Cook County Mixed-Use Property Reforms Hike Assessments for Some Owners

Kathy Jeziorski, CPA

The Cook County Assessor’s Office’s revisions to how it classifies so-called mixed-use properties have brought dramatic – and potentially costly – changes in assessments for some property owners. The revisions were triggered by a report from the Cook County Office of the Independent Inspector General (OIIG) that identified a loophole allowing certain owners to obtain “an unfair tax advantage.”

The Mixed-Use Issue

Under county ordinance, residential properties include multifamily buildings. A subset of multifamily buildings are Class 3-18 buildings, which are described as “mixed-use commercial/residential building with apartment and commercial area totaling seven units or more or 20,000 square feet.”

These buildings are assessed as entirely residential properties, with the assessed value equal to 10% of a property’s fair market value (FMV). Commercial buildings, by contrast, are assessed at 25% of FMV.

A January 2023 report from the OIIG found that this system has created an “apartment loophole.” The loophole allows the owner of what would be a Class 5 Commercial property to place one apartment on the property and obtain a 3-18 classification.

In other words, owners could receive a tax perk merely by placing one dwelling unit within a commercial property that otherwise would be subject to a 25% assessed value rate. The report urged that “this inequity in the administration of property tax assessment in Cook County” be addressed.

The Reforms

The Assessor’s Office took prompt action based on the report. While the ordinance has not been amended, the Assessor’s Office revised its interpretation of the ordinance and the definition of Class 3-18 property.

Under the new definition, the Class 3-18 property classification is available only for a mixed-use building with:

• Apartment and commercial area totaling at least seven units; or
• 20,000 to 99,999 square feet of building area.

In addition, the commercial component of the property can account for no more than 35% of the total rentable square footage.

When a property does not qualify as a Class 3-18 building under those criteria, the Assessor’s Office will send the property owner a letter notifying them of a potential change. A field inspector will then visit the property to conduct an official inspection.

If the inspector determines the commercial space exceeds the 35% limit or the building exceeds 99,999 square feet, the property’s classification and building record will split into two classifications based on the percentage of square feet attributable to commercial use (Class 5) and residential use (Class 2 or 3); this is being referred to as a “split-class assessment.” The residential portion will continue to be assessed at 10% of FMV, and the commercial portion will be assessed at 25%.

The reclassifications began in 2023 for the southern and western suburbs of Chicago. Reclassifications for Chicago are occurring this year, with the northern suburbs slated for 2025.

Not surprisingly, the change has produced some significantly higher property assessments.

Reassessments typically affect the second installment tax bill in the following year. So, if an owner receives a reassessment notice in 2024, the tax bill reflecting that assessment will arrive in July 2025.

Owner Options

Owners of properties subject to such a change will be notified by letter. If they choose to appeal the class change to the Cook County Board of Review, the required evidence generally includes:

• Accurate, dated color photos of the interior and exterior, taking during the assessment year of the appeal (undated photos are acceptable with a date attestation);
• Floor plans, survey, appraisal or similar documentation with an accurate description of the building, its square footage (including a breakdown for the residential and commercial portions) and its current usage;
• Evidence that each residential unit is used for residential purposes and has a separate entrance, mailbox and utility meters;
• Current leases showing the building is used for both residential and commercial purposes;
• Income evidence; and
• Evidence that the residential units are zoned for residential use, either legally conforming or legally non-conforming.

Cook County Assessor Fritz Kaegi also has suggested property owners submit detailed information to his office to help develop a more accurate assessment of their properties. This would include a “Real Property Income & Expense” filing with building characteristics, income, expense and vacancy data (note that this filing is not an appeal).

Kaegi has indicated that providing such information before or during the assessment stage could preempt the need to separately appeal to the Board of Review – which, even if successful, will not correct underlying data inaccuracies. 

If you have any questions or concerns, please contact your ORBA Advisor or Kathy Jeziorski at [email protected] or 312.670.7444 to review your personal tax situation. Visit ORBA.com to learn more about our Real Estate Group. Please be advised that ORBA does not represent clients in property tax appeals or provide any ancillary services related to property tax appeals.  Therefore, if it were to become necessary to appeal a reclassification or reassessment, we would not be in a position to assist you.

Is an Illinois Series LLC structure right for your real estate business?

Ryan Kertes, CPA

Illinois is among the minority of U.S. states that permits “series LLCs,” which give businesses the option to create a separate series of limited liability companies (LLCs) with their own interests, liabilities and members. The structure generally is well suited for real estate businesses, but you first need to understand the implications for your liabilities, taxes and otherwise.

LLC Benefits

The main appeal of a standard LLC is the legal protection. An LLC owner’s personal assets are protected from business-related liabilities.

The liability protection is similar to that of a corporation, but corporations must adhere to a variety of formalities, such as holding regular board meetings and keeping minutes. The so-called “corporate veil” of protection can be pierced if these formalities are not followed, making shareholders personally liable.

Corporations also are subject to double taxation, with their profits taxed at the corporate tax rate at the entity level and again at the individual shareholder level. LLCs are generally taxed on pass-through basis. All income, gains, losses, deductions and credits pass through to the LLC members, who report their proportionate shares on their individual tax returns.

The Series LLC Difference

A series LLC generally consists of a parent LLC with one or more “child” series underneath its umbrella. In Illinois, the name of each series must begin with the entire name of the parent LLC, as set forth in its articles of organization, and be distinguishable from the names of the other series. The registered agent and registered office for the parent will serve as the agent and office for service of process in Illinois for each series.

Each series has its own separate assets, liabilities, rights and obligations. Each must obtain a separate employer identification number (EIN) for tax purposes and maintain its own bank accounts, books and records. It also is advisable for each to have a separate operating agreement.

Compared with establishing a separate LLC for each property, a series LLC reduces the administrative burden. For example, it can file a single annual report, rather than a separate annual report for each LLC. And, depending on how the series LLC is set up, it can file a single federal tax return for the parent and all of the series.

The Real Estate Context

Real estate businesses are among those for which a series LLC makes the most sense. If you own multiple rental properties, for example, you may already have considered establishing separate LLCs for each property to insulate them from liability related to other properties. If one property incurs environmental liability or is targeted in a slip-and-fall case, the other properties would not be at risk for the cleanup costs or court judgment.

With a series LLC, you often can obtain this protection at a lower cost than it would incur to establish multiple regular LLCs. In Illinois, you pay $400 to file the Articles of Organization (Form LLC-5.5(S)) for a series LLC with the Department of Business Services. Once that is filed, the parent can establish one or more individual series by filing the Certificate of Designation (Form LLC-37.40) for each series, at a cost of $50 per series. If the business simply established a regular LLC for each property, the cost would be $150 per LLC. The greater the number of separate properties, the greater the cost savings from a series LLC.

It is critical that a Certificate of Designation is filed for each series LLC. In one case involving building code violations that resulted in $45,000 in fines, the Illinois Court of Appeals found that a series failed to prove it was a separate legal entity from its parent because it did not submit into evidence a file-stamped Certificate of Designation. 

Some Caveats

While series LLCs can provide solid advantages, they are not without their uncertainties. For example, when it comes to taxation, Illinois follows the federal treatment, but the IRS has no official guidance on series LLCs. Proposed federal tax regulations would treat each series as a separate entity for federal income taxes. The proposed regulations were issued in 2010 and have not been finalized, but, if adopted, it could be necessary to file separate federal and state tax returns for each series.

Little guidance exists as to bankruptcy, as well. It is unclear whether a series LLC could file as a single entity without drawing in the other series LLCs and/or the parent. Similarly, little case law exists on the extent of the legal protection available from a series LLC. Some real estate businesses may find that their insurance coverage provides adequate and more reliable protection.

Finally, if you own property in other states or plan to expand beyond Illinois, please be aware that some states do not recognize them and may not treat them as separate legal entities.

For more information, please contact Ryan Kertes at [email protected] or 312.670.7444. Visit ORBA.com to learn more about our Real Estate Group.