Sale-Leasebacks in Chicago and Illinois: What Owners Should Know

The core of the transaction does not change by state. You sell the building, sign a lease with the buyer and keep operating. What changes is the set of costs and rules attached to transferring and occupying real estate in a particular place, and the kind of buildings investors find there.

For a company in Chicago or elsewhere in Illinois, three local subjects deserve attention before you set a target price or rent: transfer taxes due at closing, how property tax is assessed and who carries it after the sale, and how your specific building and location will look to an investor. This guide covers each in general terms. It is not tax or legal advice, and the figures quoted below should be confirmed with your attorney and title company at the time of your transaction.

Illinois taxes the privilege of transferring title to real estate, and it does so in layers. The Illinois Department of Revenue explains that counties may impose a tax of 25 cents per $500 of value on real estate transactions and that home rule municipalities may also impose an additional real estate transfer tax. The Department directs taxpayers to its Tax Rate Database to determine the rate that applies to a given property.

• State of Illinois: the Cook County Clerk's transfer fee schedule lists the state tax at $0.50 per $500, with the seller as the party liable.
• Cook County: the same schedule lists the county tax at $0.25 per $500, with the seller as the party liable. The Clerk's recording FAQ describes the combined stamp as $0.75 per $500, of which $0.50 goes to the state and $0.25 to the county.
• City of Chicago: the City's Department of Finance states a rate of $5.25 per $500 of the transfer price, or fraction thereof. That is made up of a City portion of $3.75 and a supplemental CTA portion of $1.50. The City says that, in general, the buyer is responsible for the $3.75 and the seller is responsible for the $1.50.

Here is a hypothetical, for illustration only, using those published rates. On a $5,000,000 sale of a building in Chicago, the state tax would be $5,000, the Cook County tax $2,500, the City portion $37,500 and the CTA portion $15,000. Under the general allocation described by the City and the Clerk, the seller would bear $22,500 and the buyer $37,500. The parties can negotiate who bears these costs in the purchase agreement, and a buyer may factor its share into the price it offers.

Properties outside Chicago are not subject to the Chicago tax, but many other Illinois municipalities have their own transfer taxes, with their own rates, liable parties and exemptions. The Cook County Clerk publishes a schedule by municipality. Check the rule for your town early, and ask the municipality what it requires before it will issue its transfer stamp, so that a local requirement does not delay closing.

Transfers are reported on Form PTAX-203, the Illinois Real Estate Transfer Declaration, which the Department of Revenue says is completed by the buyer and seller and filed in the county where the property is located. Form PTAX-203-A is also used for non-residential property with a sale price over $1 million. Your attorney or title company normally prepares these.

As owner, you pay the property tax bill directly. After a sale-leaseback the investor owns the property, but most leasebacks are written as net leases under which the tenant continues to pay real estate taxes, either directly or by reimbursing the landlord. In practice the cost usually stays with your company. What changes is that you no longer control the property in the same way, so the lease must give you the rights an owner takes for granted.

The Cook County Assessor states that the county follows a triennial reassessment cycle, meaning a property is reassessed once every three years, and that the reassessment year depends on the township in which the property is located. Owners may file appeals with the Assessor's Office and at the Board of Review. For a tenant paying the taxes, that raises practical questions the lease should answer.

• ✓Does the lease give us the right to appeal the assessment, or require the landlord to appeal at our request?
• ✓If an appeal produces a refund for a period we paid, does the refund come to us?
• ✓When is our township next reassessed, and how could a recorded sale price be considered in that reassessment? Ask a property tax attorney.
• ✓How are tax bills that arrive after closing but cover periods before closing divided between seller and buyer?
• ✓Does the property benefit from any incentive classification or abatement, and does a sale or lease affect it?
• ✓Are we paying taxes directly or through monthly escrows to the landlord, and can we see the bills?

Because the tax is a pass-through cost, an increase after the sale is your expense for the rest of the lease. Model occupancy cost as rent plus taxes, insurance and maintenance, and ask a property tax attorney what range of outcomes to expect before you agree to a rent number.

The Chicago region has a deep and varied base of owner-occupied buildings: manufacturing plants and warehouses in the city's industrial corridors and the suburbs, medical and dental buildings owned by the practices in them, and office buildings held by professional firms and family businesses. Any of these can be the subject of a sale-leaseback, and each is underwritten differently.

• Industrial buildings. Investors look at clear height, loading, power, site access and whether another user could occupy the building with little change. Older plants with a long manufacturing history often require closer environmental review.
• Medical and dental buildings. Investors weigh the practice's financial strength, the specialized build-out and the location's draw for patients. Healthcare regulatory questions should be reviewed by counsel.
• Office buildings. Investors focus on the tenant's credit and term, and on how readily the building could be leased to others.

Location within the region matters as much as type. Access to highways, rail and transit, the labor pool, and the municipality's taxes and permitting all affect how many investors will compete. We do not quote typical prices or yields here, because they vary by building and by month. A current opinion should come from someone looking at your property specifically.

1. Confirm which transfer taxes apply at your address and who customarily pays each, using the state, county and municipal sources.
2. Ask your municipality what it requires before a deed can be recorded.
3. Have a property tax attorney review your assessment history, the next reassessment year and any incentive on the property.
4. Ask your CPA to estimate after-tax net proceeds, including transfer taxes and closing costs.
5. Build the tenant's property tax rights into the lease term sheet: appeals, refunds, access to bills.
6. Gather environmental reports and be ready to explain the site's history.
7. Get a current view of market rent for your building type in your submarket.

TAG is based in Chicago and represents occupiers here and nationally. In a local sale-leaseback we bring current knowledge of what comparable buildings lease for, and we work with your attorney, CPA and property tax counsel so that transfer and property taxes are counted before the price and rent are agreed.