Aside from mortgage payments, real estate taxes are generally the single largest cost of operating commercial real estate. Fortunately, opportunities do exist to control real estate taxes by securing assessment reductions through negotiation or litigation. The purpose of this article is to make the practitioner aware of the opportunities for tax reduction in DuPage and the other collar counties in the Chicagoland area (the "Collar Counties").
Property in the Collar Counties is assessed on a quadrennial (every fourth year) basis and is required by law to be assessed at 331/3% of fair cash value. Generally, quadrennial re-assessments are conducted on a township (as opposed to a county-wide) basis, and are staggered so a relatively equal number of townships within the county are quadrennially re-assessed each year.
Property can be re-assessed annually. Generally, all property in the township is re-assessed (or equalized) during non-quadrennial years by increasing each assessment by a uniform, state-mandated township equalizer so that, following equalization, all property in the township will theoretically be assessed at the mandated 331/3% level. Individual properties can, and often are, re-assessed in non-quadrennial years when the Assessor becomes aware of facts that suggest an assessment increase is warranted.
Assessment notices for a given tax year are generally released in the Fall of that year. The exact release date will depend on what township the property is located in and how early the Assessor has completed his assessment.
Each property owner has 30 days following publication of its township assessment notice in which to file a complaint with the County Board of Review. Filing deadlines, complaint forms and rules of the County Boards of Review can generally be found on their websites or by contacting them directly.
The taxpayer must file a complaint and evidence with the County Board of Review before the filing deadline or all opportunities for contesting the assessment will be lost for that tax year. After the complaint is filed, the Board will schedule a hearing and then adjust the assessment as it sees fit (i.e., assessment decrease, increase or no change).
Decisions of the County Board of Review can be appealed to either the State Property Tax Appeal Board (PTAB) or the circuit court (the court proceedings are commonly referred to as Specific Objections or SPOs). Appeals to PTAB must be filed no later than 30 days following the postmark date of the Board’s decision. Appeals to the circuit court must be filed no later than the 75th day following the due date for payment of the final installment of the tax bill in question.
PTAB decisions can be appealed to the circuit court under the Administrative Review Act. The administrative review proceedings are not de novo proceedings.
Assessment appeals typically involve whether the fair cash value (or market value) proposed by the Assessor is excessive, whether the property has been uniformly assessed in relation to comparable properties, and/or whether the assessing officials have followed the law.
Assessment protests in the Collar Counties often involve whether the fair cash value of the property as proposed by the Assessor is excessive. The best evidence of fair cash value is a competent appraisal or the recent purchase price of the property in an arm’s-length transaction. An income and expense analysis may persuade the Assessor or Board of Review to grant an assessment reduction; however, an income and expense analysis alone will likely be insufficient evidence before PTAB or in court.
The Illinois Constitution and federal equal protection considerations require uniformity of assessment. This means that like properties must be assessed similarly, notwithstanding whether the fair cash value proposed by the Assessor is accurate. The uniformity of assessment argument will generally apply in the single-family home setting because truly comparable properties can readily be found. Truly comparable properties are difficult to find (without making substantial adjustment) in the commercial and industrial property settings. Uniformity principles may, however, apply to commercial and industrial properties when the Assessor’s method of assessment discriminates in favor of some but not all similarly situated taxpayers.
If a property is income-producing and experienced abnormal vacancy (typically, more than 15%) in a given tax year, many Assessors will stipulate to an assessment reduction for either the current or following tax year. In these cases, the taxpayer must generally demonstrate substantial vacancy existed and no rental income was generated by the vacant space.
The Property Tax Code provides that newly constructed buildings shall be assessed on a pro-rata basis from the date of issuance of a certificate of occupancy or the date the building was "inhabitable and fit for occupancy or for intended customary use," whichever occurs first ("completion") (35 ILSC 20/9-180).
The Code also provides that the Assessor shall determine as near as practicable the value of each "property"1 listed for taxation as of January 1 of that year and assess the property at 331/3rd% of its fair cash value (35 ILSC 200/9-155).
The Property Tax Appeal Board and many Collar County Assessors interpret Code Sections 9-155 and 9-180 as collectively providing that a building under construction on January 1st is "property" for purposes of the Code and should be assessed at its fair cash value on January 1st (presuming the percentage of completion existing on that date), and that a building completed during a tax year should be fully assessed from the date of completion.
There are no reported cases interpreting the interplay of these two code sections, and we do not necessarily agree with the PTAB interpretation. We believe 9-180 can reasonably be interpreted to mean that an Assessor cannot assess partially completed new improvements until they achieve the level of completion required by Section 9-180.
If, however, one accepts the PTAB interpretation, a building whose construction commenced after January 1st but was not completed on December 31st of the same tax year cannot be taxed at all during that tax year.
The developer exemption remains on each lot until a habitable structure is completed on that lot, until the lot is used for a business, residential or commercial purpose, or until title to the lot is transferred to third party.
The valuation of most forms of commercial and industrial real estate is relatively straightforward: to determine fair cash value, one can obtain an appraisal, examine and evaluate sale comparables, or analyze the income and expenses generated by the property. The valuation of hotels, nursing homes, and other similar properties is far more difficult because these properties are businesses that include real estate and other forms of property. To compound the problem, many/most appraisers (e.g., the valuation expert relied upon by attorneys) do not understand how to properly isolate, and then value, the real property component of a hotel, motel or nursing home.
The real estate tax in Illinois is a tax on real property and not a tax on personal property, intangible property or goodwill. The Property Tax Code defines taxable "property" as: "The land itself, with all things contained therein, and also all buildings, structures and improvements, and other permanent fixtures thereon" [emphasis added] (35 ILCS 200/1-130).
Hotels, motels and nursing homes include extensive personal property (furniture, floor coverings, window coverings, bedding and towels, office equipment, restaurant equipment, etc.) and intangible property (such as goodwill attributable to the business operations). These items of personal and intangible property are not taxable under the Code; however, their association with the real property causes the price a buyer would pay for the hotel, motel or nursing home operation (often referred to as the going concern value) to be substantially higher than if these items of non-taxable property were not included. To illustrate this concept, ask yourself these simple questions: what would a hotel be worth without the room, lobby and restaurant furnishings? What would it be worth as an independent motel that was not associated with a major national chain such as Hyatt, Marriott, etc.? Also, wouldn’t a hotel with an assembled, trained and proven staff and a long track record of successful and profitable business operations be worth substantially more than a brand new facility with no franchise affiliation, no national advertising, no national reservations network, no staff, no training, no name recognition in the marketplace and no profits?
Assessing officials typically value hotels, motels and nursing homes for assessment purposes by determining the sales prices of comparable hotels on a per-room basis and applying those per-unit values to the property they are assessing. This technique, if strictly followed (and it usually is), results in a substantial overstatement of fair cash value of the property in question because the reported sales prices of hotels, motels and nursing homes inevitably represent the "going concern value" of the business enterprise, which includes the value of the real estate and a substantial premium for non-taxable personal property and goodwill.
A knowledgeable attorney and appraiser team, fortunately, can solve these assessing inequities.
Real estate taxes are a substantial expense of owning and operating commercial real estate. Opportunities exist in the Collar Counties for substantial tax savings. As attorneys, we can provide a valuable service by identifying these opportunities and advising our clients to take action and save valuable tax dollars.
1 The Code defines "property" as "The land itself, with all things contained therein, and also all buildings, structures and improvements, and other permanent fixtures thereon …" (35 ILCS 200/1-130).
Michael J. Elliott and Joanne P. Elliott are principals in the law firm of Elliott & Associates. The firm’s area of concentration is the contesting of assessments of commercial and industrial properties, condominium developments and high-end single-family homes in the metropolitan Chicagoland area. Michael J. Elliott received his B.S. from Purdue University in 1981 and his J.D. from Loyola University of Chicago in 1984. Joanne P. Elliott received her B.S. from Indiana University in 1981 and her J.D. from John Marshall Law School in 1984.