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As the Assessor has now published his property tax assumptions for the Chicago Tri reassessment, we decided to look at his industrial property assumptions for the first township released which is Rogers Park. We are looking at the industrial property assumptions as they tend to be the simplest and often most uniform property type. There were only eleven properties reported which is a small sample set but it simplifies our analysis. Below is an abbreviated print out from the Assessor's site.
The twelve industrial buildings range in size from 1,995 square-feet to 1,189,856 square-feet. The year built of the buildings ranged from 1916 to 2018. The land-to-building ratios ranged from 0.46:1 to 6.00:1. We note that the Assessor adjusted for land size on one property that had an 8.23:1 land-to-building ratio but made a land adjustment which brought the property to an effective 6.0:1 land-to building ratio.
From this highly diverse data set, we then looked at the assumptions the Assessor made in his valuation. On the positive side there were varying rental rate per square-foot assumptions which ranged from $11.20 to $16.80 per square-foot. At that point, however, all other assumptions are disturbingly similar. All vacancy rates were estimated to be at 5%. The expense ratios ranged from 47% - 49%, and again, almost all virtually the same. The capitalization rates were all at 8.5%.
The Assessor has historically made different capitalization rate calculations for Class A, B and C properties. The lion’s share of the properties are all Class C. We checked Norwood Park and Elk Grove Township from two years ago and well over 90% to 95% are reported as Class C buildings. The Class A and B properties had identical vacancy and expense percentages but lower capitalization rates.
Let us start with vacancy and capitalization rates. The Assessor states they are all 5% vacant and have an 8.5% capitalization rate. Is a two-story, 54,726 square-foot, 1933-built, industrial building with a 0.46:1 land-to-building ratio going to have the same capitalization or occupancy rate as a 1991-built building with a 1.25:1 or greater land-to-building ratio? Some of these properties have very high ceilings and great functional utility. Many, however, in their sample set are two-story, or one and part two-story buildings with low ceiling heights that would not be in nearly as much demand as their counterpart one-story buildings with higher ceilings. The point is, there should be at least some variation in both vacancy and capitalization rates here.
The Assessor’s expense ratio assumptions are where we have the greatest issue. In his analysis, expenses of all size properties range from 47% - 49%. This is a serious error. Our firm analyzes expenses for various property types every year and breaks them down between properties under 50,000 square-feet and those over 50,000 square-feet. We find that small buildings are far more expensive on a per-square-foot basis to operate than larger buildings. Our expenses are based on year-end financials for various industrial buildings. To increase our sample size, we looked at 161 industrial buildings with reported expenses from year-end 2021, 2022 and 2023 financial statements. We look at five categories of expenses including insurance, common area maintenance (CAM), legal/administrative, utilities and management. The median expense for properties under 50,000 square-feet was $1.81 per square-foot of building area and $1.14 per square-foot for industrial buildings over 50,000 square-feet. We found that industrial buildings over 50,000 square-feet had expenses that were 37% lower than those under 50,000 square-feet. Please note that these expenses exclude property taxes.
How can the Assessor have virtually identical expenses for all properties when smaller properties are substantially more expensive to operate? Given that older buildings have lower rents as well as higher expenses, their expenses as a percentage of rents should be significantly higher than in newer buildings. Given this assumption, either small buildings are either being vastly over-assessed or large buildings are being massively under-assessed. Buildings with higher land-to-building ratios have higher expenses than those with lower land-to-building ratios (due to parking maintenance, snow plowing, etc). In short, the Assessor’s assumptions should have significantly higher dispersions than a 47% - 49% expense ratio would imply.
Obviously mass appraisals are very complicated and difficult. Our concern is not that mistakes can be made, as that is inevitable in the mass appraisal process, but the Assessor’s reluctance to modify assessments in the face of evidence suggesting the valuation is off. The Assessor’s models are surprisingly blunt instruments where potentially large errors will occur. Taxpayers are entitled to challenge assessment errors in a fair and objective way with some reasonable probability of success.
Address | Year Built | Land SF | Bldg SF | Investment Rating | Adj Rent $ / SF | Vacancy % | Exp % | Cap Rate |
3158 W Wallen, Chicago | 1960 | 191,459 | 23,250 | C | $14.00 | 5% | 47% | 8.50% |
7475 N Rogers, Chicago | 1927 | 18,584 | 32,930 | C | $11.34 | 5% | 47% | 8.50% |
7017 N Ravenswood, Chicago | 1991 | 5,000 | 4,000 | C | $16.80 | 5% | 49% | 8.50% |
1774 W Lunt, Chicago | 1923 | 6,014 | 5,765 | C | $15.40 | 5% | 49% | 8.50% |
1769 W Lunt, Chicago | 1932 | 6,085 | 5,000 | C | $16.80 | 5% | 49% | 8.50% |
7013 N Ravenswood, Chicago | 1968 | 5,000 | 8,000 | C | $15.40 | 5% | 49% | 8.50% |
1731 W Greenleaf, Chicago | 1961 | 1,890 | 1,995 | C | $16.80 | 5% | 49% | 8.50% |
1624 W Pratt, Chicago | 1933 | 24,920 | 54,726 | C | $14.00 | 5% | 47% | 8.50% |
7027 N Ravenswood, Chicago | 1916 | 6,500 | 5,500 | C | $15.40 | 5% | 49% | 8.50% |
6558 N Clark, Chicago | 1916 | 14,285 | 16,160 | C | $14.00 | 5% | 47% | 8.50% |
7025 N Ravenswood, Chicago | 1916 | 2,500 | 2,000 | C | $15.12 | 5% | 49% | 8.50% |
6567 N Ridge, Chicago | 2018 | 1,939,612 | 1,189,856 | C | $11.20 | 5% | 47% | 8.50% |
