Propmodo Daily

By Franco Faraudo · Mar. 11, 2024

Greetings!

As cities grapple with vacant offices and declining property values, they are seeking ways to prevent further erosion of their property tax revenue. Chicago has proposed a controversial solution: increase property taxes. However, this contested tax proposal, which is currently being voted on, faces opposition from real estate industry groups who claim the language on the ballot is misleading. In today's email coverage, we examine the ongoing legal battle surrounding this property tax vote and assess the likelihood of similar measures being adopted in other cities across the nation.

The Federal government has finally released a draft official definition for the term "net zero building." While this new definition helps clarify the concept, it still overlooks numerous emissions associated with the construction process and the building's supply chain. In our analysis, we examine whether the White House's official designation of a "net zero" building goes far enough in addressing the full scope of emissions related to the built environment.

This week, Propmodo Technology is focusing on multifamily tenant experience. Our coverage is made possible with the support of our sponsor, Amenify, which has just unveiled the Multifamily Ancillary Income Report. Be sure to check out our article on apps enabling smart home device control, especially the increasingly popular remote temperature control. Also, as the rental market cools and rental income stagnates, landlords must shift their focus from acquiring new tenants to generating ancillary revenue through value-added amenities and services.

Now, let's dig in!

Could Chicago's Real Estate Tax Set a Precedent for Struggling Downtowns?

Downtown Chicago's office market has been in a downward spiral over the past several months, a situation exacerbated by record-high vacancy rates and soaring borrowing costs. This crisis has sparked fears about what lies ahead. City leaders have been pushing a $1 billion program aimed at assisting building owners in converting their vacant properties into residential buildings. But, this program has not gained significant traction, as it faces the same challenges plaguing the broader market, and efforts to accelerate and scale up the conversions have yet to materialize. Amidst this backdrop, an ongoing saga surrounds Mayor Brandon Johnson's proposed transfer tax, adding another layer of complexity to the situation.

The transfer tax was proposed by Mayor Johnson last summer as a way to address homelessness in the city and would raise the transfer tax rate on all property sales in Chicago by $1 million and up. Broken down, the tax change would raise the rate to 2 percent for all sales between $1 million and $1.5 million and increase to 3 percent for sales over $1.5 million. The tax hike was fiercely opposed by the real estate industry as soon as it was released, culminating in a lawsuit brought by industry trade groups led by the Chicago chapter of the Building Owners and Managers Association (BOMA).

The measure would also include a tax break for small transactions, with the rate decreasing to 0.6 percent for property sales less than $1 million. Johnson’s proposal was approved last fall to be on the recent March primary ballot as a referendum question, but in February, a judge ruled the so-called “mansion tax” was invalid. The judge ruled the referendum as it was written was vague and unconstitutional. The proposal would stay on the ballot, but the votes would not be counted. 

Days later, the Chicago Board of Election Commissioners voted to appeal the judge’s ruling so that votes on the referendum would be counted. Though the Chicago primary isn’t until March 19, early voting has already begun. And last week, Chicago leaders got their answer. An Illinois Appellate Court overturned the lower court’s ruling, reinstating the tax referendum. The court agreed with the appeals filed that the judge neglected to give her own analysis in granting the request to invalidate the ballot question. 

BOMA could file another appeal to the Illinois Supreme Court, but as long as things move forward and a majority of voters support the referendum, the Chicago City Council is required to evaluate the tax change and pass the new ordinance in the spring, according to the bill. BOMA argues that the referendum question is deceptive and designed to manipulate voters. They contend that the impacts of the proposed property tax increase would extend far beyond just commercial properties, adversely affecting homeowners, small businesses, renters, and hindering the development of affordable housing options throughout the city. “At a time when commercial real estate markets are in immense turmoil, homeowners and neighborhoods throughout the city would be hit hard,” a BOMA statement said.

The ongoing issue over the transfer tax could certainly have industry-wide implications. Hiking taxes on high-dollar transactions has been tried before in other major cities, and it has always faced opposition from the real estate industry and other groups. In New York City, a mansion tax aimed at helping fund critical repairs to the city’s subway system and other needs became law in the summer of 2019. The city’s most powerful real estate lobby, the Real Estate Board of New York (REBNY), came out strongly against it. 

Last year, Los Angeles implemented a mansion tax on commercial and residential properties selling for over $5 million, while Santa Fe is poised to enact a similar tax this year on residential properties exceeding $1 million. Opponents argue that such measures could further dampen investment and contribute to declining property values. Comprehensive studies evaluating the impact of these taxes are not available, leaving their short-term and long-term effects largely uncertain. While added costs are generally undesirable, some suggest that demand for luxury real estate in powerhouse cities like New York and Los Angeles will remain resilient enough to withstand these taxes.

This dismissive stance fails to account for the already precarious state of the commercial real estate market. With record-high vacancy rates and soaring borrowing costs, the industry is grappling with a crisis that has cast doubt on its future prospects. Imposing additional financial burdens through mansion taxes could potentially exacerbate the challenges faced by commercial property owners and investors, further destabilizing an already vulnerable market. In such a delicate climate, policymakers should exercise caution and thoroughly evaluate the potential ramifications of such measures before implementing them, lest they inadvertently compound the woes afflicting the commercial real estate sector.

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Propmodo Daily is written and edited by Franco Faraudo with contributions from readers like you and the Propmodo team.

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