A property tax revolt of a quiet kind is underway in many parts of the country.
But instead of pitting placard-carrying homeowners against maligned municipal officials, this revolt matches high-powered real estate consultants against local taxing authorities in sometimes complex legal proceedings.
Real estate experts across the country increasingly are being asked by commercial owners to review their real estate portfolios with an eye toward reducing the property taxes collected on them.
As a result, property tax services is emerging as an in-demand specialty in the real estate industry, a specialty that consultants, accountants, attorneys and brokers are moving to fill.
The increase in the number of commercial owners seeking property tax relief can be traced to the softness of the office market in many areas of the country, a softness that has spilled over into retail and industrial property as well.
Effective office rents have fallen for several years in most metropolitan areas as landlords have aggressively competed for tenants by offering concession pacakges that have run as high as 40 percent off asking rates.
Lower rents meant lower values for the buildings as investors became wary of paying high prices-if they were willing to buy at all-for office property in markets where vacancies were often 20 percent or more.
”Property tax is a major issue right now. We have 14 people who specialize in nothing but property tax valuation,” said Bruce Richman, director of the real estate advisory team in the Chicago office of the accounting firm of Coopers & Lybrand.
”A lot of corporations don`t realize that the second largest tax bill they pay after income taxes is real estate taxes,” Richman said. ”In this marketplace, if values of real estate really are declining, the first thing I should be concerned with is paying too much real estate tax.”
Richman said a number of financial institutions that hold significant amounts of foreclosed real estate have hired Coopers & Lybrand to review their portfolios for property tax purposes, the implication being that if the lender had to take the property back, it must be worth less than its last market assessment.
”It`s also going to be an issue for the (government), which has taken back a lot of property in the savings and loan bailout. These properties can`t have the same value they had before they were taken back,” Richman said.
”There are also owners of large portfolios-developers, pension plans or other institutions and foreign investors who may not be all that aware of property tax issues-that we are assisting in seeking reductions,” Richman said.
Coopers & Lybrand is just one of dozens of accounting, real estate and other private firms that have added a property tax component to its service portfolio in recent years. In Coopers & Lybrand`s case, the unit can provide everything from appraisals to negotiation services with assessors to expert testimony in assessment appeal lawsuits.
Ernst & Young has a similar property tax consulting service. Earlier this year, the company surveyed 2,200 real estate executives across the country to gauge their feelings on the property tax burden.
The study found that most businesses do little to reduce their property taxes, even though they spend considerable time and money attempting to reduce income taxes.
That is partly explained by the response of 64 percent of those surveyed who felt their real estate assessments were fair. Only 22 percent of the respondents said they thought their tax assessment was too high, with 3 percent saying it was too low.
In Cook County, however, the equity of the property tax system has been a subject of heated debate for several years.
The Building Owners and Managers Association of Chicago in December of 1987 issued a white paper on the problems of the assessment of property in downtown Chicago, calling the process of taxing property in Cook County
”complicated, political and disproportionately borne by our office tenants.”
Last year, a Civic Federation study of data from 1977 to 1987 found that the effective tax burden on Cook County homeowners was just 1.5 percent of full market value. But the effective rate on commercial property was 5.4 percent, and for industrial property it was 4.8 percent.
”Real estate taxation, especially in Cook County, remains a hot topic for attorneys who have become inundated with calls for help from their taxpaying clients,” said John K. Morris, chair of the Chicago Bar
Association`s Real Estate Taxation Committee.
Reflecting the growing importance of property tax appeals, more than 120 attorneys, appraisers, real estate brokers and consultants attended a recent seminar on the appeal process sponsored by the Chicago Board of Realtors.
If large numbers of commercial property owners were to be successful in winning huge assessment reductions in Cook County, it would certainly translate into higher property taxes for homeowners, many of whom are already complaining about escalating real estate taxes.
That`s because the amount of tax money needed to be raised per the levies of the various taxing bodies does not change even if individual taxpayers see assessments lowered. Someone has to make up the difference.
”There have been low returns on offices over the decade. The result is that there is a lot of unsalable property until there is a price adjustment downward,” said Jared Shlaes, director of special real estate services for Arthur Andersen & Co. ”Assessors have to resist downward adjustments because of the declining tax base that that would entail.”
To fill the vacancies in a city like Chicago, either tenants will have to be lured from out of town or new businesses will have to be encouraged to start up, Shlaes said.
”And property taxes are the biggest discouragement at the local level to both of those,” he said.
Unless the owner is also the tenant, real estate assessment reductions on commercial buildings do not benefit the owners of those buildings as directly as they benefit individual homeowners.
In today`s market, virtually all of the operating costs of a commercial building are passed on to the tenants. Any increase in property taxes, which are passed through directly to tenants, translates into increased occupancy costs for the companies in the space rather than for the building owners.
Similarly, when building owners win reductions of assessments, they benefit only indirectly. Owners who can pass on lower property taxes than competing buildings will have a bigger edge in the fierce competition for tenants.
There is little to distinguish most of the top-of-the-line office high-rises downtown in terms of the property taxes they pay. The average tax per square foot per year is $7 in Class A space downtown, but drops to $4.50 per foot for lower Class B space, according to a study of the Chicago office market by Real Estate Research Corp.
The Sears Tower, where property taxes come in right on the $7 per square foot average, has 3.6 million square feet of rentable space. That translates into a tax bill of more than $25 million per year.
The Sears Tower was on the market in 1989 and its asking price reportedly was more than $1 billion. One of the reasons the 110-story building was not sold, according to real estate sources, was that potential buyers feared the sale would send property taxes on the building skyrocketing.
”The taxes on the Sears Tower have always been one of the highest in the city,” said Philip Chinn, vice president and national manager of Sears Roebuck & Co.`s corporate property operations. ”But the taxes have steadied lately to about $7 a foot, which is would you expect them to be.”
Class A suburban office users in Cook County pay about $4 per square foot in real estate taxes, but their counterparts in Du Page County pay only $2.50 per foot, the RERC study said.
But in 1986, taxes were much lower. BOMA found that the average real estate tax cost in the central business district for both Class A and B space was about $3 per square foot that year versus $1.60 for suburban space.
It is the county assessor`s job to determine the value for tax purposes of every piece of property within the county. It is the assessment that determines what proportion of the total tax bill is placed on each property owner.
The assessor, however, does not determine how big that tax bill is. Each taxing body decides that on its own through its request for tax dollars, called its levy.
”We should be on the line for the accuracy and fairness of our assessments,” said Richard Vanecko, chief deputy assessor in the office of Cook County Assessor Thomas Hynes.
”If the assessment is not equitable, then we`re to blame, not for what the taxes are but for the inequitable share of taxes being paid by that homeowner,” he told those at the Chicago Board of Realtors seminar.
There are 1.58 million parcels of real estate in Cook County that must be taxed every year. They include everything from vacant lots to brick bungalows, dry cleaning stores to machine tools shops, suburban dental offices to downtown corporate headquarters.
In theory, most residential property in Cook County is assessed for tax purposes at 16 percent of its market value. Residential property with seven units or more is assessed at 33 percent. Vacant and unused land is assessed at 22 percent of fair market value.
Commercial property is assessed at 38 percent, industrial at 36. Tax incentives are available for some commercial and industrial projects, which can lower the assessment level for a specified number of years.
A state multiplier is used to calculate an equalized assessed value, a number that is designed to even out assessment inequities throughout the state.
To fill the levies of the taxing bodies, the assessor calculates the tax rate per $100 of equalized assessed valuation that is needed to do the job. The collector then bills the owner accordingly.
Taxpayers unhappy with those bills may contest their assessments, first in the assessor`s office and, if unsuccessful there, with the Cook County Board of (Tax) Appeals. The appeals board is a quasi-judicial body with the limited power to review the decisions of the assessor acting only on cases brought before it by taxpayers themselves.
The appeals board receives requests for review from about 2 percent of the properties each year, or an average of about 35,000 per year, said chief deputy commissioner Thomas Jaconetty. But in 1989, the board received more than 39,000 appeals.
”It is not uncommon to review and decide appeals on 400 parcels a day at times,” Jaconetty said.
Of those taxpayers who seek relief from the appeals board, about 30 percent do receive some type of reduction, Jaconetty said. Homeowners, who account for about 55 percent of the appeals each year, win reductions about 48 percent of the time, he said.
The board has the power to increase or decrease an assessment without limit, though Jaconetty said incidences of assessment increases are rare.
(Homeowners could, for instance, appeal that the assessment on a local business is too low, thereby adding to the tax burden of the homeowners.)
”Commercial appeals tend to be the most difficult and some owners are appearing before the appeals board only because they are pursuing a remedy in court,” Jaconetty said. By law, property owners cannot appeal an assessment case to a county court until all administrative options have been exhausted.
”An unusually large vacancy in one year does affect value, but it depends on how it is presented as to how much of an effect it will have,”
Jaconetty said.
”If there was a fire, a demolition or a bankruptcy of a tenant, things out of control of the owner, then the board would be lenient. But that is not so when there is a voluntary business decision to make a part of the property unused for whatever reason,” he said.
The board has a variety of methods to help determine value. It can look at the actual income of a project compared to its potential income, it can examine the actual vacancy rate versus what was projected, or it can rely on certain accepted market values known as cap rates, a financial formula for translating the future income expected from a project into a present value.
But properties can be valued in more down-to-earth terms, as well. Theaters and restaurants may be assessed on a value per seat, truck terminals may have a worth of so much per docking door, bowling alleys can afford so much per lane and grain elevators are worth so much per bushel stored.
Taxpayers who believe their assessments are excessive and who do not gain relief from the board of appeals may file lawsuits seeking a reduction.
But Lawrence Brodsky, a tax and real estate attorney with Holleb & Coff in Chicago, said that for taxpayers to win such a suit they must prove one of several contentions: 1) that the assessed valuation is so excessive as to amount to an unconstitutional taking of property, 2) that the assessment was made without ascertaining relevant facts or in ignorance of known values, 3)
that the assessor`s office violated its own rules, or 4) that the assessment violates the uniformity of taxation provision in the Illinois Constitution.
Brodsky said about 2,000 tax assessment cases are filed each year in Cook County, but that it can take two or three years for a case to wind its way through the courts. About 40 percent of all cases are settled before they go to trial, he said.
”In all cases, the taxes are presumed to be just and the burden rests on the taxpayer to show their invalidity,” Brodsky said. ”And the taxpayer does have a very, very difficult burden. A mere difference of opinion (on values)
is not enough. You must show not only that the valuation is (substantially)
excessive, but must show that it was not made in an honest manner.”
