Cook County reduces tax burden on rental housing

The Cook County Board's Finance Committee has listened to MPC's recommendation to reduce the property tax burden on multi-family housing.

April 8, 2002

By unanimous vote, the Cook County Board (through its Finance Committee) enacted long sought-after changes to the Cook County property tax system. The ordinance includes three major provisions.

First, all Class 3 multi-family (more than six unit) building’s assessment levels will be reduced from 33 to 30 percent in tax year 2003, with a further reduction to 26 percent in 2004. This proposal was first recommended by the Metropolitan Planning Council (MPC) and the Tax Policy Forum in 1998 as a way to encourage development of new multi-family housing and preserve existing housing options.

Second, the ordinance creates Incentive Class S to extend to "mark up to Market" multi-family rental buildings, where at least 20 percent of the units are occupied by tenants using Section 8 vouchers. The portion of the building's units that is designated Section 8 will be eligible to be assessed at 16 percent (rather than 33 percent). Further, owners must agree to retain all of the building's Section 8 units for at least five years after the expiration of the initial Section 8 contracts and agree to maintain the building up to code.

Finally, the ordinance expands the Class L Landmark Incentive to include designated Class 3 multi-family and Class 4 not-for-profit buildings. Further, the incentive is extended to qualifying Class 5a Commercial, Class 5b Industrial and Class 3 and 4 buildings designated as contributing buildings in landmark or historic districts.

MPC’s Vice President of Policy and Planning Scott Goldstein testified that since 1998, MPC has worked with the Cook County Assessor, the Tax Policy Forum and dozens of organizations to develop a reasonable proposal to reduce the tax burden on multi-family housing in Cook County from 33 to 26 percent to stimulate development and make more rental housing available and affordable for families. MPC also supports creating Incentive Class S to extend to “Mark Up to Market” multi-family rental buildings, where at least 20 percent of the units are Vouchers.

Based on For Rent: Housing Options in the Chicago Region, prepared for the Metropolitan Planning Council by the University of Illinois at Chicago, the supply of rental housing has fallen by 76,000 units in Cook County despite increasing demand, and risen in the collar counties since 1990. These trends have put upward pressure on rent levels throughout the region, but especially in Cook County due to the accompanying decline in the number of rental units. Not surprisingly, average rents increased more in Cook County (4.3 percent in Chicago), between 1998 and 1999. One major disincentive for rental housing development in Cook County is that prospective apartment developers and owners face much higher property taxes. Currently in Cook County, large apartment buildings (more than six units) are assessed at 33 percent, while condominium complexes, small apartment buildings (six or fewer units), and single-family homes are assessed at 16 percent.

Low vacancy rates and additional demand pressures in Cook County highlight the need for more rental housing and preservation of existing housing. The housing market in Cook County remains extremely “tight” (defined as a 6.0 percent vacancy rate). Vacancy rates for large apartment buildings in Chicago and suburban Cook County stood at 4.0 and 3.5 percent, respectively, in 1999. In addition to future expected population growth, Section 8 Housing Choice Vouchers will be provided to an increasing number of Temporary Assistance for Needy Families (TANF) recipients and former public housing residents, increasing the demand for affordable housing in the area.
Despite the clear demand, there has been less apartment and more condominium development in Cook County. Property taxes are incorporated into the market value of land, but also increase operating expenses and reduce cash returns from development/ownership of apartment buildings. Potential developers have responded accordingly by taking advantage of lower assessments on condominium and residential property in Cook County and converting apartments into condominiums and constructing new condominium complexes. There were 8,500 condo conversions in Chicago and 4,600 in suburban Cook County between 1993 and 1998, while the number of rental units has declined by 62,000 in Chicago and by 14,000 in suburban Cook since 1990. Economic models predict that there is unmet demand of 7,000 units of housing in the region that the market is not producing on an annual basis.
In combination with diminishing supply, the high assessment of multi-family housing in Cook County has contributed to rising rents. Apartment owners pass on a portion of the cost of property taxes to renters in the form of higher rents. Consequently, renters face relatively higher housing costs through high rent levels than condominium owners and homeowners with low property taxes. Moreover, these owners can deduct mortgage interest and property taxes paid from federal income tax liability. Rents for large apartment buildings rose by 2.9 percent in Cook County and by 5.8 percent in Chicago between 1998 and 1999. Average rents across the region ($708 in Chicago and $738 in suburban Cook County in 1999) increased by more than rate of inflation.
High rent levels overall in Cook County disproportionately affect low-income, minority families. Housing is generally considered affordable if a household pays no more than 30 percent of its income in rent. However, according to the American Housing Survey, 36.9 percent of renter households in Chicago (and 35.1 percent in suburban Cook County), 27.4 percent of Black and 15.6 percent of Latino renter households, paid more than 30 percent of their income in rent in 1995. As a result, these renter households indirectly contribute a greater proportion of their income to fund schools and support municipalities. Furthermore, rent payments do not cover operating costs for many owners, which hinders them from making quality improvements. Within large apartment buildings in Chicago, more than one-third (36.1 percent) of all units were in “poor” condition, the largest percentage among all types of housing.
There is broad support for lowering Class 3 assessments. The policy was first recommended by the 1998 Tax Policy Forum, co-convened with MPC, the Civic Federation, the Cook County Assessor, the Suburban Mayors Action Coalition of Cook County and the Taxpayers Federation as a result of dozens of meetings with hundreds of organizations and individuals.