How real estate is fighting Mayor Johnson’s transfer tax plan

This weeks’ court hearing in lawsuit challenging referendum’s ballot language looms over ongoing campaigns with “millions” in fundraising on both sides

<p>From left: Illinois Realtors&#8217; Jeff Baker; Mayor of Chicago Brandon Johnson; Black Coalition for Housing&#8217;s Courtney Jones (Getty, Illinois Realtors, LinkedIn/Courtney Jones)</p>

From left: Illinois Realtors’ Jeff Baker; Mayor of Chicago Brandon Johnson; Black Coalition for Housing’s Courtney Jones (Getty, Illinois Realtors, LinkedIn/Courtney Jones)

Illinois Realtors is pressing on with its campaign against the Chicago real estate transfer tax supported by Mayor Brandon Johnson, even as its allies express confidence the referendum will be derailed in court, perhaps as soon as Wednesday.

The trade group is going head-to-head with advocates of the Johnson-backed measure in the weeks leading up to the March 19 election. Millions of dollars have been raised between the competing groups, as they distribute fliers, knock on doors and hold town hall-style meetings to get their divergent messages to voters.

The troubled National Association of Realtors is set to kick in another chunk of change to fight the referendum. And Illinois Realtors CEO Jeff Baker claimed the association’s members are united in their opposition to the ordinance.

“This is a tax that will hit everybody, no matter what income level, and no matter what your living situation is,” Baker said. Much of his group’s focus on the campaign is pointing out the risk of annual property tax hikes hitting homeowners due to the transfer tax draining market value from big commercial buildings.

If passed by a simple majority of voters, the referendum would increase the real estate transfer tax imposed on sales over $1 million to fund services for people experiencing homelessness, including quadrupling the 0.75 percent rate the city currently charges for deals over $1.5 million.

It has caused concern among commercial real estate players, who make nine-figure deals that would have their transfer tax costs rise exponentially, sparking fears of investors skipping over Chicago for more business-friendly markets.

The Illinois Realtors trade group is dedicating $1 million to mailers, digital advertisements and field campaigns, and the stream of incoming donations will be extended. NAR — which is dealing with the fallout of its latest president resignation, this time amid a blackmail threat, as well as lawsuits over broker commissions — has donated even more to the transfer tax fight since the last campaign finance report, though the amount hasn’t yet been disclosed publicly, said Illinois Realtors spokesperson Anthony Hebron.

Meanwhile, advocates of the transfer tax, which is known as Bring Chicago Home, have upped their ante from the $700,000 in campaign funds previously reported to a number “in the millions,” according to the campaign’s spokesperson Jose Sanchez, who took a shot at the measure’s opponents.

“They’re going to lose, and I think they’re wasting money,” he said, calling the opposition campaign “an attempt to keep people homeless.”

If passed, the measure would save transfer tax costs for an estimated 95% of homebuyers, dropping the rate from 0.75 percent to 0.6 percent of the sale price for deals under $1 million. The rate would jump from to 2 percent for sales between $1 million and $1.5 million, although the first $1 million would be taxed at 0.6 percent. The tax rate would rise to 3 percent for any portion of a sale price over $1.5 million.

Any savings for homebuyers below $1 million would be outweighed by the impact on the commercial real estate sector and resulting jumps in annual residential property taxes, Baker argues.

Property taxes in Cook County are a zero-sum game. So any taxable value sucked out of commercial real estate by the transfer tax or otherwise means residential owners will foot greater property tax bills to make up the difference. Most commercial properties are already assessed at 2.5 times the value of residential properties, meaning every dollar of assessed value that comes out of the commercial tax base costs the residential base $2.50.

Still, Illinois Realtors member Courney Jones, a leader in residential real estate on Chicago’s South Side, said he’s “not so freaked out about” the prospect of the transfer tax tweaks on the table. Jones is the legislative chair of the Chicago-based Dearborn Realtist Board and the third vice president of the National Association of Real Estate Brokers, the NAR equivalent for Black and brown real estate professionals.

The potential rise in residential property taxes that could come with the transfer tax increase is “important but not a priority,” Jones said. The Dearborn Realtist Board hasn’t taken a stance on the referendum.

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Only 40 percent of Black households own homes in Chicago, compared to 77 percent of white households, according to The Chicago Community Trust, and the Dearborn group is focused on addressing barriers to ownership to close that gap. Jones pointed to a need for more down payment assistance and problems with credit modeling systems as bigger Chicago real estate issues.

Bring Chicago Home supporters conducted a study that they say disproves some of its opponents’ talking points, said Sanchez. It cited Seattle, New York City and San Francisco as three cities that recently imposed a bigger transfer tax rate on the highest-value properties that’s similar or costlier than the new rate proposed for Chicago, and those markets took the increase in stride, he said.

At the start of 2020, Seattle changed its transfer tax from a flat 1.28 percent to a tiered structure that ranges from from 1.1 percent for sales under $500,000 to 3 percent for sales above $3 million. The average number of housing units valued at more than $500,000 built each month rose steadily for a 57 percent increase by 2021, according to the study. However, average monthly construction fell again in 2022.

The study cited New York City’s move in 2019 to increase its transfer tax on sales over $2 million, with the rate going as high as 3.9 percent for sales over $25 million. Following this change, the total number of construction permits issued for housing units declined in 2020 and 2021 during the pandemic but rebounded to pre-pandemic levels in 2022, according to the study.

However, the rush for New York building permits in 2022 was mainly motivated by the approaching expiration of a crucial property tax break, rather than seen as the market overcoming the impact of transfer taxes. By the same token, other economic factors such as interest rates could change again and soften the bruises Chicago commercial real estate would take from the transfer tax hike.

“Having a workforce that is housed, that is receiving support, makes for a stronger economy, makes for better workers, allows people to spend more,” Sanchez said.

Indirect effects of the transfer-tax increase will impact Chicagoans across demographics, Baker said.

“Small business owners are very concerned about this, and the impact it will have on their overall property valuations,” Baker said.

Drexel Properties president Jeff Weinberg, who invests in Chicago multifamily, used his own firm’s recent purchase of four buildings holding 90 units he said were run down to show how a transfer tax hike would squeeze his capacity to fix up housing. He said he would have paid over $125,000 more in transfer taxes than the $74,000 he was charged, which he said equates to the cost of rehabbing eight apartments.

The city should work more closely with landlords and investors in crafting legislation, Weinberg said, adding the current plan “will drive out the small investors, leaving only corporate owners.”

Meanwhile, there’s a hearing set for Wednesday in a lawsuit filed by industry trade groups, led by the Building Owners and Managers Association, that seeks a judge’s ruling to void the election due to invalid ballot language. The city on Friday intervened in the suit, which was filed against the Chicago Board of Election Commissioners, with a motion to dismiss the complaint that called the trade groups’ case “an attempt to interfere in the legislative process.”

Until the fate of the lawsuit is determined, the campaigns are moving forward as if each vote will count.

Editor’s note: This story has been updated to correctly note that NAR’s former president recently resigned.

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