Cook County, Ill. systematically revalues all properties for taxation every three years, and 2012 is the reassessment year for Chicago. The last revaluation took place in 2009, shortly after the collapse of Lehman Brothers and the beginning of the Great Recession. The county has already sent reassessment notices to real estate owners in the northern sections of Chicago and will notify those in the rest of the city of the proposed assessed value of their properties over the next six months. The 2012 assessment will be used to determine each Chicagoan’s real estate taxes through 2014.

Homeowners and business owners alike should pay close attention to this year’s revaluation. Real estate has undergone a significant value loss since 2008, and that alone makes the 2012 revaluation a defining event for Chicago’s property owners.

Assessment officials strive to make the process as transparent as possible, and the notices contain a wealth of information about the property and its assessment history. At neighborhood meetings throughout the city, officials stress that the proposed 2012 assessment contained in the notice is only the first step in a process, and that every taxpayer has the opportunity to provide evidence which shows that the proposed assessment inaccurately reflects the property’s value. The assessor calculates values using mass appraisal techniques applied to data amassed on all segments of the city’s real estate markets, but recognizes that each property is unique and that market data can be made more precise by information provided by the property owner.

Despite the efforts at transparency, the process of producing a final tax bill is not restricted solely to valuation. The budgets of local agencies funded by real estate taxes affect the bill as well.

The assessment process

Real estate taxes are an ad valorem tax, or dependent upon how much the property is worth. Illinois relates taxes to the fair cash value of the property. Simply said, the assessor must determine how much the property would have sold for as of Jan. 1, 2012. The primary purpose for assessment valuation is to determine the fair share of taxes and to assure that each property is uniformly taxed in accord with its value.

Value loss must be considered in that context. The real estate markets—residential and commercial—were at the heart of the boom of the last decade. In the last three years real estate has, in turn, felt the full force of the burst bubble. According to the Moody’s REAL Commercial Property Price Index, as of the first quarter 2011, office, industrial, apartments and retail properties had all fallen back to 2003 value levels.

In Chicago specifically, the most telling statistic may be the lack of property sales. From an average of 50,000 to 55,000 Cook County sales per year in the boom years, sales in the last three years have not exceeded 5,500 per year.

Office vacancy rates in the Central Business District have gone from 11.5 percent in 2008 to more than 20 percent as of the first quarter of 2012, according to MB Real Estate Services. Concessions and rent abatements continue for new tenants.

Retail rents declined from $18 per sq. ft. in 2009 to $16 per sq. ft. by 2011, according to Colliers International. And the S&P/Case-Shiller Home Prices Indices show that Chicago condominium prices in 2010 had fallen to 2002 levels, and that home prices closely followed the downturn in condos. Home prices were down 18.7 percent on an annual basis.

One could strongly argue that the decline in value, together with the paucity of sales, demands new methods to arrive at fair cash value. Income data is available to determine values more accurately determine, even for the residential and condo markets, and extraordinary times require extraordinary solutions.

The budget process

The other contributor to the real estate taxpayer’s bill is the aggregate budget requirement of local schools, police, fire, county, city governmental, park districts and libraries, which determines the dollars that must be collected from real estate taxes. The assessment determines the proportion of that aggregate amount the individual taxpayer owes, based on property value.

Chicago’s usage classifications further obfuscate the process: Residential properties are assessed at 10 percent of value while commercial properties are assessed at 25 percent. That triggers a state equalization factor, which is included in the computation of every taxpayer’s bill. Experienced tax counsel can help taxpayers evaluate all these factors and determine whether to protest their assessment.

James Regan is the managing partner of the Chicago law firm of Fisk Kart Katz and Regan, the Illinois member of the American Property Tax Counsel.