'No One Is Going To Buy' — Multifamily Investors Say Spiking Valuations In Rogers Park Will Kill Deals

Cook County Assessor Fritz Kaegi mailed out the latest assessed property values for Chicago’s Rogers Park neighborhood earlier this month, and many multifamily owners have sticker shock.

Sal Becovic, whose family owns several dozen multifamily properties in the area, Chicago’s northern-most neighborhood, said some of their buildings were assessed at double, and sometimes almost triple, the values recorded during the last assessment in 2018. 1608 West Sherwin Ave., an 84-unit apartment building, was valued at about $2.7M three years ago, when the assessor’s office was run by Kaegi’s predecessor, Joe Berrios, but the value was just reset to $7.5M.

“I expected an increase, but not an almost [triple] increase,” he said.

The assessed values will help eventually determine how much in property taxes owners have to pay. The higher the value, the more landlords will pay when the city, the Chicago Public Schools and other taxing bodies set their rates in 2022. That has introduced unpredictability to the Rogers Park multifamily market, according to Becovic, and potential buyers are now hesitating to pull the trigger on additional investments.  

“It could give the market a heart attack,” he said. “The most important expense, and you don’t know what it’s going to be.”

Cagan Management Group Chief Operating Officer Michael Daniels said his firm owns or manages about 250 units in the lakeside neighborhood, and it saw its buildings’ assessed values increase between 30% and 110%. Another property the firm is eyeing as a potential purchase got hit with a value more than 200% higher. That led Daniels to have second thoughts about the investment.

“No one is going to buy anything in Rogers Park right now,” he said. “The only way to alleviate this concern is predictability.”

Rogers Park is the first Chicago township to get its reassessment under Kaegi; reassessment happens every three years. Kaegi’s office will roll out reassessments for the city’s seven other townships later in 2021, so even though Rogers Park is a tiny slice of Chicago, what happens there, especially whether owners can successfully knock down their assessments on appeal, could set the tone for the rest of the city.

“The spotlight is on what’s happening in Rogers Park right now,” Becovic said.

Kaegi, formerly a financial manager at Columbia Wanger Asset Management, said his new approach is more in line with the assessment profession’s national standards. A 2020 report from the International Association of Assessing Officers found Berrios’ office in 2018 significantly under-assessed commercial properties, leading to an unfair tax burden on homeowners, and did not follow IAAO’s recommended methods.

That bolstered a 2018 report by nonprofit news site ProPublica Illinois, which found commercial property landlords were given breaks by Berrios. The controversy helped fuel Kaegi’s 2018 run for the assessor’s office, his first political campaign, and he defeated Berrios after promising to revamp how assessments were done. Chief among his campaign promises was to rebalance the tax burden between local homeowners and commercial landlords.

And although that probably means many commercial owners will see a bump up in taxes, it will also give them the predictability they say is essential.

“There was nothing predictable about the way assessments were done [under Berrios] except that they were unpredictable,” Kaegi told Bisnow. “This office has never been more predictable about how it makes assessments than right now.”

The latest assessments have shown that commercial properties such as large multifamily properties were severely undervalued, Kaegi said. The office’s data teams calculate fair market values by collecting information from commercial property services such as CoStar and Trepp, interviewing local owners and estimating rents, vacancy rates, expense rates and cap rates for each property. Lower cap rates boost a property’s assessed value, and that’s where they found most of the problems with Berrios’ methods.

“They used double-digit cap rates in Rogers Park, and that’s not a thing,” Kaegi said. “If you’re looking for a driver of change, that’s it.”

Kaegi estimated cap rates for multifamily properties in Rogers Park were 5.0% for the neighborhood’s seven large institutionally owned properties and between 6.0% and 8.0% for the 792 other multifamily buildings with seven to 171 apartments. Those estimates more accurately reflect the properties’ true cap rates, he said.

And the new procedures made a difference.

The total 2018 assessed value of Rogers Park, including residences (classified as single-family homes and condos), retail outlets, industrial buildings and multifamily properties, was $636M, and residences accounted for $440M, or about 69% of the total. Multifamily buildings of seven or more units totaled $103M, about 16% of the neighborhood’s entire value.

But in the most recent assessment, the value of Rogers Park homes and condos, estimated at $521M, was 61% of the total, while large multifamily buildings nearly doubled in total value to $196M, or 22% of Rogers Park’s value.

That means the neighborhood’s small homeowners will overall pay a smaller share of the taxes next year when rates are decided, according to Kaegi, and the difference will be picked up by commercial owners, especially multifamily landlords, whose properties were the most undervalued. He said he expects to see roughly the same pattern in the rest of the city.

Owners can file appeals until mid-July, first with the Assessor, then with the Cook County Board of Review, if they feel numbers are off.    

“We’re supposed to be a mirror to the market, and if we’re assuming numbers not in line with the market, tell us,” Kaegi added. “We always stand ready, and humbly, to be corrected.”

One thing both Becovic and Daniels agree on is that the Kaegi has been transparent and willing to listen. The assessor holds an annual analyst day, gathering hundreds of commercial real estate stakeholders together, and presents data underlying the most recent assessments, along with a step-by-step analysis of how the assessment process will play out.

“The reason we have market analyst days is to show the math,” Kaegi said.

Perhaps just as important for Becovic and other Rogers Park owners was Kaegi attending a webinar held last week, just days after those painful assessments hit, by the Rogers Park Builders Group, an advocacy group that promotes neighborhood development.

“I think everyone felt he was listening, and that there will be further conversations where we help him understand what it takes to run a building,” Daniels said.

“I could never imagine Berrios, days after the gauntlet was thrown down, coming out to defend himself in a webinar with the Rogers Park Builders Group,” Becovic said. “What we appreciate is Fritz Kaegi and his team right away were willing to take questions and criticisms head-on.”

But that doesn’t mean the landlords are satisfied. Becovic said Rogers Park provides thousands of affordable apartments in a beautiful lakefront location, and higher property taxes could disrupt what makes it a special neighborhood, the city’s most diverse.

More than one-third of the neighborhood's roughly 54,000 residents spoke a language other than English at home in 2018, according to a study of the American Community Survey by the Institute for Housing Studies at DePaul University. In addition, 20.6% were Hispanic or Latino, 26.3% were Black, 5.4% were Asian and 43.9% were White.

“There is a lot of naturally affordable housing there, apartments that are not [income] restricted in any way, they’re just owned by longtime owners who aren’t very aggressive,” Becovic said.

“We need to make sure we take that into account,” Kaegi said.

He added that Berrios typically understated the values of large, institutional properties more often than mom-and-pop buildings, so the latter are seeing much smaller increases to assessed values. And when owners file appeals, they must provide detailed financial information, and if properties’ rents are lower than first estimated by the assessor’s office, or if the expenses are higher, the initial assessed value will come down.

If Rogers Park has the same experience as the north and northwest suburbs, the property tax bite may not be so bad.

The 2019 reassessment of that region boosted the total value of commercial and industrial buildings to $5.89B, a nearly 90% increase, according to Kaegi’s office. The residential value went up to $8B, a more than 16% increase.

But when the tax bills arrived the following year, the municipalities and other taxing bodies dropped their rates, so residential tax bills increased just 1.1%, and the owners of commercial and industrial properties paid 15.8% more, according to the Cook County Treasurer’s office.

A 15% tax hike won’t ruffle Becovic too much.

“It’s not going to turn my business upside down,” he said.

But he added that he will adopt a wait-and-see attitude while he and other owners appeal the new assessments.

“Guys like me, who have scale, will probably be able to get through it, but this could end up wiping out a lot of family businesses that own one or two buildings, or to avoid being wiped out, they’ll have to raise rents. This could be a disaster show.”

In the meantime, like Daniels, he’s having second thoughts about buying in Rogers Park, at least for now. He’s doing a walkthrough of a neighborhood building on Friday, he said, and although he likes the building, even after factoring in a potential property tax increase of about 20%, he’s now uncertain.

“We’re in this limbo,” he said. “But sometimes you’re willing to overlook things if [a building] captures your heart.”