Since his campaign for assessor in 2018, Kaegi has argued that his predecessor, Joe Berrios, severely undervalued commercial properties, placing too much of the property tax burden on homeowners. It’s logical he would raise commercial assessments so much because they were irrationally low to begin with, Kaegi says.
He’s been at it since 2019. That’s when he began valuing properties in north suburban Cook County under the county’s three-year assessment process. He reassessed the western and southern suburbs in 2020 and moved on to the city this year. The stakes are especially high given how much of the county’s property wealth and economic strength is concentrated downtown.
The assessor’s work so far has resulted in a major shift in the tax base. He’s hiked commercial values so much that residential property accounts for 37% of total assessed value in five of the eight Chicago townships that his office has reassessed so far, down from 48% in 2018. Nonresidential real estate—mainly offices, apartments, hotels and other commercial property—accounts for 63% of total assessed value, up from 52% in 2018.
Kaegi’s critics in the commercial real estate community contend he’s hiking their assessments to score political points with homeowners: By shifting more of the tax burden onto commercial landlords, he can say he’s limiting property tax increases on homeowners.
Kaegi denies he has an agenda, saying he just wants to get the numbers right.
“We think we’re baking in a uniform, very fair, consistent reflection of value,” he says.
The appraisal data provides a useful measuring stick to determine whether he’s gone overboard. Provided by Trepp, a New York-based research firm, the data covers Chicago properties with $50 million or more in debt that’s packaged into publicly traded mortgage bonds such as commercial mortgage-backed securities or securities sold by Fannie Mae.
A routine part of the lending process, appraisals are used by lenders mainly to determine how much they should lend on a given property. Though not as strong of an indicator as a property’s sale price, appraisals are generally considered reliable estimates of fair market value for commercial buildings.
The Trepp data includes the city’s tallest skyscraper, the Willis Tower. Kaegi hiked the value of the 110-story building by 78% from 2020, to $1.24 billion, but his estimate was still 30% lower than the building’s appraised value of $1.78 billion in March 2018. The assessor’s value is also below the $1.3 billion that Willis Tower’s owner, New York-based Blackstone Group, paid for the property in 2015 before launching a major redevelopment of the building.
A few blocks away, Kaegi’s office placed a value of $854.2 million on the Old Post Office, the massive office development straddling Ida B. Wells Drive. The building was appraised at $1.17 billion when it was refinanced in 2019.
The appraisal data doesn’t tell the whole story. Because it comprises a small sample of big properties mainly downtown, it’s hard to extrapolate it to draw broader conclusions about the accuracy of Kaegi’s assessments for smaller buildings, say, in Chicago neighborhoods.
It’s also unfair to conclude that the assessor’s values are too low when compared with appraised values of properties in 2018 and 2019, before the coronavirus pandemic, says Farzin Parang, executive director of the Building Owners & Managers Association of Chicago.
But recent data and sales in Chicago suggest that commercial property values in the city have held up, if not increased, over the past two years, with the possible exception of hotels and retail. Sales of big downtown properties plunged as the pandemic disrupted the market in 2020; they have picked up this year, but brokers say some buildings aren’t selling because uncertainty over property taxes.
Parang also disputes the entire premise of the Crain’s analysis, saying it’s not fair to compare the assessor’s estimated values with appraised values, or even with the actual prices that investors pay for properties. The valuation methodologies are different, he says.
“They’re not apples to apples,” Parang says.
The reality is that appraisers and assessors are both seeking the same answer: what an investor would pay for a property. State law requires that assessors try to get as close as possible to a property’s “fair cash value,” or what it would sell for in an arm’s-length, nondistressed transaction. Assessors also use aggregate sale prices in what are called “ratio studies” to test how well they are hitting the mark.
Parang also worries that Kaegi’s increases will hurt not just landlords, but downtown businesses. Most big office landlords pass along their property taxes to their tenants, so any additional cost will be absorbed by them. Parang cited a 2019 study from Jones Lang LaSalle showing that property taxes eat up 21.7% of an average Chicago office tenant’s occupancy cost, more than in eight other peer cities, including New York and San Francisco.
The good news for commercial landlords is that Kaegi doesn’t have the final say on what a Cook County property is worth. Landlords have found more sympathetic ears at the county Board of Review, a separate body that hears appeals from property owners. The board has slashed Kaegi’s assessments the past two years, limiting the overall tax hit on commercial buildings in the suburbs.
The Trepp data shows that Kaegi overshot the values on four properties. In the most extreme example, his office estimated that McClurg Court, an apartment complex now known as Arrive Streeterville, is worth $343.8 million, versus an appraised value of $184.6 million in July.
But Kaegi points out that his office is valuing properties en masse, relying on general market data to come up with a figure, unlike an appraiser, who has access to property-specific data directly from the building owner. And though his estimates may be low on average, he’s not unhappy with the result.
“We’re certainly much closer to the mark than we were before,” he says.