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Recent Court Decisions on Assessments Highlight Lesser Known Property Tax Provisions

K-12 Education Property Tax

The Illinois Appellate Court recently issued two decisions involving property tax assessments, and each is noteworthy for a different reason.  One is noteworthy because it focuses on the longstanding legal principle that a party challenging the assessed valuation of a property must follow only the procedures outlined in the Property Tax Code.  The other is significant because it provides guidance on the newer, and relatively novel, method set out in the Property Tax Code for valuing supportive living facilities, a property type that is an increasingly significant portion of many school districts’ property tax bases.

In Jorgensen v. Berrios, the appellate court considered a lawsuit alleging the Cook County Assessor failed to implement a historic residence assessment freeze.  Under Article 10 of the Property Tax Code (35 ILCS 200/10-40 et seq.), properties certified as historic residences are entitled to a property tax assessment freeze that eliminates from taxation the value added by a rehabilitation to the property for a period of eight years after the rehabilitation occurs.  After the eight-year freeze, there is a four-year period in which the assessment is gradually increased to the full amount.  Plaintiffs filed a complaint in the Circuit Court seeking an injunction requiring the Cook County Assessor to lower the property’s assessment, which was dismissed because the procedures outlined in the Property Tax Code for challenging an assessment had not been followed.  Those procedures include filing an appeal with the local assessor and then with the board of review, before taking any further appeal to the Property Tax Appeal Board or the Circuit Court.

The Appellate Court upheld the dismissal of plaintiffs’ complaint based on plaintiffs’ failure to exhaust their administrative remedies.  Illinois courts generally do not entertain lawsuits seeking remedies not provided for in the Property Tax Code because the Code provides a comprehensive system that regulates the assessment and collection of property taxes.  The only exceptions to this rule are when the tax is unauthorized by law or levied on an exempt property.  In this case, plaintiffs attempted to argue that the assessments were so grossly excessive that they were the product of fraud and therefore unauthorized by law.  The Appellate Court, however, found a sufficient basis for the assessments and reaffirmed the doctrine of exhaustion of administrative remedies.  This is a positive outcome for taxing agencies, which benefit from being able to rely on the predictability of assessment challenges being brought only as prescribed in the Property Tax Code.

In Manteno Community Unit School District No. 5 v. PTAB, the Appellate Court overturned a recent PTAB decision that reduced the assessment on a supportive living facility.  Since 2007, the Property Tax Code has provided a special method of valuing supportive living facilities for tax purposes.  Section 10-390 of the Property Tax Code (35 ILCS 200/10-390) requires the valuation to be based on the income capitalization approach to value.  It goes on to require that the portion of Medicaid payments not be attributed to the revenue generated by the real estate.  Likewise, the portion of revenue for services generated by residents not eligible for Medicaid must also be excluded from the calculation of the real estate value.  This becomes important since Medicaid caps the amount a supportive living facility can charge for rent and for services, but the same caps do not apply to private-pay residents.

The decision goes into great detail in analyzing the method of valuing supportive living facilities, but the crux of the decision is that PTAB erred in reducing the assessment based on the property owner’s bookkeeping practice of assuming all residents paid only the rent allowed by Medicaid regardless of whether the resident was relying on Medicaid or paying out-of-pocket.  The Court found that it was appropriate to use the limited amount of rent paid by Medicaid only for the portion of the property occupied by residents utilizing Medicaid.  For the remainder of the private-pay residents, the market rent charged to non-Medicaid residents is to be used in the income capitalization approach.  The net result of this decision is positive for school districts since it prevents the undervaluation of a property type that is becoming more commonly found as one form of senior-living arrangement.

We will continue to monitor changes as they affect Illinois school districts and the property tax assessment, appeal, and collection process and bring you more information as it becomes available. For more information on this topic contact the authors of this alert or any other Franczek attorney.