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Theoretical Tax Savings from 25% to 10% Assessments

At first blush, dropping from a 25% to 10% assessment would suggest a corresponding tax bill reduction of 60%; however, this would only occur if the assessment itself did not change. In actuality, the Assessor may also substantially increase the property’s assessed value, wiping out much of the savings.  Our analysis of a hypothetical property before and after obtaining a 6B classification illustrates the extent to which the actual savings achieved could vary under various tax regimes. In our analysis, a property in a 7% tax rate community, might realize a tax savings of 49%, compared to 60%, with a change to a 6B classification; while a property in a high 25% tax rate community would realize a reduction of just 34%.

The analysis explores the mathematical implications of going from a 25% to 10% assessment through the application of tax loaded capitalization rates.  The conundrum has always been that the act of lowering the assessment drops the operating costs of the property which, in turn increases the overall value of the property, partially offsetting the benefits of the lower assessment.  For analytical purposes, we assume a hypothetical 10,000-square-foot building, with an NOI before real estate taxes of $100,000.  We use a 2.8032 state equalizer and a market rate capitalization rate (before the tax load) of 9%.

At a 25% assessment level and a 7% property tax rate, an NOI of $100,000 would result in a value of $719,135 via the income approach. Property taxes would equate to $3.53 per square-foot (see chart below).  If the assessed value stayed the same, the taxes would drop 60% to $1.41 per square-foot.  Applying the tax loaded Assessor’s formula with a 10% assessment, however, instead of a 25% assessment, the same $100,000 NOI would yield a value of $912,222. Due to the value increase, ad valorem taxes would be $1.79 per square-foot—a savings certainly from $4.70 per square-foot, but amounting to a 49% reduction, rather than the hoped for 60%. The full 60% relief would result only if the Assessor leaves the assessed value alone at its prior level; but is this likely?

 6B W/No Value Change
6B W/Value Change

Taxes SF% ReductionAssessment
% Reduction
7%Value$719,135 $719,135

Taxes SF$3.53 $1.41 -60%Taxes SF$1.79 -49%
10%Value$624,688 $624,688

Taxes SF$4.38 $1.75 -60%Taxes SF$2.37 -46%
13%Value$552,169 $552,169

Taxes SF$5.03 $2.01 -60%Taxes SF$2.88 -43%
16%Value$494,736 $494,736

Taxes SF$5.55 $2.22 -60%Taxes SF$3.33 -40%
20%Value$434,480 $434,480

Taxes SF$6.09 $2.44 -60%Taxes SF$3.842 -37%
25%Value$377,077 $377,077

Taxes SF$6.61 $2.64 -60%Taxes SF$4.38 -34%

Interestingly, on a percentage basis, the tax savings actually drop as the tax rate goes up.  In the chart above you can see that with a 25% property tax rate and a 25% assessment an assessed value of $377,074 is calculated, equating to property taxes of $6.61 per square foot. Nevertheless, value jumps quite dramatically to $624,688 when a 10% assessment is used in a loaded capitalization rate calculation.  The property taxes based on this value would be $4.38 per square-foot or a 34% savings.

Unfortunately, it appears we have an example where people in lower income areas (typically where the very high property tax rates are) benefit less, at least on a percentage of tax reduction, from a 10% incentive than in lower property tax areas such as Chicago.  

We emphasize this is purely a theoretical exercise; but, these numbers may help you to prepare your client for a more realistic estimate of tax savings with the understanding that the assessed value part of the tax calculation is never fixed. Even without consideration of the impact on value from any renovations to the property, which may have been required to get the Class B classification, the property’s assessed value may increase simply as a result of the lowered tax expense.

J. Chie, Esquire

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