Property Tax Insights
Donald T. Rubin
As a result of the unprecedented assessment increases to commercial and industrial property values in Cook County, how will lenders deal with the resulting impact on their borrowers' tax liabilities? How will they respond to borrowers who claim they cannot meet their lender's call for substantial upward adjustments in their tax escrows? With regard to income producing properties, what happens when loan to value ratios change due to the decline in market values resulting from the affect of additional property tax expenses on the borrower's NOI. A $50,000 increase in property tax expenses, capped at 7%, could diminish the market value of a property by more than $700,000. It's not always that simple, but a decline in market value is the logical consequence of a higher tax bill for both owner/occupants and landlords. And that leads to an additional line of inquiry as to how tenants, and prospective tenants, will respond to a significant increase in their overall rent coming from these potential increases in their property tax liabilities? Will it, or has it already, caused a slow down in both leasing and sales activity? Will prospective tenants, as well as prospective purchasers and lenders, be taking a more cautious approach to making their final decisions going forward? How will lenders ultimately respond to their increased risk as existing loan to value ratios begin to fluctuate? The typical response would be for them to adjust interest rates upward where possible, to account for the sudden increase in risk, and to work to get their loan to value ratios back in synch. How they choose to accomplish this could have significant consequences for the real estate market.
Ultimately, will the anticipated significant increase in Cook County property taxes for commercial and industrial property owners cause just a minor leak, or a major breach in the real estate dam? Stay tuned!
Property Tax Insights
Donald T. Rubin
New Trier Township is located in Cook County, IL. The entire township was subject to a reassessment in 2019. The Assessor opened the township for appeals on April 29 2019. The Assessor then certified the final assessments for all real estate in the township on August 15, 2019, meaning that he had completed his work for the year and closed his books.
Well...... not so fast. On August 19, 2019, he sent letters to approximately 1100 homeowners in the township informing them that they were the grand prize winners of significant additional tax relief because the initial models his office used to establish the 2019 assessments failed to recognize the existence of sections of floodplains on these properties. As a result of the Assessor's allegedly flawed analysis, these 1100 property owners received additional reductions in the market value of their properties by as much as $400,000. However, the Assessor failed to state what the floodplain risks were that generated some of these enormous reductions. Was the property in a regulated floodplain, did it require mandatory flood insurance and, most importantly, was there actually any evidence that market values were significantly diminished as a result of the existence of designated floodplain areas on these properties? Could their proximity to golf courses, many of which are located on floodplains, or lakes, rivers, ponds, forest preserves or scenic ravines that actually enhance the value of their properties, have resulted in these reduction "gifts"? What was the actual risk level of flooding on these properties, many of which appear to be located in the A-E zone, indicating a 100 year flood possibility? How many of these properties, in fact, have ever experienced significant flooding, or sought assessment relief due to chronic flooding problems?
We don't have any answers because the Assessor hasn't yet seen fit to release the evidence supporting his findings. Furthermore, because he has lost jurisdiction over these properties, he has issued Certificates of Correction, which essentially asks the Cook County Board of Review to "fix" his problem by granting his recommended reductions. And, of course, if the BR refuses to do so, he will cast them as villains for failing to help these poor unfortunate taxpayers, many of whom just happen to reside in the most expensive homes in the county. Finally, how much will this gift add to the property tax burdens of other New Trier property owners who don't have the good fortune to have a koi pond on their lot, which would apparently be enough to qualify for assessment relief under this Assessor's criteria? Could millions of dollars be shifted on to the backs of these less fortunate property owners? Have they been given notice of this possibility...or will they only experience the sticker shock when they see their 2019 tax bills in 2020?