Chicago’s new mayor is throwing his support behind a revised proposal to raise real estate transfer taxes on property sales of $1 million or more to raise money to combat homelessness, following a similar move by Los Angeles and other localities.
Mayor Brandon Johnson’s backing for a so-called mansion tax is intended to address a housing market beset by rising prices and increasingly limited options. But the proposal is likely to face stiff opposition from real estate professionals, who argue that any new taxes are too steep a burden during a historically difficult time to sell buildings or fill them with new tenants.
The new plan is emerging after more than a year since the last sale of a downtown Chicago office tower because of rising interest rates and other challenges slowing the pace of deals throughout the country. This is the longest such drought since 2008 and 2009 when the Great Recession all but shut off property sales.
Critics also question whether higher taxes are the best way to encourage more development.
In Los Angeles, a new mansion tax on sales of $5 million or more in the early going has fallen far short of revenue predicted by the measure’s backers. CoStar News also recently reported that the city has yet to dole out any of the $38 million collected since the program’s onset in April, with the mayor and City Council yet to sign off on how the funds should be spent.
Similar to Chicago, the tax money raised in Los Angeles is aimed at promoting housing construction and alleviating the worsening homelessness problem.
Other cities and states, including the Chicago suburb of Evanston, Illinois; Washington state; Washington, D.C.; New Jersey; Hawaii; and Vermont reportedly have enacted graduated transfer taxes.
Revised Plan
Johnson this week outlined a revision to the previously discussed Bring Chicago Home initiative to city aldermen during closed-door meetings, the Chicago Sun-Times first reported.
Under previous Mayor Lori Lightfoot, some members of Chicago’s City Council introduced the Bring Chicago Home resolution, in which property sales of $1 million or more would trigger a much higher city transfer tax. For a $1 million sale, the buyer would pay $26,500 in city transfer taxes, up from $7,500 today.
Opponents at the time argued the measure would effectively be a massive tax increase on both the buyer and seller because it would drive down sale prices.
Four aldermen backing that plan called a special meeting on the topic in November 2022, but that meeting was called off when they failed to reach a quorum required for a vote. Lightfoot was among those who did not attend the meeting.
Johnson, a former Chicago Public Schools teacher who was broadly opposed by real estate professionals in his runoff victory over pro-business, tough-on-crime candidate Paul Vallas in April, is expected to pursue several measures to address homelessness and a shortage of affordable housing.
His backing of a revised mansion tax was signaled in July when his transition team released a 223-page report that recommended reviving the Bring Chicago Home initiative.
Under the new plan offering a sliding scale, city transfer taxes on sales of less than $1 million would decrease to 0.6% from the previous 0.75%. City transfer taxes would jump to 2% on sales between $1 million and $1.5 million. Deals of more than $1.5 million would increase to a 3% tax, higher than the previously proposed rate of 2.65% on all sales over $1 million.
That means larger commercial properties would be taxed at four times the current rate, which real estate industry professionals fear would further drive down prices that have been declining for more than a year amid rising interest rates and other factors.
In one recent deal, Spanish billionaire Amancio Ortega’s real estate investment firm paid $231.5 million for the 44-story apartment tower at 727 W. Madison St. Its city transfer tax bill was $1,736,250. If the proposed measure were to pass, that bill would jump to $6,945,000.
Separate state and country transfer taxes would not be changed as part of Johnson’s proposal.
BOMA/Chicago, a trade association for 240 commercial buildings in Chicago that voiced opposition to the previous proposal, this week expressed similar worries about the plan.
“The proposed three-tiered transfer tax plan will hurt the city's commercial office industry at a historically vulnerable time,” Farzin Parang, BOMA/Chicago’s executive director, said in a statement to CoStar News.
“Homelessness is a challenge that should be shared by the entire city,” he added. “Placing the burden on only one industry sector — and one that is at its weakest state in almost a century — is bad public policy.”
Next Steps
The referendum could be introduced to the full City Council as soon as next month, which could approve the measure by October, the Sun-Times reported. It still would require the support of a majority of Chicago voters in a binding referendum vote next year, as well as further legislation by the City Council if it were to win voter approval, the newspaper said.
Backers say the plan is expected to generate $100 million annually to fund programs to combat homelessness, down from the previously estimated $160 million, the Sun-Times reported.
Critics have argued that any estimates fail to account for an already sluggish sales market, plus a potential slowdown in deals and price reductions the new proposal could bring. Proponents including the city’s zoning committee chairman, Carlos Ramirez-Rosa, say the tax would lower the bill on most home sales, though.
“People who are purchasing homes for the first time are likely spending less than $1 million, and they will now see a decrease,” he told the Sun-Times. “Do you want to pay less in real estate taxes? I think voters will overwhelmingly say ‘yes.’ ”
BOMA’s Parang says such thinking overlooks the long-term effects of COVID-19 on the Loop business district.
“As downtown office building values plummet due to a sluggish return to office, the livelihood of tens of thousands of Chicagoans is at risk,” Parang said in the statement. “In addition, homeowners across the city can expect to shoulder more of the city's property tax burden. Some projections estimate that a $250,000 home could see an increase up to $900 in annual property tax bills due to the challenges facing the office industry.
"A transfer tax increase will only make such matters worse, and it is both counterproductive and unnecessary to fund the Bring Chicago Home initiative entirely through such a tax.”