Enterprise Zones and Losing a City of Chicago Transfer Tax Exemption — Ouch!
Recently I heard about a case that made its way to appellate court last year. The case involved an Enterprise Zone. What is an Enterprise Zone? Well, the City of Chicago has designated certain geographical areas in the city as Enterprise Zones. If you are a business in the Enterprise Zone, the city provides you certain benefits, including tax incentives, in order to encourage the growth of your business. If you purchase commercial property in an Enterprise Zone and continue to use it for commercial purposes, you are typically exempt from paying the hefty City of Chicago transfer tax.
Some time ago, a Buyer in Chicago bought commercial property within an Enterprise Zone. Under the Enterprise Zone Program, the Buyer did not pay any transfer tax to the city. He also did not take occupancy of the property at closing. Rather, he leased it back to the Seller for a period of eleven months, in which the Seller continued to operate the same business as prior to the sale. That’s continued commercial use, right? Wrong.
The City of Chicago reviewed the transaction and determined that such temporary “continued” use was not sufficient to fall within the purview of the Enterprise Zone program. The key factor in the city’s decision was the Buyer’s intended use of the property, which was to turn the parcel into residential condominiums. Even though that may have been the Buyer’s business and was a commercial use to him, once a property is converted to condominium or residential use, it is no longer commercial property and is ineligible for the Enterprise Zone Program. The case was appealed and the city eventually won. Metro Developers, LLC v. City of Chicago Department of Revenue, 377 Ill.App.3d 395 (1st Dist. 2007).
So why did I include the word “ouch” in the title to this post? Because the City of Chicago transfer tax is no joke — the Buyer’s share of the transfer tax is $7.50 for every thousand dollars of the purchase price. The purchase price in the above case was $5,900,000.00. That translates into $44,500.00 in transfer tax, from the Buyer alone! Ouch!