Although Mayor Richard M. Daley last week repeated his call for reforming the Cook County property tax system, adding the way commercial property is assessed is resulting in costly litigation, Houlihan says market conditions pose a dilemma for his staff. He recently revealed at an event hosted by the Civic Federation that owners of the city's 100 most valuable Loop office properties--0.5% of all parcels in the city--pay $605 million in property taxes--20% of the property tax revenue. The median increase in market value was 26%, Houlihan says.

Comparing sales prices produces an inaccurate assessment, Houlihan says, because office properties trade for reasons peculiar to that particular building, such as location and age. Sales prices also have been inflated by historically low interest rates, lack of better investments and an influx of foreign capital, he adds. A better approach is the income method, Houlihan says, which results in lower assessments because of market trends.

Vacancy has increased by 60% in three years, resulting in lower rents, while expenses have increased at a rate greater than inflation, according to Houlihan. He uses the case of Sears Tower to illustrate the point.

Actual rents range from $9 per sf to $25 per sf at the 3.5-million-sf building at 233 S. Wacker Dr., Houlihan reports. His office settled on $18 per sf in its assessment, resulting in $92 million a year in rent. Meanwhile, vacancy has increased from 1.3% to more than 15% in three years, knocking $13.8 million off the top line. Operating expenses have increased from $6.75 per sf to $7.75 per sf, Houlihan says, and after factoring in additional income generated by the property, his office comes up with a net operating income of $51.8 million.

Houlihan used an 8.75% capitalization rate in his assessment. The bottom line is a $530-million market value, which results in a $30.5-million property tax bill--or nearly $9 per sf.

If critics still think a $530-million assessment is too charitable, three assessments between the time it changed hands this year and the building's 1997 sale of $849 million came in much lower--at $250 million, $346 million and $600 million.