Property Taxes input?

[Mallikarjun Reddy Pateel]

Hello Chicagoans,

we are looking at a couple of Multifamily properties around Chicago, wanted to clarify a few things about property taxes and Valuation.

1. I see cook county calculates property taxes on a 3-year basis(northern, southern, Chicago areas), will the sale triggers new assessments increasing the property value to the sale price, therefore, an increase in property tax?

2. this is what I found on the cook county website :

"Residential properties are assessed as of January 1st of the current year, using three to five years of prior sales information. By using multiple sale years, this increases the stability of market value estimates.

The Cook County Assessor's Office uses mass appraisal to produce property values. Instead of appraising property one-by-one, mass appraisal looks to the real estate market to detect local trends in property values based on location and characteristics. Those trends are used to estimate the fair market value of each property based on its location and characteristics. Mass appraisal is a way to put fairness into the assessment system"

the above statement sounds a little contradictory to me, will they look at the property by property sale information to estimate the Market value or Mass appraisal or both?

3. I read an article that the cook county assessor's office shifting the tax burden from homeowners to commercial property owners being a significant property value Increase in the commercial sector. if apartments fall into the residential category does this have any Impact on Multifamily owners?

[H. Jack Miller]

We have a of mortgages in this market and all I know is the real estate taxes are increasing at a very rapid rate, much faster then inflation and the ability to raise rents. 

[Mallikarjun Reddy Pateel]

not sure if you noticed, but did the sponsors underwrite their prop taxes based on purchase price or current taxes?

[John Warren]

@Mallikarjun Reddy Pateel the answer is, yes a sales price can trigger an increase. Depending on where you are at in the 3 year cycle, it might be a bit of time though. For instance, if you are in year one then you won't see an increase for almost two years. The formula's are complicated, but what I do is I run two scenarios based on the cookcountypropertyinfo.com website.  In one scenario, I look at the current taxes and make sure I am happy with the cash flow and the deal. Then I run a second scenario where I look at a worst case. For instance, if I buy for 500k and the property is assessed at 300k then I multiply this out as though the property is re assessed at 500k (40% higher). If the deal still works, it is a go. If it does not work, it is not a go! 

There is more to it than that of course, but that is the high level. On 7 units or more, there are some new tax incentives if you are doing rehabs and if you are renting to "affordable" housing tenants which can be market or subsidized. 6 units and under, you can check for home owner's exemptions, senior exemptions, senior freezes, etc. 

[Mallikarjun Reddy Pateel]

@John Warren 

Thank you, that's exactly how I underwrite my deals matching the assessed market value to the purchase price in a worst-case scenario. 

any thoughts on tax rate or equalization factor Increases in coming years?

[John Warren]

@Mallikarjun Reddy Pateel surprisingly, most of the tax rates have been dropping the last few years as assessed values climb. This is one of the trickiest factors in figuring out a future tax liability since you can't accurately predict the tax rate. The assessed value, in my experience, will eventually catch up with the sales price although it takes a few years. The taxes will rise, but then over time you can get some significant reductions along the way too. 

[Jonathan Klemm]

@Mallikarjun Reddy Pateel - Great post and tons of really good questions.  I am by no means a Chicago tax wizard-like @John Warren.

I didn't realize you could apply for homeowners, and senior exemptions on 6 units and under that's really good to know.

I think the best way to underwrite future taxes is to look at the past increases and see if you can interpolate what those would be for the future. 

I have no idea if this is logical, but maybe taxes will come down a little bit with interest rates rising......I feel like uncle sam has to give us a break somewhere at some point.