board members and state legislators regarding the potential negative impacts of the assessor's proposed values.

Commercial owners also need to communicate with their tenants about possible tax increases. The increased taxes will not hit until around June of 2020. Giving tenants an opportunity to make adjustments for the predicted tax increases can help preserve tenancy.

Verros: Owners and investors filing appeals should work with a team that has extensive litigation experience, as they may have to fight a little harder for relief. They should consider placing extra attention on lease and purchase and sale agreement language as it relates to real estate taxes. Now is the time to adapt to the changing environment and get real advice that is based on this new reality.

This feature was produced in collaboration between Bisnow Branded Content and Verros Berkshire. Bisnow news staff was not involved in the production of this content.