Newsletter of 2010
"History never repeats itself; rather, it is people that repeat history."
- Author Unknown
As we close and review the chapters of yet another year, we are faced with challenges most generations of today find unfamiliar and known only to a remaining few that had experienced the Great Depression of the 1920's and 1930's. Not unlike that period, we experienced an almost immediate and historic expansion of both domestic and international markets only to realize a credit collapse that was one of the catalysts leading to an eventual economic contraction of unexpected proportions. As we awaken from this disaster, we have to compensate for shortfalls suffered thus far, and, more importantly, revise our methodology in our financial dealings to prevent ourselves from repeating the mistakes of the past.
While there are many different reasons people acquire real property, property ownership has proven repeatedly to be the best type of investment one can make. Before the final decision is made to acquire any real property, regardless of type, careful attention must be given to the core details and the appropriate amount of due diligence must be performed. We have observed that the following models have been repeatedly utilized in today's marketplace: a business owner purchases her commercial property with the intent to house her core business operations; an investor purchases a twelve unit mixed-use property with the intent to generate income to supplement or completely serve as his retirement income; and, others may purchase a distressed property in order to rehabilitate it and make a quick profit from the sale. While every investor has his or her strategy, there is one sound observation realized in these tough economic times: the investors that have not been affected as much by the decline in today's market are those that (1) purchased their property with a sizable down payment, (2) formulated their purchase offer based on mitigating potentially detrimental situations such as long term vacancies or substantial collection losses, and (3) continually re-invested in their properties as well as their business models either through placing a new façade on their strip center, by introducing a new theme for their restaurant compatible with today's trends and tastes or fostering a good line of communication between themselves and the tenants. A property owner must acknowledge the fact that a property, not unlike a child, must be nurtured. However, unlike a child, it is an inanimate metaphysical object that never achieves independence and will always require the property owner's constant attention.
As property owners, the one concept that should always be a constant thread in your minds as well as planning is due diligence. Once the acquisition has been made, careful attention must be given to ensure costs are as low as possible without compromising the integrity of maintaining the property's highest and best use. One way is to aggressively negotiate the best prices and/or service packages that are not only required but also recommended to enhance the longevity of your property. Some examples of services you may want to review are your telephone packages, insurance rates and utility services. Also, if you have a specialty mortgage, try refinancing into a traditional mortgage with a lower interest rate or renegotiating the terms with your respective bank or lender. We have seen first hand that a simple telephone call can save you potentially hundreds and maybe even thousands of dollars a year. If you save $2,000 against a former net income of $100,000, you have just increased your cash flow by 2%. These are monies that can go toward paying down the principle of your loan or other viable improvements for your property.
Even though successful property ownership is akin to science, it is a concept that has the true potential of bearing fruit in our aspirations and dreams. It is truly an indication of obtaining the American Dream, however, it is also a responsibility and, if not properly cared for, potentially a great liability. That is why when we invest in properties, regardless of type, we must determine if the purpose or intended use of the property makes sense. Some of the questions that you should ask are:
Is there a reasonable rate of return based on your investment or value of your down payment?
Is it a property that has the potential of needing a high amount of constant maintenance that will only serve to take valuable time away from your everyday life?
Is it a property that initially requires expensive as well as extensive repairs?
What is the pattern and practice of the current tenants as well as the terms of their respective agreements?
What is the historical vacancy of the property and the immediate geographic area?
Can the property enable or maintain a positive cash flow despite an unforeseen vacancy or repair?
Owning property can be a very advantageous achievement if properly built of the foundations of diligence, perseverance and, at times, sacrifice. Let the mistakes of the past remind us of the pitfalls experienced today so that tomorrow can be a brighter day.
Just like anything with high potential - do your homework first, and then, never put the book down.
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Reclassification of Assessment Levels in Cook County
For 2009, the assessment percentage levels for all properties have been revised under what is commonly known as the 10/25 ordinance. The following table illustrates how the assessment levels have changed from 2008 tax year to the present:
|
Property Class |
2008 and Prior |
2009 to Present |
|
Vacant Land (Class 1) |
22% |
10% |
|
Residential (Class 2) |
16% |
10% |
|
Apartment Buildings with over 6 units (Class 3) |
20% |
16% in 2009 13% in 2010 10% in 2011 |
|
Not-For-Profit (Class 4) |
30% |
25% |
|
Industrial (Class 5) |
36% |
25% |
|
Commercial (Class 5) |
38% |
25% |
|
Class 8 and 6b |
16% |
10% |
The direct result of this shifting of assessment levels invariably increases the fair market valuation of your property. For example, if the assessment for your commercial property was $380,000 in tax years 2008 and prior, the fair market value was $1,000,000. The same assessment of $380,000 would now translate to a fair market value of $1,520,000. In other words, even though the assessment level percentage burden is decreasing by 34.21%, the fair market value is increasing by 52%, if the assessment remains the same as in the above example. For the most part, paradoxically, the Assessor has maintained the same assessments for commercial properties despite the reduction of assessment levels.
By filing an appeal aggressively and annually is the only way to ensure you are not being assessed unreasonably. Do not be deceived into thinking that because the assessed valuation is remaining stagnant or decreasing that the tax will remain the same. The same assessment as in year's prior now translates to a higher fair market value. You cannot take the chance to stay complacent and not file an appeal, especially in these times of declining valuations.
Finally, repercussions to policy and what this new ordinance will do to the state equalization factor as well as local tax rates are not yet known. However, the only thing we can foresee and prepare for is a dynamic change in the burden of property taxes between the various classifications of properties.
"My Property Value Has Decreased. Will My Property Taxes Go Down?"
This is a question that is repeatedly asked by almost every property owner. Unfortunately, the answer is not a clear yes or no. The annual property tax is the multiplication of the assessed value (AV) (which is determined by the fair market value (FMV)), the state equalization factor, and the local tax rate. While the property owner may file an appeal and reduce the AV to reflect an appropriate FMV, the equalization factor and tax rate may increase to accommodate the taxes needed to meet the local budget levies imposed by the schools and county government. Generally, when there is a general decrease in assessments in any particular area, the local tax rates will increase to accommodate the almost always-increasing budgetary needs of all levels of government.
If we want lower property taxes, there are five viable ways to achieve them:
- The first option is to always remain attentive to the assessed valuations imposed by the Assessor and to file an appropriate appeal at the Assessor and/or the County Board of Review;
- The second option is to press legislators to find alternate sources of income. Some economists recommend taxing Internet transactions between local citizens and out of state vendors. These vendors neither pay sales taxes nor property taxes to the local governments. Furthermore, these merchants do not employ people that reside locally and directly benefit from sales transactions perform by individuals that reside in Cook County. Basically, these out of state merchants contribute only to one thing locally: increased vacancies due to empty local storefronts who are unable to compete with these internet companies who have an unfair competitive advantage - no taxation.
- The third option involves electing politicians that believe in forward thinking methodologies and efficiency. With the constant advancement of technology, there is no excuse to employ more resources today than the levels of employment 15 or 20 years ago. Consulting firms can help these political offices to devise and implement effective methodologies distilled from sound private sector business practices to reduce such waste.
- The majority of property taxes go to the educational needs of a community and, as a result, a careful review and overhaul must be given to this expenditure. Contrary to the current actions, one suggestion would be to consolidate the administration and operation of local school districts. Combining the management of the respective districts would help minimize administrative costs by decreasing the amount of resources allocated to basic, everyday and/or repetitive tasks. Finally, in the best interest of the children, many are mandating for a longer school year. This would ensure that children are receiving the maximum education for the taxes paid and it will help educate our children to be better equipped to compete internationally.
- The taxing authorities should conduct a closer examination of not-for-profit properties that do not pay or pay a very minuscule amount of property tax. While many are legitimate and foster humanitarian services to the community, the Assessor should conduct the same examination it performs on commercial and industrial properties to ensure that the not-for-profit are granted a realistic exemption percentage and are liable for their fair share of property taxes as well as other related burdens of the community they are located in.
To achieve solutions to this problem means to be proactive, creative and fearless in local, state, and federal politics and relevant venues. The current state of affairs of our country, states, and local towns need, at times, draconian yet effective plans. We cannot afford to be politically correct or publicly safe by adhering to nonsensical and dated concepts that have not stood the test of time nor current economy. Many experts have been calling for reform and the need to continually adapt to the local, national and international landscape without sacrificing our ideals or identities.
The Shrinking Homeowner's Exemption
In 2004, the State legislature passed an expanded version of the homeowner's exemption (H.O.E.) to alleviate the drastic rate of increase to residential properties' assessed values to be effective for tax years 2003 through 2005 for properties located in Chicago, 2004 through 2006 for the Northern townships and 2005 through 2007 for the Southern townships. In 2007, the State legislature passed an even more effective expanded version of the homeowner'sexemption for tax years 2006 through 2008 for the City of Chicago properties, 2007 through 2009 for the Northern townships and 2008 through 2010 for the Southern townships. While the maximum equalized assessed value deducted from the tax equation for the first version passed in 2004 was $20,000, the deduction for the second version was $33,000 in the first year of the triennial period, $26,000 in the second year, and $20,000 in the third year. After this second version of the expanded H.O.E. expires, the maximum benefit allowed will decrease to $6,000. In other words, from a realized $600 to $2,500 exemption benefit, residential property owners will realize a much smaller benefit if nothing is done by the State legislature to provide a new alternative or boost.
The Assessor has tried to alleviate this foreseeable problem by reducing the assessed value of homes throughout the majority of Cook County. Unfortunately, the Assessor has inadvertently compounded this problem by reducing the assessment level percentage for commercial properties thus shifting more of the taxation burden onto residential properties. Without a renewal of the expanded version of the homeowner's exemption, residential property owners should anticipate higher property taxes in the second half of this year.
Reveliotis Law, P.C. is committed to assisting its clients in achieving the most equitable assessed valuation for property taxation. If you have any questions, please do not hesitate to contact us at 312-239-6430.
