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West Loop Associates, LLC v. The Property Tax Appeal Board

Court of Appeals of Illinois, First District, Fourth Division

June 29, 2017

WEST LOOP ASSOCIATES, LLC, Petitioner,
v.
THE PROPERTY TAX APPEAL BOARD, THE CITY OF CHICAGO, and THE CHICAGO BOARD OF EDUCATION, Respondents.

         Direct Review from the Illinois Property Tax Appeal Board 09-32895.001-003-C-3 10-34445.001-003-C-3 11-29146.001-003-C-3

          JUSTICE McBRIDE delivered the judgment of the court, with opinion. Presiding Justice Ellis and Justice Burke concurred in the judgment and opinion.

          OPINION

          McBRIDE JUSTICE

         ¶ 1 Petitioner West Loop Associates, Inc. (West Loop), seeks review of three final administrative decisions by respondent Property Tax Appeal Board (PTAB) to increase the valuation of commercial property located at 550 West Jackson Boulevard in Chicago from $70.4 million to $73.8 million, rather than reducing it as West Loop sought to $58.0 million. West Loop's separate actions with PTAB for the tax years 2009, 2010, and 2011 were consolidated into a single administrative hearing, and the three subsequent appeals to this court, Nos. 1-15-1998, 1-15-1999, and 1-15-2000 have also been consolidated. We have jurisdiction over this direct appeal from PTAB due to section 16-195 of the Property Tax Code (35 ILCS 200/16-195 (West 2014)) because West Loop petitioned for at least a $300, 000 change in the assessed valuation of its property. West Loop argues PTAB (1) abused its discretion by granting a motion in limine to bar opposition to certain facts in the opinion of the City of Chicago's property valuation expert, Kathleen M. Dart, of KMD Valuation Group, Inc.; (2) applied the wrong valuation methodology in rejecting the joint opinion of West Loop's valuation experts, Arthur J. Murphy and Timothy R. O'Keefe of Urban Real Estate Research, Inc.; and (3) rendered a decision contrary to the manifest weight of the evidence either by erroneously disregarding the Murphy valuation or by insufficiently analyzing the evidence. West Loop argues for a reversal of PTAB's decision and remand so the agency can properly evaluate the evidence. The respondents are PTAB and intervenors below, City of Chicago (City) and Chicago Board of Education (CBOE or education board).

         ¶ 2 West Loop purchased the subject property in 2005 for either $125 million or $135 million (both values appear in the record on review). The property is comprised of three adjacent parcels totaling 26, 369 square feet which are recorded under Cook County property identification numbers 17-16-113-002, -003, and -009. The rectangular site is zoned "DX-16: Downtown Mixed-Used District" and is located in the West Loop submarket of Chicago's Central Business District. It sits at the northwest corner of the intersection of West Jackson Boulevard and South Clinton Street, across from Union Station. To its west is a large building that fronts onto West Jackson Boulevard and is bordered by South Jefferson Street, and to the north is West Quincy Street. The land is improved with an 18-story, multi-tenant office building, the upper floors of which contain 406, 041 square feet of rentable office space and the lower floors of which contain mechanical equipment and a public parking garage with 148 spaces. The building was constructed with a steel frame, metal, green-tinted curtain wall glass, and some stone on the first level. Most of the structure was built in 2001, although it was erected on an existing foundation and incorporated a four-story communications room needed by then-tenant MCI World Com (Verizon).

         ¶ 3 For tax years 2009, 2010, and 2011, the Cook County assessor initially determined that the value of the 550 West Jackson property was $96.1 million. West Loop appealed to the Cook County board of review, which, after considering the evidence and facts submitted, reduced the assessed value to $70.4 million. West Loop then sought further review by PTAB. West Loop based its tax assessment challenge to PTAB primarily on Murphy's $58 million valuation which was retrospective to January 1, 2009. According to its "Statement of Policy, " PTAB "shall determine the correct assessment *** of any parcel of real property which is the subject of an appeal, based upon facts, evidence, exhibits and briefs submitted to or elicited by [PTAB]" (86 Ill. Adm. Code 1910.10(b) (1997)) and "revise the assessment of any particular parcel of real property when it finds such assessment to be in error" (86 Ill. Adm. Code 1910.10(d) (1997)). PTAB granted requests from the City and CBOE for leave to intervene in order to protect their interests in the property tax receipts.

         ¶ 4 The education board retained an expert to critique the Murphy report consistent with the Uniform Standard of Professional Appraisal Practice and the City retained an expert to perform an independent valuation. The municipality's expert, Dart, came to the conclusion that the retrospective market value of the property as of January 1, 2009, was $73.8 million. Dart noted in her written appraisal rendered on June 13, 2012, that she had been hindered in completing her report. She attached a copy of a letter she sent to West Loop's counsel asking to schedule a site visit accompanied by a property manager and/or building owner and to receive copies of written records such as leases, rent rolls, and annual operating statements. Dart had specified in her letter, "Please contact the undersigned to schedule a date for the building visit. Due to time constraints, we are requesting your response by April 27, 2012. Upon review of all information provided, we may need to request additional documents. Please feel free to contact me or [my client in the City of Chicago Law Department, Senior Counsel Richard Danaher]." Dart submitted a mail delivery receipt indicating her letter had been received by West Loop's counsel on April 11, 2012. Dart's report indicated that she performed her valuation work between May 22, 2012, and June 1, 2012, based in part on "exterior and very limited interior observations of the subject property" and by extracting information about the building and its site, such as income, expense and lease figures, from the Murphy appraisal and from other materials filed by West Loop's counsel. Dart "reserve[d] the right to revise [her] report if necessary, if a property visit is granted and subject data, including subject leases, detailed operating statements, occupancy reports, and property reports are provided."

         ¶ 5 In late January 2015, PTAB notified the parties that the matter would proceed to hearing on March 25, 2015. On Friday, March 20, 2015, the City filed the motion in limine which is now at issue in West Loop's appeal. The City contended that West Loop's failure to respond to Dart's letter was equivalent to affirmatively denying her request and cited section 1910.94 of title 86 of the Illinois Administrative Code, which addresses the consequences of denying a request to "physically inspect and examine the property for valuation purposes." 86 Ill. Adm. Code 1910.94(a) (2006). Tracking the language of paragraph (a) of section 1910.94, the City argued PTAB should bar West Loop from presenting "any testimony, objection, motion, appraisal critique or other evidentiary material [such as cross-examination of the City's valuation expert witness] that is offered to refute, discredit, or disprove [the City's] evidence *** regarding the description, physical characteristics or condition of the subject property." The City also cited section 1910.79 of title 86 of the Illinois Administrative Code for the proposition that West Loop's conduct contravened PTAB's general policy that all relevant information be disclosed prior to hearing. 86 Ill. Adm. Code 1910.79 (2006). That section states:

"Policy on Discovery
a) It is the policy of the Property Tax Appeal Board to obtain full disclosure of all relevant and material facts prior to hearing.
b) It is the policy of the Board to encourage voluntary exchange by the parties of all relevant and material facts prior to hearing through the use of requests for documents and information. When less formal procedures have proven to be unsuccessful, formal discovery by means available under this Part will be allowed." 86 Ill. Adm. Code 1910.79 (2006).

         Three days later, on Monday, March 23, 2015, West Loop filed a written response in which it argued the motion in limine should be denied because West Loop had not been properly served with the motion, had not actually denied access to Dart, and had not been contacted by the City's attorney with reasonable attempts to resolve the issue. Paragraph (b) of section 1910.94 states, "Any motion made to invoke this Section shall incorporate a statement detailing the consultation and failed reasonable attempts to resolve differences over issues involving inspection with the taxpayer or property owner." 86 Ill. Adm. Code 1910.94(b) (2006). The following day, Tuesday, March 24, 2015, West Loop sought a continuance of up to 30 days to allow Dart to visit its property. PTAB, however, denied a continuance at the "11th hour" and indicated it would rule on the motion in limine at the hearing because the parties and the agency had already begun preparations. When the proceedings commenced on Wednesday, March 25, 2015, PTAB characterized West Loop's failure to answer Dart's inspection request as "a negative, a response of no, " PTAB granted the City's motion, and PTAB said it would consider objections if they arose during the hearing.

         ¶ 6 Before summarizing the hearing testimony, we briefly note the following parameters. Pursuant to Illinois law, real property is to be "valued at its fair cash value, estimated at the price it would bring at a fair voluntary sale." (Internal quotation marks omitted.) Chrysler Corp. v. Illinois Property Tax Appeal Board, 69 Ill.App.3d 207, 211, 387 N.E.2d 351, 355 (1979). Stated in other terms, fair cash value is fair market value. Chrysler Corp., 69 Ill.App.3d at 211, 387 N.E.2d at 355.

         ¶ 7 Three basic valuation methods may be used to estimate a property's fair market value. Chrysler Corp., 69 Ill.App.3d at 211, 387 N.E.2d at 355. These three methods are the sales comparison approach, the income approach, and the replacement cost approach. Chrysler Corp., 69 Ill.App.3d at 211, 387 N.E.2d at 355. No one of these methods is conclusive, but each is a factor to be considered in valuing a property. Cook County Board of Review v. Property Tax Appeal Board, 384 Ill.App.3d 472, 480, 894 N.E.2d 400, 407 (2008) (Omni). "Professional appraisals generally employ more than one method to determine valuation; the use of more than one method in a single appraisal serves as a check on the value reached by the other method or methods." Omni, 384 Ill.App.3d at 480, 894 N.E.2d at 408. Theoretically, the three approaches will lead to the same value or will at least allow the professional appraiser to "weigh any disparate results in order to reach a determination that best reflects the total true value of the property." (Internal quotation marks omitted.) Omni, 384 Ill.App.3d at 480, 894 N.E.2d at 408.

         ¶ 8 When market value is not conclusively established by a contemporaneous, voluntary, and arm's length sale of the actual property, then the preferred method of determining value is through the sales comparison approach, based on sales of comparable properties on the open market. Omni, 384 Ill.App.3d at 480-82, 894 N.E.2d at 408. The record also includes materials written by the Cook County assessor's office which outline the three established methodologies. According to the assessor's office, (1) the sales comparison approach compares the subject property to similar properties that have recently sold and have similar characteristics or indicators of value; (2) sales prices may be adjusted due to differences in location, physical characteristics, time of sale, physical condition, size, age, and other market related conditions; and (3) when similar unsold properties are included in the calculations, "[e]xtensive editing and adjustments are made."

         ¶ 9 The income approach is based on rental income generated by the property and is considered by the assessor's office to be "a very important indicator of property value." The assessor's office uses "market estimates for income, expenses, and a rate of return for an investor (the capitalization rate)" in its calculations to determine value.

         ¶ 10 Heavy reliance on the third methodology, the reproduction approach, is generally frowned upon. Chrysler Corp., 69 Ill.App.3d at 211, 387 N.E.2d at 355. According to the information prepared by the assessor's office, the reproduction cost approach is derived by determining the cost to construct the building, less the estimated depreciation of the property. Also, "[g]enerally, the reproduction cost approach should be emphasized only in the context of some special-purpose property, which is defined as property of such a nature and applied to such a special use that it cannot have a market value."

         ¶ 11 The party appealing an assessment to PTAB bears the burden of producing "substantive, documentary evidence or legal argument sufficient to challenge the correctness of the assessment." (Internal quotation marks omitted.) Omni, 384 Ill.App.3d at 484, 894 N.E.2d at 411; 86 Ill. Adm. Code 1910.63 (2000) (PTAB does not presume the county board of review or local assessing officer to be correct, however, the contesting party has the burden of going forward with "substantive, documentary evidence or legal argument sufficient to challenge the correctness of the assessment of the subject property" or face the dismissal of the appeal).

         ¶ 12 West Loop's first witness was Timothy W. Casey, an employee of Jones Lang LaSalle and the manager of the 550 West Jackson building. Casey classified the building as a B or B-property, due to its location west of the river and because designing and constructing around one tenant's existing telephone room had "greatly limited the things they were able to do" and resulted in a lobby that was "much too small." Casey deemed the building to be "primarily back office" rather than "high-end executive-level" space. The vast majority of tenants, meaning 70-to-80%, were financial services or trading firms who liked the building's redundant, independent feeds from separate electric substations. However, trading firms "tend to be very volatile" and "occasionally come and go." The 14th floor had been occupied by a trading firm which went bankrupt in 2009 and moved out, then another trading firm leased the space for 10 years but was gone within 2 years, and a third trading firm was currently occupying the space when Casey testified in 2015. With each tenant turnover, West Loop paid broker commissions, spent money on "tenant improvements" to customize the space, and sometimes gave "free rent." Casey said these were "below-the-line, " "non-operating" expenses attributable to acquiring tenants and they could not be recovered directly. Casey indicated this below-the-line accounting practice was approved by the "BOMA [(Business Owners and Managers Association)] committee" for real estate taxation. In tax years 2009, 2010, and 2011, West Loop had an annual statement loss of income to expenses of about "$3 to $4 million."

         ¶ 13 On cross-examination, Casey said the small lobby does not "fit the classification for a decent BOMA building downtown, " but he conceded that the limitation existed when West Loop bought the property in 2005 for $135 million. He denied that the redundant power sources "give this property a leg up in obtaining financial services tenants." The 14th floor is 16, 508 square feet, out of the building's total of 406, 041 feet. He was unaware whether the building's website included a building classification, said he had not looked at the website "in a while" because tenants did not use it, and would not be surprised if the website described the building as a Class A property. He acknowledged that Chicago's West Loop office submarket is "the best" and that the property is located across the street from a prime commuter station, several blocks away from other commuter rail stations, and three blocks from the Kennedy Expressway; and that there is public parking in the building as well as within a block or two.

         ¶ 14 The next witness, Murphy, testified that his qualifications as an appraiser included a bachelor's degree, two master's degrees, courses in real estate valuation, Illinois licensing as a general real estate appraiser, and "MAI" designation with the Appraisal Institute. In addition, Murphy had eight years experience as a commercial valuations deputy assessor in the Cook County assessor's office and 19 years in private practice performing appraisals around the United States, which focused on real estate tax appraisals. Murphy did not inspect the property himself before submitting the appraisal report. He relied on the inspection and preliminary appraisal developed by another appraiser in his office, O'Keefe, and had subsequently inspected the property in preparation for the hearing. Murphy considered the building to be "Class B" based on the "smaller" than normal lobby, some "functional obsolescence, " and that the property was "built sort of as back office space in downtown Chicago." It is situated "outside of the downtown really quality office space" or Class A properties that were generating $50 gross income per square foot, and this was reflected in its "gross rent [of] around 35 bucks." However, "[I]t's a quality building. There's no doubt about it. It's a good building."

         ¶ 15 Murphy's testimony and written report indicated that he used a concept called "investment value, " which he believed is "higher than market value, " and is created "when investors gather in a bullish market" and have motivations other than "the pure value of the real estate, " such as wanting to "build up their portfolio." The owner of 550 West Jackson is a "guy [who] owns buildings here and in New York" and is "building up a portfolio." The investment value concept or "real estate value" approach is "relatively new" and not everyone in the appraisal field would agree with it. However, appraisal work is "an argumentative field." Murphy placed "minimal weight" on the building's sale price of $125 million in October 2005, which he attributed to "faulty expectations" that the building had a "bright future." At the time, there were long term tenants and real estate and financial services tenants who were experiencing a "boom." After the sale, a "major tenant" that was occupying 125, 000 square feet, Refco, went bankrupt and vacated the property, and eight of the current tenants were brought in only by abating their rent for 3 to 14.5 months, abating some of their operating expenses and taxes, granting "substantial" tenant improvements, and making capital expenditures. West Loop tried to refinance but was turned down by several lenders, some of whom indicated the property was worth less than $60 million.

         ¶ 16 Murphy testified about a letter addendum attached to his written valuation which indicated it was "difficult" to value the property in light of a "severe global financial crisis" which was depressing sales volume, sale prices, and rental rates; causing loans to be cost prohibitive; and leading to increasing vacancy rates and "excessive" rent concessions. Sales prices between 2004 and 2008 were not reliable indicators for the current market and until there was sufficient "empirical data, " "discounting for the market is somewhat subjective."

         ¶ 17 Murphy's appraisal also discussed the three methodologies of property valuation. However, when asked whether his appraisal used three approaches to value, Murphy answered "yes and no" and said the replacement cost approach was the "the yes and no one." Murphy did not consider the replacement cost approach to be important in determining the value of the subject building and said the methodology was actually "very suspect in buildings like this" which are neither new nor special purpose properties. Murphy began his cost valuation by determining the land was worth $275 per square foot or $7.250 million, based on five comparable sales ranging from $272.38 to $503.14 per square foot. He then calculated it would cost $96.8 million to replace the building, to which he added 3% for indirect construction costs and 7% for "entrepreneurial incentive, " resulting in a total of $106.71 million. After deducting 20% for depreciation and 32.5% for "external obsolescence, " and adding $10, 000 for the building's parking improvements, Murphy concluded the cost value was $58 million. He explained that he used the calculations from his income approach in his cost approach, in order to conclude that external obsolescence had occurred:

"So the real value you see here is a value based on the income approach. So that's why I'm saying I did and I didn't. I'm showing it, I'm doing it, but then the depreciation I used is based on the income approach ***."

         ¶ 18 Utilizing an income approach, which Murphy considered to be the most appropriate methodology for determining the market value of an office building such as 550 West Jackson, Murphy valued this property at $58 million. According to his report, Murphy first determined the property's gross income, subtracted certain expenses to derive net operating income, and then derived and applied a capitalization, or CAP, rate to reach a final value of the property's income-producing capacity.

         ¶ 19 In order to estimate income and expenses, Murphy had considered rent and expense data from the subject property, seven undisclosed but comparable rental properties, and figures compiled by BOMA for all downtown Chicago buildings with net rentable area of 300, 000-to-600, 000 square feet. Murphy testified that he did not identify the comparison properties by address in his report because those property owners were clients to whom he had fiduciary responsibilities. Murphy did not consider it necessary to identify the comparable properties in his report because he could disclose that information during the hearing if asked and because the report was "for experts" who "really understand these buildings" and "know whether or not I'm telling the truth." He estimated the gross income of 550 West Jackson by first estimating a market rent of $35 per square foot, adding garage and miscellaneous income of $14, 520, 478, applying a 10% vacancy rate based on market conditions, and concluding the gross income was $13, 068, 430. He estimated the property's total operating expenses were $3, 729, 908, or $9.19 per rental square foot, even though the property's square foot operating expenses ranged between $7.41 and $8.12 between 2007 and 2009, and even though the BOMA figures ranged between $8.23 and $8.29. He increased the operating expenses by $1, 217, 913-which PTAB now indicates is about $3 per rentable square foot-for advertising and leasing commissions, tenant ...


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