Tuesday, January 25, 2022

Reality Ignoring: The Appeal Game Inside Wealth Tax

Commercial property appraisal is a mysterious, complicated subject, but it is critically important in Cook County today, as Keggie, now completing his third year as an appraiser, tries to shake off office. He campaigned in 2018 as a reformer against his predecessor, Joseph Berrios, who was widely criticized for underreporting commercial properties, which shifted the county’s property tax burden to homeowners.

Berios accepted campaign donations from estate tax appeals attorneys and faced allegations that he had little to do with them. In the past, Berios has denied being part of any pay-to-play scheme. Cagi does not take donations from appeals lawyers, but landlords allege he is overvaluing commercial properties, scaring investors and undermining the local economy.

Valuations are only one variable used to calculate property taxes, but they form the basis for a zero-sum game: when appraising one group of property owners, such as office landlords, the other group. , such as homeowners, pay more in taxes than they should. If the owners of the city’s biggest, most expensive properties succeed in their appeal, they will effectively be shifting millions of dollars of taxes onto other property owners. Somebody has to pick up the slack.

The landlords argue that Cagi is putting too much burden on them. In West Chicago Township, which includes the Fulton Market District, his office this year saw a 24% increase in residential assessments from 2018, the last time the city was reassessed. But non-residential assessments jumped 115% – more than five times. Non-residential properties now represent 60% of the township’s tax base, up from 46% in 2018.

Keggie’s Office Priced McDonald’s Headquarters, 110 N. The 575,000-square-foot building in Carpenter St., grew 30% this year to $213.6 million from $164.3 million in 2020, county records show. The appraiser increased the value of the Google building, also known as 1K Fulton, to $197.3 million, up 56%.

But property owners have many opportunities to appeal their assessments if they feel they are too high. They can start with the appraiser, which is still reviewing appeals for McDonald’s and Google buildings.

If landlords are not satisfied with the outcome there, they can appeal to the County Board of Review, headed by three elected commissioners. The Illinois Property Tax Appeals Board is next. As a last resort, they can file a lawsuit.

Appeals lawyers will often include an appraisal, in which their client’s assets are overvalued, as a key piece of supporting evidence to make the case. The appraisal carries weight, but the appraiser or other appellate body may still deny an appeal outright, or grant a partial reduction in value. The review board has generally been more willing to reduce the assessment on appeal than the assessor’s office.

So how do the owner of the McDonald’s building and his appeals team make the case – with a straight face – that a property he just bought for $412.5 million is actually worth $148.7 million? After all, state law requires that appraisers estimate a property’s “fair cash value” or what it would sell in an arm’s length, non-distress transaction—exactly like the sale of a McDonald’s building last fall.

Another inconvenient fact: An appraisal completed last October for the building’s lender, which had assets of $409 million. With Keggie’s valuation of a mere $213.6 million, given the sale price and prior valuation, why appeal?

That sounds like a stretch to Robert Dane, a property taxation and valuation consultant who used to work for the International Association of Assessing Officers, a professional group.

“It is clear to me that if something sold for $413 million, it would be worth more than $149 million and could even be worth more than $214 million,” he says. Huh.

Here we step through the look-glass to understand how appeals lawyers and their appraisers can deviate from reality. When a property owner or appraiser values ​​a commercial property for their lender, they use their actual revenue and expenses to arrive at an estimate — figures directly from a financial statement or budget.

But property tax assessments are supposed to be based on “fee-simple value” — what the property will be worth with tenants at estimated rents, estimated expenses and other variables based on market data. A buyer may pay a premium for a building leased for a longer period to a marquee tenant such as McDonald’s, but a fee-simple appraisal is supposed to identify the tenant and ignore what they actually paid in rent.

Differences in valuation methods go a long way toward explaining why an appraisal filed in support of an appeal is much lower than the sale price or appraisal made for the lender, says Mike Elliott, president of Chicago property tax, Elliott & Associates. Maybe. The firm appeals.

But since appellants are not required to use asset-specific financial data, they have a lot of room to fudge the numbers. Appraisers who work on appeals can underestimate a property’s value by assuming below-market rents, increased expenses, and a high vacancy rate, says Tim Wilmuth, chief appraiser at the Palm Beach County (Fla.) property appraisal office.

They “spread it,” he says. “That way, none of the variables look particularly out of line.”

But one variable can make a big difference. McDonald’s property valuation, for example, is based on a market office rent of $148.7 million, at $25.50 per square foot.

McDonald’s is far below what it actually pays. According to appeal documents, the fast-food chain began paying rent of $31.75 per square foot when the lease began in August 2018. By August 2020, its rent had increased to $33.94 per square foot.

But what matters in a fee-for-simple appraisal is what the valuation date, January 1, 2021, will be in place for a random, unnamed tenant. The Chicago office market turned for the worse in early 2020, when the coronavirus swept through the city, a convenient trend well documented by valuations of both McDonald’s and Google buildings.

The evaluation of the McDonald’s building devotes nearly 50 pages, including several news stories, to explaining the devastating negative impact of last year’s pandemic and civil unrest on the local office market.

“Due to the virtual stagnation in the market due to the global pandemic, the long-term impact on real estate values ​​is still believed to be somewhat unknown,” the valuation says. “However, the immediate impact is considered significant and the impact is indisputably recognized by all market participants.”

Not in the Fulton Market district. The demand for office space in the neighborhood has never waned, and rents there have actually risen over the past year. Brokers who operate in the neighborhood say the going rate for Class A office space ranges from $35 to $42 per square foot, which is higher than the $25.50 per square foot used in appraisal of a McDonald’s building.

“Fulton has been the real COVID winner” in downtown Chicago, says Kyle Kamin, vice president of CBRE’s Chicago office, who represented Google in its lease at 1K Fulton. “It has been raised significantly.”

Had the appraiser of the McDonald’s building used a more accurate market rent, the estimated value of the property would have been much higher. Even at $35 per square foot—the low end of Class A office space rentals in Fulton Market—the building’s net operating income would increase by $3.8 million. Keeping all other variables constant, the estimated value of the property increases to $196.5 million.

Representatives from Normandy Properties, a Pennsylvania-based real estate investor that last acquired the McDonald’s building, did not return phone calls, and neither did Craig Donevald, a partner at Chicago-based Finkel Martwick & Colson, which is based in Normandy. is the law firm handling the appeals. , The appraiser, Neil Renzi, president of Elmhurst-based Renzi & Associates, declined to comment while the appeal is still open.

A 531,000-square-foot building at 1000 W Fulton Market, 1K Fulton’s appraiser also used below-market office rents—$30 per square foot—to arrive at a value of $135 million. Google—the property’s largest tenant, with 475,160 square feet—pays a base rent of $26.87 per square foot under the lease that began in 2016, according to valuations filed to support the appeal of Cagi’s assessment.

But today the rent is very high. At $35 per square foot, the value of the building increases from $135 million to $146.6 million, with all other variables held constant.

An executive at Newton, Mass.-based Office Properties Income Trust, which acquired the property in June, did not return phone calls, and neither did Kyle Hossoul of Ryan LLC, the company’s tax attorney. MVS Chicago appraiser, James Elkins, said he was too busy for an interview.

Appraisers can reduce the value of a building by increasing what is known as the capitalization rate, or cap rate. A cap rate is a rate of return that investors and appraisers use to value commercial properties. It represents an asset’s net operating income, or NOI, divided by its price or value. After estimating the NOI of a property, an appraiser or appraiser can divide it by the market cap rate to calculate a value. The lower the cap rate, the higher the value.

For example, valuations on McDonald’s properties assumed a 7% base cap rate, but for recent sales in the Fulton Market neighborhood, cap rates have dropped to closer to the 5% to 6% range. Cagi’s office used a base cap rate of 5.5% to come up with its value of McDonald’s headquarters.

If Renzi, the appraiser, had used that rate, his value would have increased from $135 million to $182.9 million. Add to that the high market rent of $35 per square foot, and the building’s value rises to $241.8 million, which is even more than Keggie’s estimate.

When Office Properties Income Trust acquired 1K Fulton in June, it disclosed the deal had a cap rate of 4.7%. But Elkins used a 7.5% base cap rate to value the asset, and Keggy went with 5.5%. Combine the 5.5% rate with the high $35 per square foot rent and the building’s value rises to $174.5 million, well above the appraiser’s estimate, but still well below Keggie’s figure.

Although many appeals attorneys state that a property’s recent sale price is irrelevant in an appraisal, a spokesperson for the appraiser’s office says that the sale price is a leading indicator of value, one of many that he or she considers during an appeal. . Appraisers should also discuss recent sales of properties they value in their valuations, especially the odd disclosures when it comes to Google and McDonald’s buildings.

But valuations of both rejected the high prices paid for the two properties. The McDonald’s Headquarters valuation briefly cites the impact of COVID, but fails to mention why the building sold for such a high price in the midst of the pandemic. It also means that rents in the neighborhood have declined while in reality this has not happened.

“It does not reflect the simple market value of pre-sale charges as these lease rates do not reflect the market conditions that existed as of the effective date of value (January 1, 2021),” the valuation said.

The two Fulton Market properties illustrate the wide latitude that appraisers have when appealing, but no one, including Cagi, has accused the two appraisers of wrongdoing. Still, Keggie says he “sees some systematic behaviors that are concerning for us.” He has asked the Illinois Department of Financial and Professional Regulation to investigate appraisers he believes have violated professional standards.

“We are looking for patterns of abusive behavior, and when we see it we won’t hesitate to bring it to the attention of regulators,” he says.

Nation World News Deskhttps://nationworldnews.com
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