Condo conversions boosting apartment taxes, rents in city 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. |