By Martin S. Katz

As published in Midwest Real Estate News, March 1998


The dramatic recovery of the suburban office market, has, in most cases, not yet been affected by the anticipated property tax increases which could result from the higher market values reflected by recent acquisition prices.

The most pertinent example of this is Chicago’s north and northwest suburban areas of Cook County. For assessment purposes, Cook County is on a triennial cycle. The north and northwest suburban townships scheduled for reassessment in 1998, have not been revalued by the Assessor since 1995. As the valuation date set by law in Illinois is January 1, the 1995 assessment was based primarily on market data derived from income and occupancy levels of 1994. Obviously, rents, occupancy levels and corresponding market values have dramatically increased between then and what will be the new valuation date of January 1, 1998.

All of this has been significantly affected by the proliferation of REIT acquisitions. One of the major issues which must be confronted in appealing real estate taxes over the next several years is the identification and quantification of the non-real estate related premium paid by REITs resulting from their continuing pressure to grow, to increase their multiples and to drive up their stock price. The availability of capital through the public markets and the tax advantaged structure of REITs give them a competitive advantage over private investors and allows REITs to bid up acquisition prices based on lower cap rates than have been experienced since the Japanese investment binge of the late1980’s.

The increased pressure on local authorities to produce revenues emanating from the federal cutbacks of the Reagan Administration, coupled with the database of sales now available to assessing officials to justify significant increases in assessed valuation will produce interesting potential problems for owners and managers of suburban office buildings. Those purchasers who projected five to ten percent annual property tax increases in their due diligence could now be faced with cataclysmic effects on their earnings and cash flows resulting from tax increases which are multiples of those projections. In many instances, acquisitions can be creatively structured to prevent, or at least to limit future property tax increases.

In a tax appeal successfully handled by two member law firms of American Property Tax Counsel, The National Affiliation of Property Tax Attorneys (APTC), who collaborated as co-counsel, the Ohio Supreme Court ruled that assessing authorities cannot use the allocated purchase price of a property from a portfolio acquisition to sustain a property tax increase because “other business considerations” can determine the basis for the allocation.

Those owners and managers, along with others who will be affected due to uniformity considerations, will be best served by experienced attorneys in the property tax field and by creative appraisers who recognize that refined valuation theories will be necessary to address the problem of establishing taxable real estate value. In a market where a plethora of intangible factors affect market determinations, it is essential that only the real estate component be taxable for ad valorem purposes.

These concepts, as well as other related property tax issues, were recently discussed at American Property Tax Counsel’s annual Seminar which this year addressed Controlling Office Building Property Taxes (Art, Science or Magic?). This conference brought together the leading attorneys from the U.S. and Canada in the property tax field and key representatives of the office sector of the real estate industry. Ultimately, it is anticipated that these complex valuation questions will be determined by the courts of various jurisdictions, requiring property tax attorneys, as the real advocates of the taxpayer, to be the leaders in this adversarial battlefield.