Property taxation and selling prices of industrial real estate

Purpose – The purpose of this paper is to test empirically the extent to which differences in property taxes are capitalized in the market prices of industrial real estate. Design/methodology/approach – This paper is a multiple regression study of the selling prices of 419 industrial properties near O’Hare airport in metropolitan Chicago that were sold during 2001-2004. The paper also includes a theoretical analysis of the relationship between the property tax rate on industrial property and the tax revenue that is collected. Findings – The results show that selling price per square foot is a function of property characteristics as expected, and suggest that the property tax differential between Cook County and DuPage County is fully capitalized. The property tax differential was 2.63 per cent of market value, and comparable properties sold for 16.2 per cent less in Cook County than in adjacent DuPage County. The theoretical analysis shows that the revenue-maximizing property tax rate in the long run depends upon the capitalization rate, the elasticity of demand for industrial real estate, and the elasticity of supply of industrial real estate. Research limitations/implications – The data pertain only to the area near O’Hare airport for the years 2001-2004. Additional empirical tests are needed in other places and for other time periods. Also, the impact of public services on the value of industrial property needs to be investigated. Practical implications – Appraisers of industrial real estate should adjust estimates of market value for differences in property taxes. Buyers and sellers of industrial real estate should also be cognizant of the effect of property taxes on market value. Local public officials should be aware of the possibility that a relatively high tax rate on industrial property can cause tax revenue collected to be less than the maximum amount that is possible. Originality/value – This is the first empirical study of industrial property values that includes the effect of variations in the property tax.