Business District Complex
from RECGA Member, Michael S. MaRous
Tax Issue – A 750+-unit multibuilding, 35+-year-old, well-located suburban apartment complex was purchased for $67,000,000. Soon after the purchase, even though the buyer performed extensive pre-closing due diligence, the buyer found there was severe concrete deterioration that impacted the structural integrity of the balconies in the two 20-story buildings. Furthermore, the deterioration of the structural steel supporting the balconies actually intruded into the living area of the buildings.
Upon significant analysis and with the assistance of structural engineers, it was the opinion of MaRous and Company that the only solution for the two high-rise buildings was either to raze the buildings or to entirely vacate the buildings in order to correct the issues and to rehab the buildings in the most efficient manner.
Although ownership disagreed with our analysis, we proceeded with our appraisal report and took into consideration the cost of vacating and retenanting the space, the loss of rents, the contingency cost, and the potential stigma on the project and its impact on the ability to sell the complex until the work was completed. Further consideration was given to the ability to obtain financing for the renovation and to cover the rent loss and operating expenses. Taking all these items into consideration, our conclusion reflected an overall value of approximately half that of the recent purchase price.
When our report was completed, testimony was given at a Board of Review Hearing and a significant reduction in real estate taxes and in the assessed value was provided by the county based on our report and testimony.
Approximately 1 year after the Board of Review hearing, ownership realized the negative effect of the construction on life safety issues in an occupied building and vacated the tower. The cost to ownership to resolve the structural issues and to re-lease the building with new tenants, including the loss of rent, was more than $25,000,000, which was similar to our original projection. Unfortunately, the township assessor added the cost to repair the building to the purchase price, which resulted in a significant increase in the overall market value estimate and assessed value.
When the first tower was repaired, the second tower exhibited the same issues as the first tower. As a result of our analysis, we actually had costs that we could utilize to support our updated appraisal. Again performing a thorough market analysis, our value opinion was more than $30,000,000 less than the purchase price or less then half of the assessor’s new opinion of value. Based on actual experience, on rent levels, and on an updated appraisal, a significantly lower tax assessment was granted by the county.
Another issue was the ownership by our client of a 414-space parking garage that serviced the subject complex. However, 314 spaces were reserved for commuter parking and the remaining 100 spaces are reserved for the apartment renters. However, due to the poor occupancy of the subject complex, these 100 spaces were virtually unused and the revenue generated from the commuter lot did not cover maintenance and reserve issues. An income analysis reflecting the income and expenses and the limitations of the parking garage again reflected a significantly
lower market value than the assessor’s opinion of value.
Over a 3-year appeal period with our appraisal reports and testimony as key pieces of the evidence provided, the actual tax savings to the taxpayer was approximately $1,900,000 compared to the assessor’s opinion of value.
The assessor recently reassessed the subject and again added the cost to cure the items of deferred maintenance to the purchase price to create an overall value that, in our opinion, is arguably double that which a qualified buyer would pay. A current appeal has been filed with the Illinois Property Tax Appeal Board.