Legal Articles
Proposed Real Estate Tax Reform Creates Untenantable Conditions

Fritz Kaegi, elected Cook County Assessor in 2018 and self-proclaimed “outsider”, took office vowing to reform the County’s property tax assessment system, particularly with regard to commercial properties. In February, Kaegi backed new legislation that would require taxpayers for income generating property to annually submit income and expense data to the Assessor’s Office. The Assessor could then use that data (or not) to set assessments for those commercial properties. The legislation passed in the Illinois Senate, but was stalled in the House and died when the legislative session ended. Kaegi proclaims, however, that this is not the last we have seen or heard from him on this legislation. Here is why Kaegi’s proposed mandatory disclosure bills could have significant implications on business owners and tax payers.

First, it is important to note that Income Producing Property “means real property that generates income or is owned for the purpose of generating income.” There are only a few exceptions to this definition: (1) property with an assessed value of less than $100,000 (approx. $400,000 market value); (2) residential property with fewer than 6 units; and (3) property assessed as a farm. If you own commercial property that does not fall into 1 of these 3 categories, this legislation would apply to you or your business.

Second, the proposed rules would require disclosure of “annual reports or documents created in the ordinary course of business documenting income generated from and expenses associated with income producing property . . . including, but not limited to, federal income tax returns . . ., annual reports, rent rolls, and certified or uncertified annual income and expense statements . . .” The list of financial documents the Assessor could require taxpayers to submit seems virtually limitless, and could mean companies have to turn over some of their most confidential and potentially proprietary information every year.

Aside from the logistical nightmare this could create for business owners, a taxpayer that does not comply faces a penalty in the amount of 2% of the prior year’s assessed value. An additional penalty of 2.5% would be tacked on if the taxpayer did not make the mandatory disclosures within 120 days of receiving notice of a failure to comply. After the 120 days’ notice period, and in addition to the monetary penalties, a further lack of compliance would cost the taxpayer the right to appeal to the Assessor’s office, and could subject the taxpayer to an enforcement action brought by the State’s Attorney.

The Assessor claims that this system would “eliminate uncertainty and hidden costs in the current system which deter institutional investment and hurt our economy.” A recent survey by A Fellowship for Institutional Real Estate (AFIRE) says Kaegi’s reform minded approach could have the opposite effect. As reported in Crain’s Chicago Business on April 18, 2019, AFIRE’s survey showed Chicago ranked fourth out of 26 markets where investors plan to reduce their exposure, behind London, New York and San Francisco. Kaegi’s recent commercial property tax hikes on the North Shore are partially to blame – with some landlords seeing assessments that doubled or even tripled. Property taxes are a major expense for real estate investors, and the expectation that property taxes will continue to rise may reduce the demand for commercial space, further impacting real estate investors. The speculation is this mandatory legislation would only exacerbate the problem by placing additional administrative and financial demands on businesses, particularly small businesses, as well as serve a not- so-hidden agenda to shift the majority of the tax burden to landlords and commercial property owners.

Kaegi also claims his proposed reform is in line with what other jurisdictions do, would bring transparency, fairness and more accurate assessments, and reduce the need to retain counsel, pay for appraisals and number of overall tax appeals. Again, professionals in the field say that the impact of this legislation will be the exact opposite. While this type of financial data already is collected in connection with the appeals process, when providing financial data as part of an appeal, the taxpayer has some discretion over what to submit and has the benefit of being represented by counsel who can explain the information and how it impacts the fair market value of the property in the context of other evidence being presented, such as an appraisal. Assessments based on raw financial data, rather than adjusted market information, will be inflated and, therefore, likely result in more appeals being taken.

There are other problems with the proposed legislation, including the fact that data is required to be submitted by July 1, but many corporations do not file income tax returns until October 15th, which means the required data would not be available in time to comply with the statute and penalties would surely be assessed. Furthermore, there are inadequate safeguards to keep taxpayers confidential financial information from being discovered through a Freedom of Information Act request. The proposed statute says nothing about keeping the data private and does nothing to prevent it from being sold or shared with third parties. Moreover, the “taxpayer” is required to submit the data, but who is the “taxpayer?” The owner? The net lessee? If the latter, what if the tenant does not comply? What is the owner’s recourse?

Several organizations are actively opposing the legislation, including the Illinois Association of Realtors, or trying to work out terms that add more protections for taxpayers, particularly with regard to keeping information confidential. But, since we can expect that this is not the last we have heard of Kaegi’s reform initiatives, consider this an opportunity to start thinking about a business plan that creates contingencies should this legislation pass next time around. Consider a proactive approach in the drafting of your leases and other commercial contracts to provide terms for meeting the reporting requirements in your net lease or property management agreements, and recourse for non-compliance.

This article was written by Melissa J. Lettiere, a Partner at Stahl Cowen. Should you have any questions or need assistance with your business and real estate related needs, please contact Ms. Lettiere at mlettiere@stahlcowen.com.