Publications
Property Tax Assessments - The Silver Lining for Developers
By George J. Relias, As published in Northern Illinois Real Estate Magazine October, 2008
There is a silver lining for residential developers facing increased inventory and decreasing profit margins. It is common knowledge that in most states real estate taxes are a function of the value of the underlining real estate. As such, when new units sell the purchase price becomes strong evidence of the market value in an Assessor’s eyes. However, what is the value of the unsold units?
In many jurisdictions, a newly constructed residential property is not fully assessed until the property sells or has an occupancy permit issued. In fact, an argument can be made that a property should be valued as vacant land until it becomes fit for occupancy. Although this is a sound argument, in practice assessors prorate the value of construction over the tax year.
Consequently, being able to manage the occupancy date can have tremendous benefits to the developer. One Chicago developer completes the construction of the entire project leaving only the kitchens unfinished. Anyone walking through the project sees that kitchen cabinets and appliance need to be installed before the property is functional. By delaying on the kitchen completion, the developer preserves his capital outlay and postpones the occupancy permit. This enables him to maintain a partial assessment for as long as possible before the unit closes. Furthermore, the delay enables prospective purchasers to select finishes and fixtures increasing their emotional commitment to the property prior to closing. Having the prospective purchaser financially and emotionally “invested” in the unit is important in today’s buyers market.
Developers should also seek to have their model units assessed lower than other units in the project. In Cook County for example, up to three models within a three mile radius can qualify for reduced assessments. The value of these model units can be locked at the pre-construction values for up to ten years. This is significant particularly if the pre-construction value was as unimproved vacant land.
Although model units can be costly to furnish and maintain, developers for years have enjoyed the marketing benefits model units provide to their projects. As the sales cycle for new units lengthens, more marketing expenses are required to sell each unit. Petitioning the assessor for tax relief on the model units becomes one way to help defray increasing marketing costs.
Lastly, frank and honest discussions with the local assessing authority can sometimes yield positive results. Some jurisdictions are willing to work with developers to provide equitable assessments for their projects. Many assessing officials, particularly in Chicago’s collar counties, live and work within the jurisdiction they assess. Consequently, they often have a vested personal interest in the success of each project. However, it is important to remember that real estate taxes fund the local government, police, fire, schools and park districts. A developer should critically and objectively examine their situation or seek outside counsel before brazenly asking for assessment relief.
In conclusion, residential real estate developers are facing many challenges. However, these challenges can be mitigated by understanding the real estate assessment process, as well as the policies and procedures of the local assessing authority. If one can understand how the assessor thinks and what programs they may qualify for, they are more likely to find the silver lining in today’s gloomy real estate market.