The disproportionately high property taxes on the North Side are speeding up the area’s trend toward gentrification and may be the main force causing many long-time residents and family businesses to leave the area. High property taxes have also been linked to high commercial tenant turnover and the loss of affordable housing.
Most Chicago-area property owners are now in possession of their tax bills (the first payment of which is due on Nov. 1). The bill shows the result of the recent triennial re-assessment, and the sticker shock is substantial. Increases range widely from neighborhood to neighborhood but most are dramatic, particularly in once-affordable Lake View and Rogers Park Townships.
Rents to rise: Also especially hard hit on the North Side are rental properties - especially two through six flats, many of which experienced 100 percent increases. Rents in these units will surely move up in the next year, as a continued acceleration of the condo conversion trend dries up much of the city’s overall rental inventory.
Fostering this tight rental environment is the unbalanced tax rates charged to larger rental properties. Multi-unit residential buildings of seven units or more are assessed at 33 percent of market value. That same building, were it to be sold off as condos, would then have each unit assessed at the 16 percent single family residential rate. Historically low mortgage rates are also aiding those who can to snap up these desirable in-city addresses quickly.
“Renting in many cases is an option available only to the affluent,” said Tim Glascott, a residential property manager in Lincoln Park. “They’re the only ones who can afford to pay these high rents on the north lakefront.”
Due to the increased property taxes and higher energy costs, some residential property managers are expecting rental increases of up to 15 percent in the next year. Moreover, increased taxes have a significant negative impact on renters, as they do not receive any of the tax breaks associated with home ownership—such as the federal mortgage interest deduction on income taxes and write-offs for depreciation.
Commercial vacancies equal residential conversion: The double whammy of slowing sales in the face of increasing overhead for area businesses has many undercapitalized businesses on edge today. Property managers all over the North Side face the likelihood of increased defaults and an abundance of “For Rent” signs on commercial properties in the next year if the holiday shopping season is poor. Escalating rents [boosted by the same high property taxes and energy costs] are cited as the main reason many small family businesses are failing.
“It’s terrible. You negotiate to sign a lease now and you can’t help but start to wonder when you will be trying to find another tenant for that same site and how will it work,” said Robert Schuberth, whose family owns and manages commercial property in Lincoln Park. “You see some of them leave good jobs to start something on their own, and you’re thinking, ‘how long can they last?’”
Many North Side commercial streets, like Halsted St., Lincoln Ave. and Clark St., are slowly being converted to residential as owner-operator businesses close and/or are bought out for residential development. The city has started to demand mixed-use projects which require commercial uses on the first floor of these streets, but residential sales still come more quickly than commercial tenants. And in some cases, concessions made for residential design purposes of a new development will distract from the desirability of the commercial units, making the commercial units more difficult to rent.
Tax burden unbalanced: Indeed many believe the entire state of Illinois is over-dependent on property taxes for much of its revenue. The state now raises more money through property taxes than the state income tax and sales tax combined. That is due in great part to the over-reliance of public education funding on property taxes.
“Most politicians tell you there is no stomach for tax reform in Illinois now,” said state Rep. Larry McKeon. “I don’t see that. I promised my constituency that I would make tax reform a personal initiative and I am.” McKeon, now in his third term, fought to have a bi-partisan Property Tax Reform & School Funding Committee formed because of his frustration with previous piecemeal attempts to straighten up the mess.
“The decision to buy or sell a tract of property should not be greatly influenced by the applicable property tax, assuming it is set at a fair and reasonable rate,” said Ralph Martire, executive director of the Illinois Tax Accountability Project. “Once a taxpayer owns a property, that person is likely to remain at such a location for a significant period of time so long as the tax burden is fair.”
This may no longer be the case on the North Side where taxes are perhaps the first thing a prospective buyer now looks at before moving forward with a real estate purchase.
“Unfortunately the Illinois tax system is so burdensome and complex that it does impact decisions about where to live or locate a business,” said Martire. “Many taxpayers now closely review local property tax rates, property values and available services when deciding where to locate or reside.” This is partially why Cook’s collar counties and the state of Indiana have been so successful in recruiting business to relocate out of the Cook County. The property tax savings are significant and many times it is the key factor in the decision for a business to leave.
This situation is exacerbated in Cook County due to its property classification levels. Cook is the only county in the state that assesses property at different levels based on the use of the property. Every other county assesses property at the rate of 33 percent of market value, while Cook has six levels starting at a low 16 percent for single-family residential property and topping out at 38 percent for commercial property. Perhaps this discrepancy can mostly be credited to political expediency, as most politicians will tell you that votes come from residents, not businesses.
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