Chicagoans will vote next year on a measure to increase real estate transfer taxes on sales of $1 million or more to fund efforts to combat homelessness.
The City Council on Tuesday approved a resolution to create a referendum on the Bring Chicago Home initiative backed by the city’s progressive new mayor, Brandon Johnson.
The City Council voted 32-17 to approve the measure, moving it one step closer to becoming reality, as similar proposals have in cities such as Los Angeles.
The Chicago vote came amid questions, including how the funds would be used, and worries about adding to the cost of selling a property as commercial deals have slowed significantly throughout the country.
That slowdown in deal volume follows interest-rate increases, historically low demand for office space and other economic worries. It has been nearly a year and a half since the last downtown Chicago office building sale of more than $50 million.
“As far as owners of commercial real estate are concerned, the timing could not be worse,” said University of Chicago professor Christopher Berry, an expert in municipal finance. “As far as addressing homelessness, the timing could not be more urgent.”
Tuesday’s vote puts the resolution, which would create sliding-scale increases on taxes paid on $1 million-plus sales of homes and commercial properties, on ballots in March.
The referendum would need to be approved by a majority of voters, and it then would require a separate City Council vote to become law.
Chicago’s commercial real estate community, which supported Johnson opponent Paul Vallas in a runoff election in April, has raised concerns about the lack of details in the Bring Chicago Home proposal and its expected negative effects on property values. That includes the Loop business district, which like other downtown areas throughout the country has struggled to regain its footing in the nearly four years since the onset of COVID-19.
BOMA/Chicago, a trade association for 240 commercial buildings in Chicago, is among critics who have said they should be included in discussions on how to address homelessness.
“We all want to help the unhoused,” Amy Masters, director of government and external affairs for BOMA/Chicago, said in a statement to CoStar News. “But without a detailed plan in place, combined with the many crises our city is facing, it’s unclear how this money will be spent or how effective it will be.
“It will certainly come with a cost, however. If this transfer tax goes into effect, Chicago will have one of the highest transfer taxes in the nation on top of having the highest commercial property tax which will further discourage investment growth in Chicago. Without increased investment in our office sector, we can expect to see a slowdown in job creation, a reduction in the tax base, and increased property taxes for residents across the city,” Masters said.
The Bring Chicago Home proposal stalled under previous Mayor Lori Lightfoot, but Johnson signaled its likely return when his transition team released a 233-page report that included a recommendation to revive the so-called mansion tax.
Proponents of the plan, including some of the city’s 50 aldermen, have estimated it could generate $100 million per year to be spent on services to decrease homelessness.
A so-called mansion tax in Los Angeles with a threshold of $5 million sales and up has fallen short of expectations in the early months after it was passed last year and went into effect earlier this year, plus the city has been slow to spend the money in the early going, CoStar News previously reported.
A group looking to overturn the new transfer tax recently lost an initial court battle, which it is expected to appeal.
Efforts to invest the funds have included an offer to pay owners of Los Angeles residential buildings of 12 or fewer units to cover unpaid rent by low-income tenants who are at risk of homelessness.
Berry, faculty director of the University of Chicago’s Mansueto Institute for Urban Innovation, said such taxes are mislabeled as mansion taxes because most of the dollars would come from owners of commercial properties and larger multifamily buildings. He also said the timing of the proposal is tricky.
“Because most of the tax will be paid by commercial real estate owners, we should talk about the precarious state of commercial real estate at the moment,” he said.
Over time, markets absorb new taxes and markets adjust, as with a New York City mansion tax that has been in place since 1989, Berry said. “In the short run, there will be some pain” if the measure becomes law, he said.
Bring Chicago Home was overhauled earlier this year to create a sliding scale on sales, with the transfer tax falling from the current 0.75% to 0.6% on sales of less than $1 million. The rate would rise to 2% on deals over $1 million and 3% on sales of more than $1.5 million.
As an example, that would mean that this year’s $231.5 million sale of the 44-story apartment tower at 727 W. Madison St. to Spanish billionaire Amancio Ortega would have generated a one-time transfer-tax payment of $6,945,000, rather than the $1,736,250 he faced under the current percentage.
Separate state and county transfer taxes would not be affected by the city proposal.
Before Tuesday’s vote, one of the initiative’s backers, Alderman Maria Hadden of the 49th Ward, disputed the notion that details are lacking about Bring Chicago Home’s implementation.
“We have a plan for how we’re going use the money,” Hadden said before the vote, without providing details. Hadden said that “the voters are going to tell us what they want” and city staff will work hard to map out a specific plan.
“Suppose Chicago actually did make a dent in the homeless population and this program became a national model,” Berry said. “That would benefit the country and it would benefit commercial real estate. People would be willing to pay for something like that.
“That’s a best-case scenario, but it’s possible. My concerns are that the city hasn’t been all that clear on exactly what they would do with the money. I would find it a more compelling proposal if it was specific enough to show that they’ve thought it through. By the time voters would decide on this, I would hope we would see much more tangible plans.”
Berry also said Johnson should present a broader economic vision for the city, including a potential conversion of unused office space in the Loop into apartments, entertainment and other uses.
“There’s a question about the economic future of Chicago and other cities as downtowns are less and less a center of business,” Berry said. “I have not heard any economic vision from the mayor.”