The New Year likely will bring gloom to rental apartment owners in Chicago and suburban Cook County unless some real estate tax assessment relief is provided rather quickly.
In the 2003 Cook County triennial reassessment, it was not uncommon for apartment building owners to be hit with assessment increases of 100 percent or more, and some apartment assessments rose more than 250 percent, real estate tax appeal attorneys say.
Cook County Assessor James Houlihan has proposed a 75 percent median increase in 2003 assessments for apartment buildings with seven or more units in Near North Side neighborhoods such as Lincoln Park and the Gold Coast.
In the Lakeview and Edgewater neighborhoods, on the North Side, the proposed median assessment increase is nearly 85 percent. The assessment hikes come at a time when the Chicagoland apartment market is in crisis, experts say.
“Vacancies in Chicago and suburbs have hit record highs, levels of 8 percent to 20 percent, that have not been seen since the early 1990s,” according to a new comprehensive independent study commissioned by the Chicagoland Apartment Association (CAA), which represents more than 300 members who own or manage more than 135,000 apartments in the six-county metropolitan area. Job losses during the 2001 and 2002 recession and a sharp drop in the demand for corporate rental apartment suites have sparked vacancies, according to the study.
The study’s authors also report that at the same time, the lowest mortgage interest rates in 40 years have turned thousands of Chicago apartment renters into condominium owners who were attracted to the “record deliveries of more than 5,000 condominium units in the downtown market area in 2003 alone.”
The study, which surveyed about 20 Chicago buildings with more than 7,400 rental units, found sharply lower earnings in the apartment industry since 2001.
Apartment owners report sharply higher proposed 2003 real estate assessments ranging from 46 percent to 251 percent that likely will translate into rent increases of 30 to 50 percent over the next three years, according to the CAA.
In smaller apartment buildings with fewer units the monthly rent increases necessary to cover the tax hike may be much higher, experts say.
According to Bruce Wechsler, president of CAA, the current round of real estate tax assessments most seriously affect renters earning less than $50,000 a year who cannot afford to buy a condominium even though interest rates are at 40-year lows.
“Sixty percent, or 2.5 million Chicago residents, are renters. These astronomical assessment increases put all renters in jeopardy,” said Wechsler.
Meanwhile, property owners have been forced to introduce concessions to entice renters. Rental concessions of one month to three months of free rent on a 12-month lease have been routinely offered.
“This equates to an 8.3 percent to a 25 percent discount from market rents,” the report said. Concessions coupled with high vacancy rates have forced economic occupancy rates to fall below 75 percent in some cases.
At the same time, apartment owners have been hit with insurance rates that have soared as high as $650 per unit, up from $100 per unit. And, record-high natural gas costs, which have risen 34 percent since October of 2002, are expected to spike again during the winter of 2003.
In addition, other repairs such as mechanical systems, new windows and tuck pointing have sharply increased capital expenses to 14 percent from 10 percent of effective gross income.
“Typical annual operating costs for a building in Chicago average 35 percent and real estate taxes another 20 percent of gross rent,” said apartment investor Stuart Handler, former president of the CAA. “These new real estate tax hikes could add another 10 to 30 percent, making all operating costs as much as 85 percent of gross rents.” This leaves only 15 percent of gross rents to pay the mortgage and major maintenance costs, and a return on investment, he said.
According to the study, the rental apartment assessment hikes apparently are patterned after the sharply rising values created by the sale of apartment buildings being converted to condominiums and low interest rates.
“Apartment owners won some concessions last year from the Cook County Board when assessment levels for apartment buildings with more than seven units in Chicago and nearby suburbs were cut to 30 percent in 2003 and 26 percent in 2004 from 33 percent of the market value,” Handler said. However, apartment managers and owners say the skyrocketing assessments have erased all of the benefits of the phased-in assessment reductions, which were designed to keep rents more affordable.
Real estate columnist and media consultant Don DeBat has written about Chicago-area housing and mortgage markets since 1968. He is president of Don DeBat and Associates, www.dondebat.net.