Buying Commercial Property in Chicago: What Owner-Users Should Know

Cook County classifies property by use. The Assessor's Office says Class 5 properties are those used for commercial or industrial purposes. Commercial use means primarily buying and selling goods and services or otherwise providing them. Industrial use means primarily manufacturing, extraction or processing of raw materials, and certain transportation or storage in wholesale distribution.

The Assessor's class definitions show subclasses by building type. Examples include one-story commercial buildings, bank buildings, commercial buildings over three stories, commercial condominium units and industrial buildings. Have your attorney or property tax counsel check the current class of each Property Index Number, or PIN, in the deal, because a single building can have more than one, and each gets its own notice.

A change in how the building is used can raise a classification question. If you are buying a building for a different use from the current one, ask your property tax counsel about the effect before you finish your cost model.

The level of assessment is the share of market value that gets taxed. The Assessor says commercial properties like office, industrial and retail buildings typically have a 25% level of assessment, and that these levels are set by Cook County ordinance. The Assessor also says the income approach is used to reassess most commercial properties, estimating income from market data, then deducting vacancy and operating expenses to reach net operating income.

The result for an owner-user is that your tax bill does not depend solely on your purchase price or your company's use. A building you occupy may still be valued on the income it could produce, so the assessed value can move for reasons that have nothing to do with you.

Timing is also local. The Assessor says it reassesses one-third of the county's properties each year, alternating among the northern suburbs, the southern suburbs and the City of Chicago. Ask when your building was last reassessed and when it is next due, since a recent notice and the next one can differ. The bill also reflects an equalization factor and local tax rates, which vary by location, so get the actual recent bills and ask your property tax counsel to estimate future ones. Do not treat the seller's current bill as your long-term cost.

Treat the property tax line as a forecast, not a fact. Ask for actual bills and appeal history, and have a property tax specialist estimate the bill after your purchase.

Cook County has incentive classes. The Assessor says commercial properties may be eligible for temporary incentives that can lower assessment levels, and that they vary by township. Its class definitions list industrial incentive classes in Major Class 6 and commercial incentive classes in Major Class 7, among others, each with its own requirements and assessment levels. A property with incentive treatment gets different assessment levels, so if the building already has one, or you hope to obtain one, have your attorney confirm the status and what a sale or change of use does to it.

Appeals are a right, and they can follow your purchase. The Assessor's FAQ lists three main reasons for a commercial or industrial appeal, including a sale within the last five years at a price lower than the market value on your assessment notice, and an appraisal showing the Assessor's value is too high. Vacancy relief is another. Evidence may include the closing statement, purchase contract, transfer declaration or recorded deed. Appeal windows open and close by township, so keep your closing documents organized and ask your property tax counsel to watch the dates.

Three layers of transfer tax can apply to a purchase in the city. These are the rates on the official pages as of this writing. They can change.

• State of Illinois: 50 cents for each $500 of value or fraction of $500, under 35 ILCS 200/31-10. The Cook County Clerk's fee table lists the seller as the party liable.
• Cook County: state law allows a county to impose 25 cents for each $500 of value or fraction thereof. The Clerk's table lists the seller as the party liable.
• City of Chicago: $5.25 per $500 of the transfer price or fraction thereof. That is a City portion of $3.75 and a Chicago Transit Authority portion of $1.50. The City says that, in general, the buyer is responsible for $3.75 and the seller for $1.50.

For a Chicago buyer, the $3.75 is the one that belongs in your closing budget and that you may not have seen on a deal elsewhere. Outside the city, the Clerk's office says transfer tax amounts vary by municipality, so check the suburb's rule before you assume anything.

A few details are worth raising with your attorney. The City's list of exemptions includes certain enterprise zone transfers of property used primarily for commercial or industrial purposes, with the Municipal Code's exact terms controlling and supporting documentation required. Illinois also taxes transfers of beneficial interests and of a controlling interest in an entity owning real estate, so buying a company that holds a building does not necessarily avoid the tax. Finally, Illinois requires a transfer declaration, Form PTAX-203, completed by buyer and seller, with Form PTAX-203-A used for non-residential property with a sale price over $1 million, and the City has its own Form 7551.

National purchase advice applies in Chicago too, including title, survey, environmental review and building condition. Add these local questions to the list and put them to your attorney, title company and property tax counsel.

• ✓Is the property inside the City of Chicago, or in a suburb with its own transfer tax?
• ✓How many PINs make up the property, and what class is each?
• ✓When was each PIN last reassessed, and when is the next reassessment?
• ✓Does the building have an incentive class, and does the sale or our use affect it?
• ✓Are there open appeals, and who keeps any refund for prior years?
• ✓How are property taxes prorated at closing, given the timing of the bills?
• ✓Does the current zoning allow our use, or will we need a zoning change or relief?
• ✓Who pays each transfer tax under the contract, and does an exemption apply?
• ✓Does the budget include our share of the city tax and all recording and title costs?

Zoning deserves real attention in a city this varied. Your use, parking, loading and signage needs may fit one block and not the next, and an industrial user should confirm allowed uses and truck access before spending on diligence. A planning and zoning report, as Maynard Nexsen describes it, confirms current zoning, allowed uses and whether an existing use is grandfathered.

Many owner-users look at both, and the comparison should be made on total occupancy cost and operations, not price alone. Property taxes, transfer costs, commute patterns for your staff, truck access, parking and client proximity all point in different directions from one site to another.

Model each option with its own tax estimate, not an average, because Cook County's tax rates vary by location, and buildings across the county line sit under a different assessor and different rules. We keep this guide qualitative on market conditions because pricing moves and varies by submarket. Current comparable sales should come from a live search for your property type.

Tenant Advisory Group is based in Chicago and represents occupiers, tenants and buyers, across office, clinical and industrial property. We help owner-users compare sites and leasing alternatives on those total costs, and negotiate the purchase, while your attorney, CPA, lender and property tax counsel handle their own parts.