Illinois Transfer and Property Taxes in a Sale-Leaseback

A sale-leaseback is a real sale recorded with a deed, and the transfer tax system treats it like any other sale. In Illinois there can be three layers. The rates below are taken from the statutes and official pages listed under Sources, checked on the date of this guide. Rates and rules change, so confirm them with your attorney and title company when you are pricing a deal.

• State of Illinois. The Property Tax Code imposes a tax on the privilege of transferring title to Illinois real estate at the rate of 50 cents for each $500 of value, or fraction of $500, stated in the transfer declaration.
• County. State law allows a county board to impose its own transfer tax at the rate of 25 cents for each $500 of value or fraction. The Cook County Clerk's transfer fee table lists the Cook County tax at that rate and lists the seller as the party liable for both the state and county taxes.
• Municipality. Cities and villages may have their own transfer taxes, and the Cook County Clerk notes that amounts vary by municipality. Chicago's Real Property Transfer Tax is $5.25 per $500 of the transfer price, or fraction: a City portion of $3.75 and a CTA portion of $1.50. The City's Department of Finance states that, in general, the buyer is responsible for the $3.75 and the seller for the $1.50.

The state statute, and the county statute, provide that when property is transferred subject to a mortgage, the amount of the mortgage remaining outstanding is not included in the base for computing the tax. In most sale-leasebacks the mortgage is paid off at closing, not assumed, so this usually does not help. Your attorney can confirm.

Declarations are filed with the transfer. The Illinois Department of Revenue's MyDec system is used by title companies and settlement agents to submit the state's PTAX-203 declaration forms, and it also handles the City of Chicago's Form 7551.

The following is hypothetical, for illustration only. It is not a market price and not a quote for any property. Assume a building in the City of Chicago, in Cook County, sold for a round $5,000,000 with no assumed mortgage and no exemption. That price contains 10,000 units of $500.

• State of Illinois: 10,000 x $0.50 = $5,000
• Cook County: 10,000 x $0.25 = $2,500
• Chicago, CTA portion: 10,000 x $1.50 = $15,000
• Chicago, City portion: 10,000 x $3.75 = $37,500

On the general allocation described by the official sources, the seller in this hypothetical would bear the state, county and CTA amounts, $22,500 in total, and the buyer would bear the $37,500 City portion. The same building in a suburb would drop the Chicago lines and add whatever that municipality charges, if anything.

Who writes the check can be a negotiated term of the purchase agreement, and a buyer who is responsible for a large municipal tax will factor it into what it offers. Either way, model the full amount. It reduces the value available to be split between the parties.

Both the state law and the Chicago ordinance list exempt transfers, such as deeds that secure debt, certain transfers between a parent and subsidiary, and transfers involving governmental bodies. An ordinary cash sale to an unrelated investor is not on those lists. Chicago's page adds that no transfer is exempt unless the declaration describes the facts supporting the exemption, with documentation.

Two structural points are worth raising with counsel if they apply to you:

• Selling the entity instead of the deed. The Illinois statute also taxes the transfer of a controlling interest in a real estate entity that owns Illinois property, and it applies whether or not a document is recorded. A sale of ownership interests is not automatically outside the tax.
• Moving the property between your own entities first. If the building is transferred from the operating company to an affiliate before the sale, ask whether that step is itself taxable or exempt, and how any exemption must be documented.

The leaseback itself is a new lease, not a deed. The Illinois Department of Revenue explains that in the case of ground leases the state tax applies to the transfer of a ground lease, not to the issuance or creation of one. Whether any state or municipal transfer tax could apply to your particular leaseback is a question for your real estate attorney.

Selling the building does not end your exposure to its property taxes. In a triple net lease the tenant pays the real estate taxes along with insurance and maintenance, either directly to the county or through the landlord. Your cash cost for taxes may be the same the month after closing as the month before. What changes is your position: you are now paying taxes on a building you do not own, under whatever rights the lease gives you.

That makes several lease terms more important than they first appear.

• ✓Does the lease give us the right to contest the assessment and file appeals in the owner's name, with the landlord required to cooperate?
• ✓If the landlord controls appeals, must it pursue them at our request, and who pays the fees?
• ✓Do refunds and reductions for periods in our lease term come back to us?
• ✓How are taxes prorated at closing and again at lease expiration?
• ✓Do we pay taxes directly, or into a landlord escrow, and what reporting do we get?
• ✓If the landlord later sells the building at a higher price, are we protected from any resulting increase, or do we carry it?
• ✓If the property carries a tax incentive classification or abatement, does the sale affect it, and who bears the cost if it is lost?

Owners often ask whether selling at a high price will raise their property taxes. We cannot answer that for your property, and it varies by county, but we can describe why the question is reasonable.

In Cook County, the Assessor's Office states that it uses the income approach to reassess most commercial properties. It estimates the income a property could produce at current market rents, drawing on market data and past appeal information, and divides estimated income by a capitalization rate. Recent sales of comparable properties are one of the inputs it lists for that rate. The office reviews one third of the county's properties each year.

A sale-leaseback creates two new public or discoverable facts about your building: a recorded sale price, reported on the transfer declaration, and a signed lease with a stated rent. A property tax attorney can tell you how those facts might be used in a future reassessment or appeal for your property type and township, and whether the timing of the sale within the reassessment cycle matters. Ask before the price and rent are final, because under a net lease any increase lands on you, not on the buyer.

Add a property tax attorney's review to the pre-marketing checklist. The cost of a higher assessment over a long lease can outweigh the transfer taxes paid at closing.

1. Identify every taxing jurisdiction for the property: state, county and municipality.
2. Have your attorney or title company confirm current transfer tax rates, who is liable for each, and whether any exemption applies.
3. Decide in the letter of intent who bears each transfer tax, and include the total in your net proceeds estimate.
4. Get a property tax attorney's view on reassessment risk at the proposed price and rent.
5. Project property taxes across the lease term as part of total occupancy cost, with a range, not a single number.
6. Negotiate the lease's tax clause: contest rights, refunds, prorations and protection from increases caused by the landlord's later sale.

When we represent a seller in Illinois, these items go into the first net proceeds estimate and the first lease draft, because a sale-leaseback that looks strong on price can look different once closing taxes and a long run of property tax bills are counted.