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How Cook County Over-Assesses 6B Properties

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We recently came across an industrial building that sold for about $1,200,000 and received a 6b tax classification in a southwest suburb of Chicago. A 6b incentive is designed to encourage occupancy of industrial properties that have been vacant for several years. The property had significant deferred maintenance and had been vacant for many years. The Assessor promptly changed the assessment to $1,200,000 to reflect its purchase price for the following year (as it will often do). In our view, the $1,200,000 price does not reflect its fee simple "market value" and this is an inaccurate assessment.

Part of the market value definition states that it is "assuming the price is not affected by undue stimulus." According to the Cook County Class 6B Eligibility Bulletin the purpose of the 6B benefit is to "stimulate expansion and retention of existing industry and increase employment opportunities.

A typical industrial building's assessment level in Cook County is 25% of market value. A 6b classification drops the assessment to 10% for years 1-10, 15% in year 11 and 20% in year 12. In the example above, this particular industrial building's real estate taxes with a $1,200,000 valuation would be about $66,000 without a 6b classification. With a 6b classification the taxes would drop in year one to about $26,000. We estimated that the gross tax savings over the 12 year period of the 6b classification would be $498,107 (and the discounted present value would be around $300,000 (assuming an 8% discount rate and a 2.5% per year real estate tax increase)). The value of the 6B stimulus then is $300,000.

So the question becomes what is the fee simple "market value" of the subject at acquisition, $1,200,000 or $900,000 ($1,200,000 - $300,000 6b incentive). The purchaser would clearly not have paid $1,200,000 for the property unless they received very large incentives. If looked at in the context of the definition of "market value" it would be difficult for an industrial property appraiser to conclude anything other than a $900,000 market value based upon the purchase price.

If you were to finance a loan on any other building, a bank is always looking at the effective purchase price. If you bought a house for $100,000 and the seller was giving you a $10,000 check at closing plus a $5,000 car as an incentive to buy, your effective purchase price is really only $85,000. The bank's loan (and presumably the property appraisal) should be based on the effective purchase price of $85,000. The extra $15,000 simply reflects the value of a check and a car which is not real estate.

For property tax appeals in Cook County we are required to look at fee simple" market values". Going back to our industrial building the $1,200,000 value placed on it by the Assessor is clearly not the fee simple market value but that $900,000 is. A discounted present value analysis of the financial impact of the 6b would be required but that is a relatively simple number for an industrial property tax appraiser to come up with.

Whether the Assessor would be willing to take the time and consider these arguments becomes the big question. I do know that appraisers are required to estimate "market value" in their reports and that industrial building sales should be adjusted for cash equivalency and other factors.

J. Chie, Esquire

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