Real Estate Tax and Government Incentives

Transcription

1 10 Real Estate Tax and Government Incentives KEITH W. GROEBE TIMOTHY J. HAMMERSMITH Masuda, Funai, Eifert & Mitchell, Ltd. Chicago This has been reprinted with permission. This chapter is part of a larger compilation by the Illinois Institute of Continuing Legal Education which holds the copyright to the compilation. COPYRIGHT 2004 BY KEITH W. GROEBE AND TIMOTHY J. HAMMERSMITH. 10 1

2 COMMERCIAL REAL ESTATE I. [10.1] Introduction II. Background A. [10.2] Creation of the Tax Lien B. [10.3] Calculating the Amount of the Lien C. [10.4] Priority of the Real Estate Tax Lien Competing Liens D. Extinguishing the Lien by Payment 1. [10.5] Payment of the Tax Bill by the Due Date a. [10.6] Non-Cook County b. [10.7] Cook County 2. [10.8] Proof of Payment/Payment by Legal Description III. Enforcement of the Lien A. [10.9] Non-Payment Statutory Penalties B. Tax Sales 1. [10.10] In Rem Enforcement 2. [10.11] Forfeiture 3. [10.12] Right of Redemption 4. [10.13] Estimate of Redemption IV. Transactional Considerations A. Due Diligence 1. [10.14] Special Assessments and Special Service Areas 2. [10.15] Property Index Number Review B. Title Examination 1 [10.16] Schedule B 2. [10.17] PIN Endorsement 3. [10.18] Title Indemnity 4. [10.19] Notice of Purchase or Change in Use of an Exempt Parcel 5. [10.20] Real vs. Personal Property Contract Considerations C. Additional Contractual Considerations 1. [10.21] Prorations 2. [10.22] Reproration Agreements D. Post-Closing Considerations 1. [10.23] Tax Divisions/Consolidations 2. [10.24] Tax Assessee

3 REAL ESTATE TAX AND GOVERNMENT INCENTIVES V. [10.25] Tax Reduction Strategy and Minimization A. [10.26] Exemptions B. [10.27] Exemption Filing Procedure VI. Assessment Challenges A. [10.28] Statutory Procedure for Reducing the Basis for the Lien B. [10.29] Valuation 1. [10.30] Recent Purchase Price Less than Proposed Fair Market Value 2. [10.31] Comparable Valuation Lack of Uniformity 3. [10.32] Income-Producing Property 4. [10.33] Cost Approach C. Unique Circumstances 1. [10.34] Vacancy or Functional Obsolescence 2. [10.35] Real vs. Personal Property Characterization a. [10.36] The Common Law Intention Test b. [10.37] The Integrated Industrial Plant Doctrine c. [10.38] The Process/Building-Related Test 3. [10.39] Non-Buildable Land 4. [10.40] Excess Land 5. [10.41] Open Space VII. Incentives A. [10.42] Enterprise Zones B. [10.43] Tax Increment Financing C. [10.44] Cook County Special Classifications VIII. [10.45] Tax Rate Challenges ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 3

4 10.1 COMMERCIAL REAL ESTATE I. [10.1] INTRODUCTION This chapter is designed to give the practitioner an overview of the real estate taxation process and some general pointers on possible means of keeping the real estate tax burden on property at a fair and equitable level, as well as transaction considerations upon the sale and purchase of real property. II. BACKGROUND A. [10.2] Creation of the Tax Lien The Property Tax Code, 35 ILCS 200/1-1, et seq., contemplates that all real property except that which is exempt is to be assessed and taxed and the tax on the property collected so as to support the operations of the varying municipalities and governmental entities. The lien for real estate taxes is created pursuant to of the Code. This section provides that the taxes on real property, together with all penalties, interest, and costs that may accrue thereon, shall be a first and prior lien on the real estate, superior to all other liens and encumbrances. Id. Section of the Code provides further that the lien for taxes is created from and including the first day of January in the year in which the taxes are levied and remains on a property until all taxes are paid or until the taxes are sold under the Code. See Forman Realty Corp. v. Brenza, 11 Ill.2d 531, 144 N.E.2d 623 (1957). See also United States v. Meyer, 199 F.Supp. 508 (S.D.Ill. 1961) (purpose of was to make real estate taxes lien superior to all other liens until taxes are paid or lien is discharged by proceedings under Code). See also Griffin v. Gould, 72 Ill.App.3d 747, 391 N.E.2d 124, 28 Ill.Dec. 925 (1st Dist. 1979) for additional authority on this subject. B. [10.3] Calculating the Amount of the Lien The amount of the lien for real estate taxes is a product of a three-factor equation: the tax assessment, the tax rate, and the state equalization factor. The tax assessment, which is a property owner s pro rata share of the tax levy, is determined by the township or county assessor, depending on the county in which the property is located. Under the Property Tax Code, in counties of three million or more inhabitants, the county assessor is the primary assessment official. 35 ILCS 200/3-50. In counties of fewer than three million inhabitants, the township assessor has the duty to make the assessments in the township where he or she is elected. 35 ILCS 200/3-65, 200/3-45. The state equalization factor is determined annually by the Illinois Department of Revenue pursuant to 17-5 of the Code to ensure that the property tax liens have been levied uniformly by value as provided under Article IX, 4 of the Illinois Constitution. The tax rate is computed generally under Code and is essentially the result of an algebraic equation that takes into account the tax levy authorized by particular taxing districts that encumber a parcel of real property and the aggregate equalized assessed value (the tax base) where the property is located. Each of these factors is subject to contest and appeal

5 REAL ESTATE TAX AND GOVERNMENT INCENTIVES 10.5 C. [10.4] Priority of the Real Estate Tax Lien Competing Liens As stated above in 10.2, the Property Tax Code provides that the lien for real estate taxes shall be a prior and first lien on real property superior to all other liens and encumbrances. 35 ILCS 200/ In certain instances, the lien for real estate taxes may defeat a federal tax lien on the property since 26 U.S.C. 6323(b)(6) provides an exception to the priority of a federal tax lien in certain instances. See Chicago Federal Savings & Loan Ass n v. Cacciatore, 25 Ill.2d 535, 185 N.E.2d 670 (1962). In assessing the priority of a state tax lien versus federal liens on real property, one should pay close attention to 26 U.S.C and 6323 as well as 26 U.S.C. 7425(a). Once a federal lien has attached to a taxpayer s property, federal law determines the priority of competing liens asserted against the property. See United States v. Amos, 287 F.Supp. 886 (N.D.Ill. 1968), in which the court held that a lien for real estate taxes may take priority over a federal tax lien by reason of 26 U.S.C. 6323(b)(6). When federal liens are at issue, it is a federal question as to which lien has priority. Amos, supra. There are some instances under the Code in which a competing governmental interest will take priority over a real estate tax lien. For example, states that before a court can enter an order issuing a tax deed affecting the interest or title to any property in which a city, village, or incorporated town has obtained an interest under the police and welfare power through advancements made from public funds, the tax purchaser must reimburse the municipality for the money previously advanced. If a tax purchaser does not want to acquire title and be required to reimburse the municipality, the purchaser can make application to the court to declare the tax purchase set aside as a sale in error and seek reimbursement of the tax bid amount. Id. Note as another exception to the general rule that real estate tax liens take priority that when the federal government holds a mortgage against the property, its interest cannot be defeated by a state-imposed real estate tax lien. See United States v. General Douglas MacArthur Senior Village, Inc., 470 F.2d 675 (2d Cir. 1972). See also Rust v. Johnson, 597 F.2d 174 (9th Cir. 1979). A tax purchaser and his or her counsel should review the above cases and provisions of 26 U.S.C. 6323(b)(6) and 26 U.S.C. 7425(a) prior to seeking enforcement of a tax deed so as to assess the priority of federal liens or liens held by other governmental bodies that could take priority over the real estate tax lien despite the Property Tax Code providing otherwise. D. Extinguishing the Lien by Payment 1. [10.5] Payment of the Tax Bill by the Due Date Throughout the Property Tax Code, many distinctions are made between counties with three million or more inhabitants and counties with fewer than three million inhabitants. Essentially, this cutoff point distinguishes Cook County from the rest of the state. Although the Code specifically provides that in Cook County the payment of real estate taxes will be on an accelerated billing procedure, counties other than Cook may also provide for an accelerated billing procedure but are not required to do so. 35 ILCS 200/ Accelerated billing is a ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 5

6 10.6 COMMERCIAL REAL ESTATE procedure in which the first installment of real estate taxes is calculated to be 50 percent of the prior year s tax on the property. Id. The difference between the final taxes due and the first installment is reflected in the second installment. Id. If accelerated billing is not adopted by a county with fewer than three million inhabitants, taxes are paid in two equal installments. The actual due date of the first and second installment for real estate taxes varies depending on whether accelerated billing has been adopted. Keep in mind that because, when a new property index number is created, there was no tax paid on the property index number during the prior year, the entire tax is paid in the second installment. a. [10.6] Non-Cook County Section of the Property Tax Code provides that unless accelerated billing has been adopted, or an ordinance has been adopted delaying the delinquency date and payment for real estate taxes due to the entire county or portions thereof being declared a disaster area by the President of the United States or Governor of Illinois, the first installment of taxes that remains unpaid on June 1 is considered delinquent after that date and bears interest at a rate of 1 ½ percent per month or the portion thereof in which payment has not been made. 35 ILCS 200/ If the second installment remains unpaid on September 1, interest accrues on the amount unpaid at 1 ½ percent per month. Id. As noted in 10.5 above, although not required, counties with fewer than three million inhabitants may adopt accelerated billing. 35 ILCS 200/ If the county has adopted this procedure, the first installment of unpaid taxes is considered delinquent and bears interest after a date not later than June 1 and bears interest at the rate of 1 ½ percent per month until paid or forfeited. 35 ILCS 200/ The second installment is deemed delinquent and bears interest after August 1 at the same 1 ½ percent per month rate. Id. b. [10.7] Cook County The Property Tax Code provides under that the first installment of unpaid taxes is deemed delinquent and bears interest after March 1 at 1 ½ percent per month or a portion thereof until paid or forfeited. Section further provides that the second installment, if not paid, is deemed delinquent and bears interest after August 1 at the 1 ½ percent interest rate, again until paid or forfeited. Id. Note that if the county misses the statutory deadline for mailing the tax bills, the county may not charge interest until at least 30 days after the bills are actually mailed. See Pierce v. Conant, 47 Ill.App.2d 294, 198 N.E.2d 555 (1st. Dist. 1964); 35 ILCS 200/20-5. Counsel should be aware that if the first installment in accelerated billing actually exceeds the entire tax on the property for the year, the amount of the overpayment is refunded to the taxpayer. See 35 ILCS 200/ Prior to the enactment of 21-60, this was not always the case. The first installment taxes (50 percent of the prior year) could exceed the entire tax on the property for the subsequent year when major improvements on the property had been demolished. The taxes in the subsequent year would only be on the land and any remaining improvements. One should keep in mind that despite the fact that the taxpayer may anticipate that the total tax for the entire year will not be substantially less than one half of the preceding year s tax due to certain improvements having been demolished, if the first installment is not timely paid, the delinquent first installment will bear interest as noted under the Code even though an overpayment is ultimately made and a refund is due the taxpayer. 35 ILCS 200/

7 REAL ESTATE TAX AND GOVERNMENT INCENTIVES [10.8] Proof of Payment/Payment by Legal Description Real estate taxes in Illinois are paid one year in arrears. See LeMoyne v. Harding, 132 Ill. 23, 23 N.E. 414 (1890), and Lawrence v. Miller, 86 Ill. 502 (1877), which both stand for the proposition that an owner of an undivided interest in land may protect his or her interest by paying the tax on it but need not protect the interest of other persons or other owners. If the tax has been paid by one who owns an undivided interest, the collector is to designate on the county s records on whose undivided share the tax has been paid. 35 ILCS 200/ When paying by legal description, the taxpayer needs to contact the office of the county collector, who can calculate the amount of tax on a property index number that is attributable to a specific legal description. (Section should be reconciled with 9-175, which states that in any tax year each owner is jointly and severally liable in any action for collection of taxes and special assessments as provided in of the Property Tax Code.) The Code provides further that the collector is required to issue an actual receipt to the taxpayer only if the taxpayer makes a payment for taxes in cash or requests a receipt, in which case one will be provided by mail. See 35 ILCS 200/20-40, 200/ When a receipt for taxes has been lost or is not in existence, courts have held that the collector s books (warrant books) and entries showing payment are admissible evidence to show the payment of any taxes due on property. See Scott v. Bassett, 194 Ill. 602, 62 N.E. 914 (1902). See also Catlin Coal Co. v. Lloyd, 176 Ill. 275, 52 N.E. 144 (1898). III. ENFORCEMENT OF THE LIEN A. [10.9] Non-Payment Statutory Penalties Because the varying municipalities and governmental agencies rely on property tax revenues to fund their operations, it is imperative that there be an alternative collection procedure and enforcement of the lien on the real estate if the owner does not extinguish the lien by payment. The lien for real estate taxes is created by statute and exists in the favor of the State of Illinois or a municipality. See Romain v. Fink, 5 Ill.App.2d. 323, 125 N.E.2d 298 (1st Dist. 1955). However, Article IX, 8(a) of the Illinois Constitution provides for the property owner s protection against loss of property: Real property shall not be sold for the nonpayment of taxes or special assessments without judicial proceedings. Section 8(a) of the Constitution also provides the framework and the basis for the redemption period of taxes sold under of the Property Tax Code. The Constitutional Commentary to Article IX, 8 states that this notice and due process framework are not intended to apply to any action commenced to foreclose a lien on real property that results from a personal judgment, but only for the foreclosure for the nonpayment of real estate taxes. See Robert A. Helman and Wayne W. Whalen, Constitutional Commentary, ILL.CONST. (S.H.A.) art. IX, 8, p The commentators note that the protection provided under Article IX corresponds and dates back to the 1870 Illinois Constitution. Id. The 1970 Illinois Constitution provides the General Assembly a much greater level of discretion to determine what constitutes due process with ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 7

8 10.10 COMMERCIAL REAL ESTATE respect to enforcement of tax liens and the tax sale process than was the case under the prior version of the Illinois Constitution Id. The commentators note that many states do not refer in their constitutions to due process in the sale of real estate for unpaid taxes. In these states, the subject is left to be decided exclusively by the legislature. Constitutional Commentary, p The Illinois Constitution, dating back to 1848, provides for due process. Id. Apparently, the drafters of the Illinois Constitution considered property rights worthy of specific constitutional protection. B. Tax Sales 1. [10.10] In Rem Enforcement The enforcement of the lien on real estate for taxes begins with the county tax collector publishing a notice and advertisement of the intent to apply to the court for judgment of taxes paid under protest and the sale of the taxes on delinquent properties. 35 ILCS 200/ Property Tax Code provides that at any time after all taxes have become delinquent in any year, the collector shall begin proceedings to foreclose on properties with unpaid taxes. It is noteworthy that indicates that the appropriate time for application for judgment is subject to modification in accordance with 35 ILCS 200/21-40(c). This allows the county board in a county that has been designated in part or in whole as a disaster area by the President of the United States or the Governor of Illinois to adopt a resolution modifying the due dates of any specified installment of real property taxes or special assessments for property adversely affected by the disaster. 2. [10.11] Forfeiture If there are no bidders at the annual tax sale, then of the Property Tax Code provides that the property shall be forfeited to the State of Illinois. 3. [10.12] Right of Redemption An attorney representing an owner (or potential purchaser of real property see below) who becomes aware that there are unpaid and sold-off real estate taxes on the property in question needs to be aware of the owner s right to redeem the sold taxes to prevent loss of the property through judicial proceedings. The Property Tax Code provides for very stringent time periods in which to redeem sold taxes. Counsel needs to study these provisions carefully to make sure such redemption periods are adhered to, which vary depending on the property use and number of tax years outstanding when the taxes were first sold. 35 ILCS 200/ The Code provides in that the right to redeem the real estate taxes sold due to nonpayment exists in any owner or person interested in that property, other than an undisclosed beneficiary of an Illinois land trust, whether or not the interest in the property sold is recorded or filed. Note cases that recognize that land trust beneficiaries are persons interested in the real estate. See In re Application of County Treasurer & Ex Officio County Collector of Cook County, 216 Ill.App.3d 162, 576 N.E.2d 255, 159 Ill.Dec. 586 (1st Dist. 1991). See also In re Application of County Treasurer of DuPage County, 16 Ill.App.3d 385, 306 N.E.2d 743 (2d Dist. 1974)

9 REAL ESTATE TAX AND GOVERNMENT INCENTIVES [10.13] Estimate of Redemption Hand and hand with the right to redeem is determining the correct amount to be paid to the county in order to redeem sold taxes. Typically, the office of the county clerk maintains the tax sale records and can determine the amount that must be paid to redeem sold taxes. A document called an estimate of redemption can usually be obtained and used to redeem the taxes sold. Estimates of redemption are valid for a certain period that is dependant on the statutory interest period remaining and how far along the tax deed process is. For information on title company clearance, see the discussion on title indemnity in below. IV. TRANSACTIONAL CONSIDERATIONS A. Due Diligence 1. [10.14] Special Assessments and Special Service Areas Special assessments are issued when work is done for special assessment projects. 65 ILCS 5/ Under the Property Tax Code, a county collector is authorized to apply for judgment and sale of land for taxes due to the county and state in which the collector has been unable to collect special assessments or special taxes (special service areas) or installments thereof that have matured. 65 ILCS 5/9-2-82, 5/ From this standpoint, unpaid special assessments and special service areas are treated in the same manner as general unpaid real estate taxes. 65 ILCS 5/ Special service areas essentially accomplish the same function as special assessments but generally appear on real estate tax bills as a separate line item and so they are incorporated in the general real estate lien and subsequent tax sale procedures as noted therein. 2. [10.15] Property Index Number Review A thorough level of due diligence includes a review of the survey in relation to the real property legally described by the property index number(s). See below regarding title examination. Discrepancies necessitate further due diligence considerations and possible post-closing action. B. Title Examination 1. [10.16] Schedule B When representing a purchaser of real estate and examining an American Land Title Association (ALTA) commitment for title insurance during the due diligence period, counsel should find the real estate tax information on Schedule B. Typically, Schedule B denotes the property index number or numbers that cover the real property described in Schedule A of the title commitment as well as the payment status of the real estate tax debt referenced by such PINs. The title commitment should also indicate whether the PINs affect real property other than that described on Schedule A of the Commitment for Title Insurance. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 9

10 10.17 COMMERCIAL REAL ESTATE The PIN includes a legal description of the land encompassing the PIN. See 35 ILCS 200/1-80, 200/ See also 35 ILCS 200/9-40. But see 35 ILCS 200/9-45. If the PIN legally describes property other than that described on Schedule A, a notation of affects the property described in Schedule A and other property should be provided by the title insurer. In such case, a tax parcel/division of the PIN is necessary post-closing to separate the real property being purchased from that described by the PIN, but not included on Schedule A. This aspect of due diligence is important to make sure that the purchaser does not unnecessarily pay the real estate tax on an adjacent owner s property as well as to ensure that an adjacent owner is not paying tax on the property being purchased, which could in such a case be one factor that gives support to a claim of adverse possession or at least provides the adjacent owner with a claim for unjust enrichment. The seller s counsel should also ensure that the prorations given the purchaser are based on the real property actually owned by the transferor. 2. [10.17] PIN Endorsement In many states, including Illinois, an ALTA owner s policy endorsement is available. For an additional premium, the title insurance company will insure that the PINs described on Schedule B concern only the real property described on Schedule A and no other property. Such endorsement language insures that (a) the land described in Schedule A of the policy as insured constitutes a single parcel for real estate tax purposes separate from any other land; (b) the land described in Schedule A is assessed under the property index number provided in Schedule B; and (c) the property index number noted affects no land other than that described in Schedule A. See ENDORSEMENT HANDBOOK (2000), prepared by Chicago Title Insurance Company, Chicago, IL. 3. [10.18] Title Indemnity If the commitment for title insurance notes that real estate taxes affecting the subject property are unpaid, the title insurer or escrow closing company will require that an indemnity escrow be established in order to clear the unpaid real estate taxes as an exception to coverage. The title insurer will require the seller to establish a separate escrow and deposit from the sale proceeds usually an amount equal to 150 percent of the amount of unpaid taxes as shown on the recent tax bill or estimate of redemption. See above. The terms of the title indemnity will also provide the seller s covenant that should the amount held in the title indemnity be insufficient to pay or redeem the taxes, the seller will indemnify the title company for any deficiency. The title indemnity allows the purchaser to close with the Schedule B exception for unpaid or sold taxes to be waived on its marked-up commitment or policy issued at closing and the risk of loss is then transferred to the title company. Any excess, of course, after fees and costs, is refunded to the seller upon full payment or redemption of the real estate taxes. The foregoing assumes there is sufficient time to redeem the taxes after closing. 4. [10.19] Notice of Purchase or Change in Use of an Exempt Parcel The purchaser s counsel should note and of the Property Tax Code, which provide that whenever a fee simple title or lesser interest (such as a leasehold) is purchased,

11 REAL ESTATE TAX AND GOVERNMENT INCENTIVES granted, taken, or otherwise transferred from a use that is exempt under the Property Tax Code to a use that would make it taxable, the property is subject to tax from the date of the purchase or change in use. 35 ILCS 200/9-185, 200/ It is the obligation of the titleholder of record (the purchaser) or the transferee in cases in which there is a change in use or a change in leasehold estate to notify the county assessment official within 30 days of the transfer so that the property can be assessed and taxed. 35 ILCS 200/ Failure to give notice of the change in ownership or use of the property under this section shall cause the property to be considered omitted for purposes of taxation under the Code and the property will be subject to back tax. Id. This means the assessor can go back and tax a property for prior years not fully assessed under and of the Code (subject to the limitations imposed by case law). See Holiday Inns of America, Inc. v. Tully, 106 Ill.App.3d 1004, 436 N.E.2d 592, 62 Ill.Dec. 566 (1st Dist. 1982); American Medical Ass n v. Rosewell, 237 Ill.App.3d 1097, 606 N.E.2d 68, 179 Ill.Dec. 236 (1st Dist. 1992). But see Chicago Gravel Co. v. Rosewell, 103 Ill.2d 433, 469 N.E.2d 1098, 83 Ill.Dec. 164 (1984), which deals with omitted assessments and clerical errors versus a taxpayer s failure to inform the assessment officials of change in ownership or use under this section. One should also note the bona fide purchaser exception to omitted assessment under of the Code. 5. [10.20] Real vs. Personal Property Contract Considerations The tax on personal property was abolished as part of the revision of the Illinois Constitution in The allocation of real versus personal property as part of the contract negotiation can impact at least two areas: (a) transfer taxes on the transfer of real property the portion of the consideration allocated to personal property will not be subject to transfer taxes; and (2) the local assessing official is provided a copy of the transfer tax declaration filed upon the sale of real property, which may be used in part to determine the market value of the subject property for real estate tax purposes. The failure to separate the actual value of the personal property transferred from the real property value could unnecessarily subject the personal property to certain transfer taxes and real estate taxes. If personal property is being transferred along with the real property, it is suggested that a detailed inventory of such personal property be prepared and an opinion of its value be prepared by a professional appraiser to substantiate the allocation thereof. There are also numerous accounting and federal capital gains issues that arise in such allocations that are beyond the scope of this chapter. C. Additional Contractual Considerations 1. [10.21] Prorations When considering an appropriate real estate tax proration amount, one must keep in mind that since real estate taxes are paid in Illinois one year in arrears, the seller will be giving the purchaser a credit for those taxes that have accrued during its ownership but are not yet due and payable. The purchaser s counsel needs to make sure that a sufficient proration amount is given so that a deficiency between the proration amount and the actual tax due does not exist at the time the tax bill is generated. One way to account for fluctuations in the amount of the tax on property from year to year is through a reproration agreement. See below. However, reproration ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 11

12 10.21 COMMERCIAL REAL ESTATE agreements can sometimes be administratively difficult, resulting in high attorneys fees, and unforeseen changes in financial circumstances of the seller or purchaser may make collection difficult. Therefore, many practitioners believe that all prorations should be final at closing. In such cases, the bases for such prorations need to be looked at closely. Prorations for real estate taxes are often simply based on 105 percent or 110 percent of the last ascertainable tax bill. This method may in some instances be insufficient, so counsel for a purchaser is urged to look beyond the last available tax bill and look at the assessment on which that bill was based and whether it was artificially low and not reflective of a full assessment for the property. For example, was the property vacant for the tax year subject of the most recent ascertainable tax bill and a conditional one-year vacancy reduction granted? In such case, a reduction on this basis will not likely carry over to the following year, and so the proration amount for the year in which the sale occurs would be insufficient. The purchaser s counsel should make the following inquiries of the seller s counsel: a. When is the next scheduled reassessment for the property? b. Is the current year s assessment available? c. Does the last ascertainable tax bill reflect the full assessment for the property, and if a reduction in the assessment has been obtained during the prior year, on what basis? d. Is there evidence that any prior assessment reduction was intended to be for more than one year? In considering the proration issues noted above, the following sample language may be used for general real estate taxes, etc.: General real estate taxes, association assessments, insurance premiums for common areas, and other items customarily prorated are to be adjusted as of the closing date. The Seller shall be responsible for the general real estate taxes attributable to the Property for the period prior to the closing date for those amounts accrued but not yet due and payable in the amount of 105 percent of the last ascertainable tax bill for the Property. All prorations at closing shall be final. Note that the above language may exclude the tax for special assessments or special service areas. Additional language may be applicable under certain circumstances concerning property not individually taxed in the year in which the closing occurs: If the Premises are not individually taxed for the year in which the closing occurs, for purposes of proration, the proration to be given the Purchaser at closing shall be computed by multiplying the percentage of ownership the Premises represents as compared to the entire real property comprising the Project by 105 percent of the last ascertainable tax bill for the property of which the Premises are a part

13 REAL ESTATE TAX AND GOVERNMENT INCENTIVES Another consideration in the development of vacant land is a provision in which a developer often negotiates that it will be responsible for only the real estate tax applicable to the land and not the tax on improvements constructed. Additional language in such a case follows: Notwithstanding the foregoing, in no event shall the Seller ever be responsible for any increase in the real estate taxes as a result of the construction of the Premises or the existence of any other improvements on the Property, and the Seller s sole responsibility for its share of real estate taxes hereunder shall be on the basis as if the Premises or Property were being assessed as vacant and unimproved land. Appropriate proration language based on the last ascertainable assessment, tax rate, and equalization factor follows: The proration for general real estate taxes applicable to the Premises shall be based on 105 percent of the last ascertainable assessment for the Premises multiplied by the last ascertainable tax rate and the State of Illinois equalization factor. 2. [10.22] Reproration Agreements In the event that taxes are to be reprorated when the actual bill is available, one may wish to include language similar to the following: Upon issuance of the actual tax bill for the Property, the parties will reprorate the actual taxes based on the closing date. In the event that the proration amount given to the Buyer by the Seller at closing is insufficient, the Seller shall remit to the Buyer within 14 days of notice thereof the amount of the difference due and owing to the Buyer. In the event that the amount of proration given to the Buyer at closing exceeds the actual amount of the bill applicable to the period prior to closing, the Buyer shall remit the excess credit given at closing to the Seller within 14 days of notice from the Seller. The party requesting a payment under this paragraph shall include copies of the actual tax bill in such a request. D. Post-Closing Considerations 1. [10.23] Tax Divisions/Consolidations If the property index number concerning the property covers more than the real property purchased (see the discussion in above), the purchaser s counsel should, post-closing, seek to have the property owned by the client divided from that real property not purchased but covered by the PIN. Generally, one can seek a division of existing PINs through the assessor s office in either the county or the township where the property is located. An application for a division or consolidation of a PIN that needs to be submitted asks for the legal description of the existing property and the legal description of the parcels post division. The Property Tax Code contemplates the division of parcels. 35 ILCS 200/9-45, 200/9-95. For an example of a form of petition for division/consolidation of parcels, see the forms at the Cook County Assessor s Web site, Note that the tax division may not be effective until the year ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 13

14 10.24 COMMERCIAL REAL ESTATE following the year of application. By requesting a tax division and having a separate PIN created, the purchaser avoids having to pay real estate taxes by legal description (as discussed in 10.8 above) in subsequent years. Additionally, the new owner avoids collector s error if the collector mistakenly applies for a judgment against the entire PIN when taxes on the remainder are not paid by the neighboring owner. 2. [10.24] Tax Assessee The purchaser of property should check the county records to make sure that subsequent tax bills are sent to the correct address post-closing. Even though the deed will provide that subsequent tax bills should be sent to the noted address, often the county records are not updated upon the recording of the deed. Many counties require an affidavit by the taxpayer be signed to change the address where notices are to be sent for taxation purposes. V. [10.25] TAX REDUCTION STRATEGY AND MINIMIZATION The real estate tax assessment serves as the basis for a property owner s pro rata share of the various tax levies that encumber a parcel of property. Furthermore, the assessment authority is provided under the Property Tax Code at 9-70, et seq. In counties of fewer than three million inhabitants (non-cook County), property is to be reassessed at least once every four years a quadrennial reassessment cycle. 35 ILCS 200/ Property located in counties with three million or more inhabitants shall be reassessed every three years as provided under 35 ILCS 200/9-220 a triennial reassessment cycle. One should keep in mind that despite these reassessment cycles, property is subject to reassessment each year. See 35 ILCS 200/9-75, 200/9-70, 200/9-80, 200/9-85, 200/ Of course, the owner must be given due process notice of the reassessment as provided under the Code ( and in counties of fewer than three million inhabitants and and in counties with three million or more inhabitants). Since municipalities rely on tax revenues to support their operations, it is a fact of life that the tax lien on real estate will be significant to a parcel of real estate. The best way to avoid an enforcement of the lien through proceedings under the Code for failure to satisfy or pay the lien is to eliminate, when possible, or reduce the lien to the lowest possible and most equitable level as provided under the law. A. [10.26] Exemptions Properties that are exempt from real estate taxes can be generally broken down into two categories: (1) properties specifically enumerated in the Property Tax Code as being exempt (see 35 ILCS 200/15-10, et. seq.); and (2) the charitable purpose exemption under 35 ILCS 200/ The commonly cited case that lays out the criteria for the charitable exemption is Methodist Old Peoples Home v. Korzen, 39 Ill.2d 149, 233 N.E.2d 537 (1968). Sections 15-5 through of the Code, which include the charitable exemption provision, specifically enumerate various exemptions available such as for schools, property used for religious purposes, and properties owned by municipalities

15 REAL ESTATE TAX AND GOVERNMENT INCENTIVES One should note that if property otherwise exempt is leased to an entity that would otherwise not be exempt, of the Property Tax Code dictates that the titleholder is to file with the assessor a copy of the lease so that a separate PIN can be established and tax imposed on that parcel. This type of situation creates what is known as a leasehold, a term of art in the real estate taxation area. The tax assessment for leasehold property is to be ascertained under a formula known as the American Airlines formula as provided by the court in People ex rel. Korzen v. American Airlines, Inc., 39 Ill.2d 11, 233 N.E.2d 568 (1967). Note that exemptions under the Code are based on the ownership of the property (property owned by a municipality or by the United States Government), the use of the property (school property or property used for burial purposes), or both the ownership and use, which is basically the charitable exemption under of the Code. See also 35 ILCS 200/ See Childrens Development Center Inc. v. Olson, 52 Ill.2d 332, 288 N.E.2d 388 (1972); Village of Oak Park v. Rosewell, 115 Ill.App.3d 497, 450 N.E.2d 981, 71 Ill.Dec. 293 (1st Dist. 1983) (providing exemption for what is known as exempt on exempt leasing, even though lease by one exempt body to another might be with for profit motivation). B. [10.27] Exemption Filing Procedure The procedure for filing an exemption commences with the filing of a petition and Illinois Department of Revenue application before the county board of review where the property is located. See 35 ILCS 200/ The board will review the petition and application, hold a formal hearing, and make a recommendation to the Department of Revenue as to whether the exemption should be granted in whole or in part. Id. The application and petition are then forwarded to the Department of Revenue, which either accepts or rejects the recommendation of the board. Id. It is the Department of Revenue that is the determining body as to exemptions, and an appeal from that initial decision is made by requesting a formal hearing before a hearing officer of the Department. Id. That formal hearing is equivalent to an evidentiary hearing in which witnesses are presented and a record is made. Any appeal from that decision is on administrative review. 35 ILCS 200/8-40. VI. ASSESSMENT CHALLENGES A. [10.28] Statutory Procedure for Reducing the Basis for the Lien If the property in question does not qualify for an exemption under the Property Tax Code, good tax management practices dictate that counsel should be sure that the assessment, which serves as the basis for the tax lien, is at the lowest and most equitable level possible under Illinois law. As stated above in 10.25, since property is subject to reassessment each and every year, the assessment should be reviewed annually. Under the Code, real property is more than just land; it includes all buildings, structures, improvements, and other fixtures of a permanent nature and all rights pertaining to them. 35 ILCS 200/ Real property tax in Illinois is an ad valorem tax, a function of the fair cash value of the property subject to taxation. ILL.CONST. art. IX, 4a. ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 15

16 10.28 COMMERCIAL REAL ESTATE The owner of a parcel must receive notice if either the chief county assessment officer or the board of review revises an assessment on property. Notice is to be given by publication and by mailing to the taxpayer of record. See 35 ILCS 200/12-10; 200/12-20; 200/12-30; 200/ The real estate tax assessment is a percentage of the market value of the property as determined by the proper assessing authority. 35 ILCS 200/ The Code provides for a statutory level of assessments in counties other than those that classify real property for purposes of taxation. Id. Cook County is the only county in the state that classifies property for the purposes of taxation based on use. Other counties follow the 33 1 /3 level of assessment statutory scheme set out in Code Sections 9-80 and 9-85 of the Code allow the assessing officials to revise assessments and correct their books in a manner that appears to be just. 35 ILCS 200/9-85. Practitioners, when dealing with real property in Cook County, should look to the Cook County Real Property Assessment Classification Ordinance, as amended, which sets out the scheme by which the level of assessment varies depending on the use of the property. For example, commercial use property is assessed at 38 percent of market value, industrial property is assessed at 36 percent of market value, vacant land at 22 percent, and residential property (one to six dwelling units) is assessed at 16 percent of market value. See Cook County Real Property Assessment Classification Ordinance, as amended (April 9, 2002). Prior to the 88th and 89th Illinois General Assemblies, there was a distinction between remedies available to contest the market value proposed by the assessing officials depending on whether the property was located in Cook County or another county in the state. Since the passage of P.A , the distinctions are less evident. Once a taxpayer receives notice of a revision (increase) in the assessment, he or she may have the opportunity to file a complaint before the appropriate assessing official to contest the assessment under the valuation theories noted above. 35 ILCS 200/9-75 through 200/9-85. (Assessing officials may revise the assessment upon formal complaint by a taxpayer as long as the assessor still has possession of the assessment books). If a taxpayer misses the opportunity to contest an assessment before the assessor, the taxpayer may then file a complaint before the board of review. See 35 ILCS 200/16-55, 200/ The board of review involves a much more formal process and requires the taxpayer to typically attend an oral hearing on the matter. 35 ILCS 200/16-110, 200/ See also 35 ILCS 200/ If the taxpayer is still dissatisfied with the assessment after a review and decision by a board of review, the taxpayer may file a petition before the Property Tax Appeal Board, a state agency, under or seek relief directly from the courts by filing under 23-5 through The filing of a petition before the circuit court under 23-5 through of the Code is referred to as the filing of a tax objection. The term tax objection is derived from the fact that the taxpayer is objecting to the collector s application for judgment of taxes paid under protest. The tax objection requires the taxpayer to timely pay the taxes, and by filing an objection they are deemed paid under protest without the formal filing of a protest letter, which historically has been required. 35 ILCS/23-5. If a taxpayer wishes to file a specific objection, or have an assessment reviewed before the Property Tax Appeal Board, he or she must have filed and appeared before the board of review. 35 ILCS 200/ Since the Property Tax Appeal Board is an administrative agency, any appeal from that decision will be on administrative review to the circuit court. See 35 ILCS 200/ Practitioners should be aware that under the noted sections of the Property Tax Code, taxing district intervention is allowed, and in certain instances taxing districts may proactively file an under-valuation complaint, despite the fact that the taxpayer was satisfied with the assessment as originally proposed

17 REAL ESTATE TAX AND GOVERNMENT INCENTIVES B. [10.29] Valuation For properties that have not recently sold as part of an arms-length transaction, the market value may be established by those theories found to be acceptable by the Illinois courts. See Consolidation Coal Co. v. Property Tax Appeal Board of Department of Local Government Affairs, 29 Ill.App.3d 465, 331 N.E.2d 122 (3d Dist. 1975). The three most common methods of valuation of real property accepted by the courts and used to ascertain a fair cash value from which the assessment is derived are (1) the sales comparison approach; (2) the income approach; and (3) the cost approach. Id. While all of these methods are acceptable, some have been found to be more advantageous in particular situations. 1. [10.30] Recent Purchase Price Less than Proposed Fair Market Value When a taxpayer files a complaint with the proper assessing official, board of review, or circuit court, the taxpayer is contesting the market value as proposed by the assessing official. Market value is generally referred to as the value the property would bring at a voluntary sale when the owner is willing, able, and not compelled to sell. See 35 ILCS 200/1-50. See also People ex rel. McGaughey v. Wilson, 367 Ill. 494, 12 N.E.2d 5 (1937). 2. [10.31] Comparable Valuation Lack of Uniformity When there is evidence of sales of comparable properties, for which legitimate adjustments can be made to distinguish between those properties and the subject property, and proof is offered that these sales were at arms length, this method has been found to be indicative of fair cash value. Willow Hill Grain, Inc. v. Property Tax Appeal Board, 187 Ill.App.3d 9, 549 N.E.2d 591, 139 Ill.Dec. 865 (5th Dist. 1990). See also In re Application of Rosewell, 120 Ill.App.3d 369, 458 N.E.2d 121, 75 Ill.Dec. 953 (1st Dist. 1983). This argument is usually best propounded by having an appraisal of the property in question prepared by a general appraisal Member of the Appraisal Institute (MAI). An acceptable appraisal usually considers the cost, income, and sales comparison approaches, with an emphasis on the sales comparison approach. 3. [10.32] Income-Producing Property When the property is income producing, the income capitalization approach should be used to value the property. See Consolidation Coal Co. v. Property Tax Appeal Board of Department of Local Government Affairs, 29 Ill.App.3d 465, 331 N.E.2d 122 (3d Dist. 1975). See also In re Application of Pike County Collector, 133 Ill.App.3d 142, 478 N.E.2d 626, 88 Ill.Dec. 311 (4th Dist. 1985). The theory behind this valuation method is that the property s value is directly related to its ability to produce income. Capitalizing one to three years actual net income by an acceptable rate of return/risk capitalization rate is typically appropriate in these cases. 4. [10.33] Cost Approach The cost approach is typically utilized by considering the cost to build the property new, less depreciation for its present effective age, plus the value of the underlying land. Generally, the cost ILLINOIS INSTITUTE FOR CONTINUING LEGAL EDUCATION 10 17

18 10.34 COMMERCIAL REAL ESTATE approach is used to reinforce the sales comparison approach as part of an appraisal. There are circumstances in which there are no market or comparable properties. In such limited circumstances, the cost approach may be an acceptable method of valuation. For examples of the information typically considered in assessment review cases, see the forms at the Property Tax Appeal Board s Web site ( and the Cook County Assessor s Web site ( C. Unique Circumstances 1. [10.34] Vacancy or Functional Obsolescence If otherwise income-producing property is physically vacant and not producing income, assessors often grant a conditional year-by-year reduction based on the actual weighted occupancy factor for the year. Typically, the weighted vacancy must exceed 25 percent for the tax year in question. This basis for reduction generally lies in the assessor s discretionary ability to set assessment policy. Counsel should consider that to be eligible for a vacancy reduction, no income can be attributable to the vacant space and so lease buyouts, even if the buyout consideration was paid in a prior year, could disqualify the property for a vacancy reduction on a pro rata basis. When analyzing a property, counsel should also consider the physical characteristics of the property to determine whether the property may be so unique in its design or layout that substantial modifications would be required to the improvements to accommodate a different use or different user, thus making the property functionally obsolete in the marketplace. For example, the property may be uniquely designed to accommodate very specialized manufacturing equipment, and such as additional building height or special foundations to hold the weight of unique manufacturing equipment. The marketplace may not place any value on such extraordinary improvements. In fact, there could be an additional expense to remove such improvements or modify them for the next user. The help of an MAI-qualified appraiser is necessary in such case since counsel will need an expert opinion to review the property in relation to the local, regional, or even national market based on the building s characteristics. If the market for such a unique design is extremely limited, or if there is virtually no market for the property without substantial expense to modify the property, applying some objective market data and cost modification analysis can provide a basis for reduction. 2. [10.35] Real vs. Personal Property Characterization Since personal property is no longer subject to taxation, counsel must make sure that the assessor is assessing only real property and not assessing personal property. The Freeze Act, 24-5 of the Property Tax Code, provides that no property assessed and taxed as personal property prior to January 1, 1979, or property of like kind acquired or placed in use after January 1, 1979, shall be classified as real property subject to assessment and taxation. In addition, 24-5 provides that the opposite is true no property lawfully assessed and taxed as real property prior to January 1, 1979, or property of like kind acquired or placed in use after January 1, 1979, shall be classified as personal property. 35 ILCS 200/