Inside the progressive push to pump transfer taxes

Chicago Mayor Brandon Johnson waited about a half-hour into his inaugural speech last month before giving a rhetorical nod to affordable housing advocates in his progressive base, and exacerbating the fears of real estate players.

“I’m talking about a Chicago where 65,000 people don’t wake up on the streets or in a shelter where public housing and affordable housing and a pathway to homeownership exists for everyone… We can do it, Chicago. We can bring Chicago home,” Johnson said.

It was a clear allusion to Bring Chicago Home, a proposal he embraced in his upset campaign for mayor. The program calls for a one-time real estate transfer tax on property sales of $1 million or more. The latest version making the rounds would take it to 2.65 percent of the sale price, more than tripling the current 0.75 percent rate.

The inaugural crowd was familiar with the phrase, but the scene marked a key difference from Johnson’s campaign because the group of thousands at the University of Illinois Chicago included members of the real estate community. Some had backed Johnson all along; others opposed him publicly and have since made Chicago-style realpolitik calculations, and are now looking to warm to the 47-year-old rising star of the Democratic Party.

Johnson, for his part, will need the real estate industry to address the challenges of housing as he transitions from firebrand candidate to the top insider in the city. The transfer tax isn’t the best opening gambit, according to many in the business.

“Doing this demonizes the owners and operators of multifamily in Chicago as well as business owners,” Reid Bennett, a Chicago-based broker with SVN, said of the transfer tax. He’s been helping clients with Chicago assets sell and place their capital elsewhere, as landlords are already stressed by existing taxes.

“What happens when they levy these taxes on multifamily owners is they tend to leave,” Bennett said.

All of that means Johnson’s high-blown inaugural rhetoric could become a path forward on residential development in housing-pressed Chicago — or it sets up a collision course. The chief factor will be how hard and far the new mayor pushes for a hike in real estate transfer taxes to fund goals on affordable housing that test the fiscal structure of Chicago and other cities in the U.S.

Do no harm

Los Angeles dealmakers are grappling with a similar measure that significantly jacked up the transfer taxes paid on sales of $5 million or more and went into effect in April. And in New York, a so-called “mansion tax” of an extra 1 percent of the sale price went into effect for deals of $1 million or more across the entire state many years ago. In 2019, another supplemental tax was also imposed in New York City ranging from 0.25 percent for a $2 million home up to 2.9 percent for one sold for $25 million or more.

As in Los Angeles, the tax brought a rush on home sales the month before the new tax took effect, but it didn’t appear to have any long-term effect on the market.

It’s a proposal that often looks good on paper for progressive politicians: Tax the wealthy real estate owners to pay for services for those in need. 

“They’re not looking at it from a larger perspective. They’re looking at this in isolation and not realizing all these parts are interconnected,” said Anthony Marguleas, a broker with Amalfi Estates in Los Angeles.

The reality is that tax hikes can bring unintended consequences, especially when they apply to commercial as well as residential properties, as is the case in Los Angeles and would be the case in Chicago if the current proposal passes. They make it tougher for investors to pencil out a return deemed to be worth the risk. And the additional taxes tend to be charged even when sellers lose money with the price they fetch, a point often criticized.

“These are politicians trying to make a statement,” Stephen Shapiro, the co-founder of Westside Estate Agency, a top boutique firm in L.A., said. “They need to base any tax on your profit, not on your gross selling price.”

Beasts of burden

Assets near the top of Chicago’s commercial real estate market will be hit especially hard by the new tax, if imposed, analyses performed by The Real Deal show.

Adding up all deed transfers of $1 million or more within Chicago from March 1, 2022, to March 31, 2023 showed that just the 50 priciest properties — all sold for more than $18.5 million during the period — would have accounted for 20 percent of the new revenue from the tax, had it been on the books.

Critics of the tax also question whether a revenue source that ebbs and flows with the tide of broad economic factors like interest rates should be dedicated to an issue as important as affordable housing.

Industrial sales within city limits above the threshold averaged about 100 deals a year over the past three years, according to Colliers data provided to TRD. That generated a total sales volume of nearly $700 million each year. Moving forward, though, that amount of sales volume is unlikely, as sales slowed substantially this year since borrowing costs climbed. Brokerage NAI Hiffman reported a 58 percent decrease in Chicago-area industrial sales volume to $392 million in the first quarter this year, compared to the same time last year.

Opponents also say that a new tax could slow down new housing development proposals, as builders grow wary of thinning margins when they go to cash out of a newly built structure with a sale. If imposed, the tax could force some landlords already feeling pressured by current taxes to raise rents, critics say.

Those concerns were dismissed by John Bartlett, head of Chicago tenants’ rights advocacy group MTO. He asserts that rent hikes are usually made at the whim of landlords wanting bigger revenues, and he supports Johnson’s proposal. However, he remains clear-eyed that landlords, feeling vilified themselves, will make it a scapegoat.

“I don’t know that [a transfer tax] is the issue or if it’s where rent increases come from,” Bartlett said. “I think it’s from outside that, but certainly, it will get blamed, no doubt.”

Correction: The timeline of when New York transfer taxes went into effect has been updated in this story.