Downtown Chicago's office market has been in decline for the past few months, made worse by record high vacancy rates and rising borrowing costs. This crisis has caused anxiety about what will happen next. City leaders are pushing ahead with a $1 billion program aimed at helping building owners convert vacant properties into residential buildings. However, the program has not received significant attention as it faces the same challenges plaguing the broader market and efforts to accelerate and scale transformation have yet to materialize. Against this backdrop, the situation is further complicated by the ongoing turmoil surrounding Mayor Brandon Johnson's transfer tax proposal.
The transfer tax, proposed by Mayor Johnson last summer as a way to address the city's homeless problem, would increase the transfer tax rate on all Chicago real estate sales by more than $1 million. Specifically, this tax change will increase the tax rate to 2% for all sales between $1 million and $1.5 million, and to 3% for sales over $1.5 million. Become. The tax increase was fiercely opposed by the real estate industry as soon as it was announced, leading to a lawsuit filed by an industry group led by the Chicago chapter of the Building Owners and Managers Association (BOMA).
The measure also includes tax breaks for small transactions, reducing the tax rate on real estate sales of less than $1 million to 0.6%. Johnson's proposal was approved last fall and recently featured as a referendum issue in the March primary vote, but a judge ruled in February that the so-called “mansion tax” is invalid. . The judge ruled that the referendum was vague and unconstitutional. The proposal will remain on the ballot, but the votes will not be counted.
Days later, the Chicago Board of Elections voted to appeal the judge's ruling so that the votes in the referendum could be counted. Chicago's primary election ends on March 19th, but early voting has already begun. And last week, Chicago leaders got their answer. The Illinois Court of Appeals reversed the lower court's decision and reinstated the tax referendum. The court agreed with an appeal that said the judge failed to conduct his own analysis in granting the request to invalidate the ballot question.
BOMA may appeal again to the Illinois Supreme Court, but as long as things progress and a majority of voters support the referendum, the Chicago City Council will need to evaluate the tax changes and pass a new ordinance in the spring. says the paper. invoice. BOMA says the ripple effects of the tax increase will be felt by homeowners, small businesses and renters across the city, and will discourage the development of more affordable housing. “At a time of severe disruption to the commercial real estate market, homeowners and neighbors across the city will be hit hard,” BOMA said in a statement.
The ongoing issues surrounding transfer taxes could certainly have an impact on the industry as a whole. Raising taxes on high dollar transactions has been attempted in other major cities, and has always faced opposition from the real estate industry and other groups. In New York City, a mansion tax was signed into law in the summer of 2019, aimed at funding critical repairs and other needs for the city's subway system. The Real Estate Board of New York (REBNY), the city's most powerful real estate lobby, strongly opposes it.
Last year, the city of Los Angeles introduced a mansion tax on commercial and residential properties selling for more than $5 million, and the city of Santa Fe plans to enact a similar tax this year on residential properties worth more than $1 million. Opponents say such measures could further discourage investment and lead to a decline in real estate values. Comprehensive studies assessing the impact of these taxes are not available, and the short- and long-term effects remain largely uncertain. Although increased costs are generally undesirable, some suggest that demand for luxury real estate in large cities like New York and Los Angeles will remain resilient enough to withstand these taxes.
This negative attitude fails to explain the already volatile state of the commercial real estate market. With record vacancy rates and soaring borrowing costs, the industry is facing a crisis that casts doubt on its future prospects. Imposing additional financial burdens through mansion taxes could further exacerbate the challenges faced by commercial real estate owners and investors and could further destabilize an already fragile market. In such a delicate situation, policymakers should exercise caution and consider their potential impact before implementing such policies, lest they inadvertently exacerbate the woes plaguing the commercial real estate sector. It needs to be thoroughly evaluated.
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