Price = Market Value: Fact or Fiction
There is a widely held misconception that the
actual price paid for a property will become the basis for an immediate increase
in its real estate taxes. In almost every state, including Illinois, a
property's market value is the base upon which real estate taxes must be
determined.
There are many situations in which the purchase price does not represent the property's market value and should not become the basis for its real estate taxes. Many property purchases are not dictated by the marketplace, but by their value to investors based on their requirements.
Market value and investment value are very different concepts. Market value assumes a typical buyer and a typical seller for the market in which the property is located. Investment value, however, is directly related to the interest of a specific buyer. The price paid reflects the advantages of a particular property to the buyer.
A typical example might be the price paid for a vacant land parcel adjacent to a truck terminal. The vacant parcel may have a market value of $200,000. The owner of the truck terminal, however, may be willing to pay $300,000 for the land since it is crucial for him to expand, and it would be far more costly for him to relocate his business. A purchase price of
$300,000 would not reflect market value and should not be the basis for the property's real estate taxes.
Similarly, when residential rental buildings are purchased for conversion to condominiums, the condo converter may be willing to pay more for the building than an investor in rental properties, since sales of the units will more than compensate for the higher price.
In addition, the question of what is purchased must be considered. Hotels, shopping malls, retirement communities and nursing homes contain many non-real estate assets which are typically part of a sale. The real estate assets of a full-service hotel will normally be valued at less than half its total purchase price.
[cut] The purchase of a shopping center includes a relationship with the anchor stores which play such a significant role in attracting customers and this relationship to the anchor store is a major non-realty asset that is purchased.
In each case, we must peel away the value of the non-real estate assets from the total purchase price. [cut] In Illinois, the Transfer Declarations that must be filed at the time a property is purchased makes provision for an allocation of value between real estate assets and non-real estate assets.
There are many other circumstances which challenge the myth that the price paid for a property represents the market value upon which its real estate taxes are based. It should be clear that the "price equals value principle" is, at best, a half truth.
FKK&R’s final assessment of the tax projections will be shared with our readers in the next newsletter.
2001 Reassessment Schedule
Cook County’s North and
Northwest suburbs are being reassessed in 2001. Reassessment notices should
begin to appear in your mail by early summer. The following townships will be
included in the reassessment: Barrington, Elk Grove, Evanston,
Hanover, Leyden, Maine, New Trier, Niles, Northfield, Norwood Park, Palatine,
Schaumburg, Wheeling.
We have recently forwarded Fee Agreements to clients who own properties in the 2001 reassessment area. We urge those who have received agreements to sign them and return them as soon as possible. If you own a property in any of the listed townships and have not received correspondence from us, we would welcome the opportunity to review the property’s value with you.
Firm News
FKK&R welcomes Kenneth J. Rogers to our firm as Director of Real Estate Analysis. Ken brings seventeen years experience in matters involving the operation, financing, valuation and tax assessment of shopping centers and regional malls. Most recently, Ken was with a Big Five accounting firm, where he served as national practice leader for purchase price allocation services. He was also designated as its firm wide resource for shopping center issues. Prior to that, Ken was Director of Property Taxes for Simon Property Group, the country’s largest regional mall REIT. He also served as Director of Financial Analysis for Simon. Ken’s tax appeal experience extends to over a dozen states and includes such notable properties as the Mall of America.
Ken can be reached at 312-726-1833 or krogers@proptax.com
Martin S. Katz National Service Award
The Real Estate Investment Association (REIA) announced the establishment of the annual Martin S. Katz National Service Award at its annual summit, which was held at the Palmer House Hilton on January 18, 2001. Marty passed away on May 15, 2000 after a long and heroic struggle with cancer. REIA instituted the award to honor Marty’s memory and to recognize his countless contributions to the real estate community throughout the United States. Marty had served as a director of REIA for many years and was the founder and first president of American Property Tax Counsel.
Jim Keledgian, the president of REIA, presented the 2001 Award to Congressman Jerry Weller, of the 11th District of Illinois which includes Grundy County and portions of LaSalle, Will, Cook and Kankakee Counties. Congressman Weller has worked to extend the Section 42 Income Tax Credits program, the single most important government program in fostering affordable rental housing.
FKK&R hosted a special meeting on regional mall property tax assessment and valuation on March 20 at the Union League Club in Chicago. The subject matter included:
Jeff Brown recently lectured at the Chicago Bar Association’s Continuing Legal Education Seminar on Real Estate Taxation. Topics covered in the Seminar included legal procedures for appealing and reducing property taxes, the availability of property tax incentive and abatement programs as well as methods for minimizing the property tax burden on new acquisitions.
Jim Regan has been invited to participate in a panel at the NAREIT Law and Accounting Conference to be held in Washington D.C. on May 2 – 4. The panel will address new developments affecting the valuation of REIT owned real estate.
American Property Tax Counsel News
Jim Regan chaired APTC’s 2000 annual seminar which took place on November 10-12 in Phoenix. Centering on industrial properties, the seminar participants presented new strategies and revised methodologies to analyze the effects of advancing technologies on the valuation of properties. Specific attention was given to the acceleration of functional and economic obsolescence, the economics of domestic industrial facilities in a global economy, environmental penalties and assessor practices which incorporate unsound valuation principles.
Jim Regan has been asked to chair the 2001 Seminar which will be devoted to developing principles to identify, analyze and value the presence of intangibles which are incorrectly attributed to the real estate value of varied properties including hotels, comprehensive retirement communities, regional and super regional shopping centers, and electric generation plants.