It was a luncheon in a large, stately dining room at the Union League Club, one of the city’s oldest and most prestigious private clubs. But the anti-property-tax rhetoric on the menu at last Thursday’s gathering of the Building Owners and Managers Association of Chicago would have played well in a VFW hall on the northwest side.
“Illinois’ dependence on property taxes jeopardizes Chicago’s long-term economic prospects,” says Ron Vukas, executive vice president of the association, which represents about 80 percent of the commercial rental buildings in the Loop. “We need a change.”
Vukas went out of his way to say nice things about Mayor Daley, praising him as a “tremendous force for positive change,” but his group was delivering an unwelcome word of warning about the impact of rising property taxes on downtown commercial real estate.
BOMA used the occasion to publicize a study, commissioned by the group from two Roosevelt University professors, that takes issue with City Hall’s rosy picture of a downtown commercial boom. According to the report, the commercial district’s barely making it–we’re “hanging on by our fingernails,” as one speaker put it. That might sound like crying wolf–the Loop hardly seems to be on its last legs. But the report points to a number of signs that downtown’s economic revival may be at risk.
For starters, the vacancy rate in downtown office buildings remains stubbornly high. At about 18 percent, roughly five points higher than the national average, it’s below the rate in Houston (21.2 percent) and higher than rates in New York (8 percent), Boston (11.5 percent), and Los Angeles (around 15 percent).
“Chicago’s office building inventory has the capacity to accommodate more new business and more jobs,” the report says. “But those businesses and jobs are not materializing, resulting in huge lost opportunities in terms of the dollars that would inject in the local economy.”
New office buildings have gone up in the Loop over the last few years. But according to the report they’re being built not for a new market but for an old one, as tenants move from one building to another. “Notwithstanding a few significant moves by companies to Chicago, on average the city has added only 100,000 square feet of new tenant-occupied space a year over the last five years,” the report says. “Those 100,000 square feet translate into just one large new commercial tenant a year for the whole city.”
Overall, according to the report, the commercial real estate market in Chicago has remained flat over the last decade. “Chicago real estate prices are nowhere near the highly publicized record price [set this year] of $400 per square foot,” the report notes. “In fact, Chicago building sales average slightly less than $200 per square foot for transactions over the last ten years.”
According to BOMA, rising property taxes are the chief culprit in making it hard to keep commercial tenants downtown, let alone draw new ones. Tax increases are forcing both tenants and landlords to pay a significant chunk of their income in property taxes. “Chicago had the highest property taxes over the last ten years, with an average of $6.98 in taxes per square foot,” says the report. “This compares to $5.31 for New York, $2.78 for Dallas, $2.40 for Atlanta and $1.98 for Los Angeles. By far, Chicago leads the other cities in how much of a building’s income goes to taxes. Nearly 25 percent of a building’s income in the city goes to property taxes alone. In New York and Dallas, that figure is 12.6 percent. In Atlanta, 9 percent and Los Angeles 7 percent.”
Nevertheless, there’s no sign the city will lessen its dependence on property taxes anytime soon. The result, says the BOMA report, is that we’re in a “vicious cycle”: High property taxes keep businesses from coming downtown, and as a result the city becomes even more dependent “on a stagnant number of businesses to keep funding ever-growing improvement and social programs.”
The question is what to do about it. BOMA offers no specific solutions, though predictably it takes the position that the state should pick up a greater share of education funding. One thing that remained unmentioned in the report and at the luncheon was the subject of tax increment financing districts. TIFs siphon property tax revenue that would otherwise go to the schools, parks, and other essential city services into discretionary development funds controlled by aldermen and the mayor. To make up the difference, the city’s forced to keep property tax rates higher than they need to be, which means that all taxpayers–residential, industrial, and commercial–are paying the price. If the city’s TIF districts were to magically disappear tomorrow, the city could lower its tax rates. Instead, the city’s heading in the opposite direction, creating new TIF districts–more than 100 over the last ten years–and pushing to expand and extend current ones.
Vukas says he’s well aware of the impact of TIFs and that they went unmentioned in the report simply because its focus wasn’t on the specifics of city financing. “I think TIFs are totally outdated and they need a completely new system,” he says.
City officials are understandably a little touchy on the issue of property taxes. In general, they like to say that Daley has cut tax rates–but soaring assessments have led to higher taxes regardless.
Vukas says his group met with city officials before the luncheon to share the findings of the report. “We actually briefed them,” he says. “Trying to spring something on business or government doesn’t work. Their reaction was guarded.”
Last year BOMA took a strong public stance against the city’s proposal to slap a tax on downtown properties to help pay off the bonds on the parking garage at Millennium Park, and earlier this spring it opposed a bill that would have curbed residential property taxes by increasing the home owners’ exemption. Vukas says they commissioned the Roosevelt report because, like other business groups, they intend to play an even more prominent role in urging property tax cuts.
In this regard, the report is aimed at Governor Blagojevich as much as Mayor Daley. It’s Blagojevich who’s resisting attempts to have the state pick up a greater share of educational funding–he doesn’t want to back away from his promise not to raise taxes, particularly on the eve of his reelection campaign against Judy Baar Topinka. The best bet for some sort of change will come after next fall’s election, when the newly elected governor has more freedom to act boldly.
“I don’t have a prediction for what will happen with property tax legislation,” says Vukas. “But it really worries me. People think these downtown buildings are cash cows. They don’t get it.”
Art accompanying story in printed newspaper (not available in this archive): illustration/Laura Park.