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A Taxing Situation

Everyone loves to complain about high taxes — it's practically the national sport. But for Chicago office building owners, the complaints ring particularly true.

A new study commissioned by the Building Owners & Managers Association of Chicago (BOMA) has found that Chicago office building taxes are the highest of any major city in the U.S. In fact, the study, which examined taxes from 1994 to 2004, found that Windy City building owners pay 25% of their income in real estate taxes, nearly twice that of New York and Dallas, and triple Los Angeles.

“This city is a very expensive place to operate,” observes Michael Cornicelli, BOMA's director of government affairs. “I'm worried that we've created a downtown office environment in Chicago that is going to be viewed as not very desirable by a growing number of tenants.”

The high taxes are an outgrowth of a formula in Cook County that assesses all residential real estate at 16% of its fair market value while commercial buildings are assessed at 38%. Cornicelli hopes to use the new data as ammunition in lobbying the state legislature for change. In 101 Illinois counties outside of Cook, both residential and commercial properties are assessed at 33% of fair market value.

With a second-quarter vacancy rate of 14.4%, according to CB Richard Ellis, Chicago's CBD is struggling. However, most observers agree that it is the gross rent total that most concerns tenants. John Goodman, an executive vice president at tenant brokerage Julien J. Studley in Chicago, calculates that a mid-size tenant contracting for 25,000 sq. ft. in the CBD is paying 80 employees about $5 million a year in wages and benefits. He estimates the company's total rent probably comes to $800,000, with property taxes representing about $200,000 of that. A move to the suburbs or another city could save $100,000 in taxes but might also result in the loss of labor, he says.

Even so, building owners have been frustrated by operating costs and taxes that frequently exceed net rents. The study also revealed that operating expenses per sq. ft. averaged $4 lower than in New York, but $3 higher than in Los Angeles and nearly $6 more than in Dallas and Atlanta.

“As property taxes have risen, we've been forced to cut our net rents to keep these spaces affordable for tenants,” says Robert Six, a senior vice president with Zeller Realty Group, which owns the high-rise at 401 N. Michigan Ave, currently 18% vacant. Net rents there average about $16 per sq. ft., says Six. Operating expenses last year totaled $8.95 per sq. ft. and real estate taxes were $7.89. To hold onto tenants, Zeller has had to drop net rents by 25% from their pre-9/11 peak five years ago.

Some developers are pushing ahead on new projects anyway. Hines LP of Houston, which also owns 8 million sq. ft. of office in the Chicago area, broke ground in July on a 60-story, 1.5 million sq. ft. high-rise at 300 N. LaSalle that will open in 2009. “Tenants are looking at issues like parking and commuting and utility costs. Property taxes are just one aspect,” asserts Thomas Danilek, a Hines senior vice president.

Even if taxes are a burden, several high-profile tenants have taken advantage of municipal incentives to locate downtown. United Airlines decided in July to move its headquarters from suburban Elk Grove to a 150,000 sq. ft. space for 350 employees at 77 W. Wacker in Chicago. The company had considered the suburbs and other cities, but chose Chicago in part because the city offered a $10 million incentive package.

“Certainly property taxes here are an issue,” says Thomas Johnson, president of the Taxpayers' Federation of Illinois. “But the development assistance available in Chicago counters the higher taxes quite effectively in some cases.”

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