Higher property taxes, higher rents, stalled investment and revenue shortfalls await Chicago if the new transfer tax is enacted.
Since we last posted about Chicago’s proposed new real estate transfer tax, known as Bring Chicago Home, a lot has happened around the issue.
In late February, a circuit court judge ruled that the ballot measure violated Illinois election law because it attempted to push through an unpopular proposal (raising taxes on some individuals) by bundling it with a popular one (lowering them on others). But recently, the Illinois Appellate Court reversed the ruling, putting Bring Chicago Home back on the ballot.
This means the issue will be decided at the polls on March 19.
As a reminder, Bring Chicago Home proposes to raise transfer taxes on real estate purchases over $1 million by 167%; raise taxes on purchases over $1.5 million by 300%, and lower transfer taxes on purchases under $1 million by 20%. Revenue from the new tax would go to help Chicago’s unhoused population.
But Bring Chicago Home is not just about whether you believe the city needs to do more to address homelessness. Nor is it about raising taxes on wealthy homebuyers while giving middle class buyers a break. Bring Chicago Home will have sweeping ramifications that will impact every Chicagoan, whether they are rich or poor, own or rent, and even whether they live in the city or beyond it.
Not A Mansion Tax
In our last post, we explained that Bring Chicago Home wasn’t only a tax increase on “mansion” sales but on all Chicago real estate transactions over $1 million. We pointed out that 90% of these transactions don’t involve homes at all but are for commercial real estate like apartments, office buildings, retail, restaurants and land. And we cited studies showing how the negative impact on commercial property values would stick the average Chicago homeowner with nearly $500 per year in additional property taxes.
That would be enough for many people to oppose this measure, but there are other reasons to vote against it too.
Higher Rents
Proponents of Bring Chicago Home have been telling voters that the measure won’t have any effect on apartment rents. But a survey by the Neighborhood Building Owners Association and apartment broker Kiser Group found that 74% of landlords would raise rents to offset the higher transaction costs associated with Bring Chicago Home.
Apartment renters “don’t understand how this will affect them at all,” one landlord told Crain’s Chicago Business, which reported the survey results. She added that property owners also would be less likely to invest in building renovations and upgrades because those funds would be siphoned off by the tax increase.
Of course, Chicago tenants of all income levels are already dealing with rents that have gone up a lot in the past few years. But for renters living on the margins, another $50 or $75 per month is highly consequential. It’s one of the cruel ironies of Bring Chicago Home; a measure intended to stem the tide of homelessness could actually make the problem worse by forcing rent increases on tenants who can least afford it.
Fuzzy Math
The city’s revenue projections for the new transfer tax are also dubious given how the tax has played out in at least one other market. Sponsors of Los Angeles’ transfer tax increase, known as Measure ULA, claimed the new tax would generate $900 million per year to fund affordable housing programs. However, according to a special report in the Los Angeles Business Journal, revenues for the first four months totaled just $55 million – or less than 20% of the average monthly projections.
To make matters worse, because the LA City Council had already approved spending for $150 million worth of ULA funds, they were forced to pull those funds from other sources to meet their obligations.
In Chicago, the mayor’s office projects that the new transfer tax will bring in $100 million annually. But behind the scenes, the administration is less optimistic. Last September, Crain’s reported that the mayor’s own budget forecast for 2024 estimated that transaction taxes would fall below budgeted amounts “driven primarily by the underperformance of the real property transfer tax.”
Whatever Chicago’s revenue estimates are, one can be sure they do not account for a scenario where high-value commercial and residential transaction activity falls by 50% or more from pandemic-era, low-interest-rate-fueled levels. But that is exactly what happened in LA.
Stifling Investment
Chicagoans also need to remember that it’s not just millionaires and billionaires who are affected by the new transfer tax. It’s also mom and pop businesses and investors who will face higher barriers to investing in Chicago neighborhoods.
The restaurant or tavern owner who wants to open a new establishment; the auto mechanic, craftsman or distributor who wants to buy an industrial building to expand a family business; the rehabber who wants to fix up a classic Chicago 6-flat…tens of thousands of dollars in additional transaction costs could delay those dreams or put them out of reach entirely.
As far as developers and investors with deep pockets, one should keep in mind that such businesses are highly focused on margins. If acquisition costs reduce returns by just a couple of percentage points, these companies can and will look to other cities where their investment criteria are more easily met. This is already happening in LA, where several developers and investors told the LA Business Journal they’ve begun to transition out of the city because deals no longer pencil out due to ULA.
The bottom line is that, just like in LA, Bring Chicago Home has been sold to voters as a tax on the richest of the rich to help the poorest of the poor. That simply isn’t true. Bring Chicago Home will raise property taxes on all Chicago homeowners; raise apartment rents, disproportionately affecting marginalized tenants; disincentivize investment in Chicago; and fail to achieve stated revenue goals.
Homelessness is an issue that affects all Chicagoans, from homeowners and renters to businesses and workers to government officials. Therefore, we believe all Chicagoans should have an opportunity to be involved in viable, focused solutions. As a company that has proactively participated in such solutions for years and is also acutely aware of real estate market forces, we strongly believe that Bring Chicago Home moves the city we love in the wrong direction with damaging and potentially long-lasting consequences.
We encourage those who care about the future of Chicago to vote “No” on Bring Chicago Home on March 19th.
