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Property Tax Rates and Value Rules of Thumb

Property tax rate increases result not only in increased annual expenses but may also result in a corresponding diminution of the property’s value.  This article will give you general “rules of thumb” for what a one percentage point increase in property taxes in Cook County will do to your client’s overall property values.

To calculate the property tax change on value, we used a loaded capitalization rate technique and assuming a 2.8032 multiplier and a 9.0% capitalization rate.  We made one run using a 25% assessment level and one run using a 10% assessment level.The results follow:

Assessment rate

x

0.2500 

0.2500 

Equalization factor

x

2.8032 

2.8032 

Local property tax rate

x

0.12000 

0.13000 

Effective tax rate

=

0.08410 

0.09110 

Market derived cap rate

+

0.0900 

0.0900 

Tax loaded cap rate

=

0.17410 

0.18110 

Implied adjustment for location/ 

Economic Characteristics


-4%


Under the assumptions in the example above, a property tax change from 12% to 13% (at a 25% assessment level) results in a value reduction of 4% due to the one percentage point increase in the property tax rate.
The pattern is as follows for various property tax ranges.

25% Assessment Level with a 1% Increase in the Property Tax Rate

Property Tax Rate Range       Value Reduction
7-9%                                                   -5%
10-15%                                               -4%
16-27%                                               -3%
28-35%                                               -2%

10% Assessment Level with a 1% Increase in the Property Tax Rate

Property Tax Rate Range       Value Reduction
7%                                           -3%
8-34%                                    -2%
35%                                         -1%

Thus, for most commercial properties with a 10% assessment, a one percentage point increase in property tax rates will result in a 2% reduction in value.  Only for properties at the extreme high or low end of the property tax range would the value reduction be somewhat higher or lower.

For properties with a 25% assessment, the impact of a one percentage point increase in property tax rates is more significant, particularly for properties with lower property tax rates.  

We should note that in theory, if the property tax increase does something to improve city services or make the area more desirable (thus increasing rental rates or lowering vacancies), then the negative impact of increased taxes could be partially, or completely offset.  Unfortunately, we frequently see property tax rates increasing at rates above inflation and simply attempting to maintain existing services, which may not offset the negative impact of higher property tax rates.

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