Editorial: Owners are scrambling to unload high-profile buildings. Is this backlash to Mayor Johnson’s ‘mansion tax’?

It’s been a slow year for big real estate deals in Chicago.

Small wonder. Worries about the future of downtown, combined with the 18-month spike in interest rates, would give most owners of office buildings and even high-rise apartments pause about testing the market now for their properties.

So it’s interesting — to say the least — that in just the past few days the owners of three high-profile Chicago properties have put them on the block. These are the retail portion of Block 37, the vertical mall on State Street; the 76-story NEMA Chicago apartment tower on Roosevelt Road; and one of the biggest apartment complexes in Chicago, the Pavilion Apartments near O’Hare Airport.

It’s not that the economic future of downtown Chicago is any clearer now than it was a week ago.

The major event affecting these property owners in that time span was the City Council’s Nov. 7 approval of Mayor Brandon Johnson’s proposal to quadruple the transfer tax on the sale of properties like these. The tax hike will be put to Chicago voters in March, and if approved, likely will take effect at the beginning of 2025.

Is it a coincidence that these properties are for sale just as their owners face the likelihood of millions more in taxes if they wait? Maybe. But we doubt it.

The so-called mansion tax— a misnomer if ever there was one, since it mainly hits commercial property owners — is designed to generate around $100 million in yearly revenue for programs to alleviate homelessness in Chicago. Commercial real estate representatives railed against the proposal, arguing that its timing couldn’t be worse given the office market’s struggles to adapt to the work-from-home movement, as well as retail woes on Michigan Avenue and throughout much of the central business district.

As approved by the council, the rate will rise to 3% from the current 0.75% for properties selling for more than $1.5 million. Homeowners fetching less than $1 million on sales of their abodes will see a slight tax cut (a shrewd modification of Johnson’s initial proposal designed to boost support). When government takes 3% from the proceeds of a commercial property sale, that’s a meaningful dent in the returns investors get when they finally decide to cash out of a prized asset.

As has repeatedly been the case in the first year of Johnson’s mayoralty, the voices of business went unheeded. On more than one issue, Johnson and his City Council allies thus far have made a show of hearing business out and then plowing ahead with initiatives that either raise taxes or impose new requirements on companies which essentially have the same effect.

Of course, what Johnson and his progressive supporters are beginning to realize is that business owners don’t simply sit pat and pull out their wallets when the taxman gets this aggressive.

They pivot. They respond. In some cases, they just close down.

And then the revenue that looked like such a sure bet on paper falls short of projections, and the tax-and-spenders wonder what happened.

So let’s review these three major properties likely to be offloaded before the new real estate transfer taxes hit.

The retail portion of Block 37, on which CoStar broke the for-sale news, was acquired out of foreclosure 11 years ago for $84 million. At the time, the space was something like 30% occupied. It’s now 70% filled, and 690 apartment units sit atop the retail portion. It’s far more valuable now. So, let’s say it fetches $200 million. At today’s transfer tax, the bite will be $1.5 million. Once Johnson’s whopper takes effect, that jumps to something like $6 million.

The 800-unit NEMA Chicago, with spectacular views of Grant Park and Lake Michigan, is an even starker example. A planned sale of one of the tallest skyscrapers in the city, also first reported by CoStar, is sure to generate considerably more than the $405 million in debt on the property. Let’s call it $500 million to be conservative.

Today, the transfer tax on that would be $3.8 million. Make that something like $15 million if owner Crescent Heights had waited for Johnson’s tax. Another $11.2 million in taxes will focus the mind.

Far from the lake and the Loop’s gleaming towers, the 1,116-unit Pavilion Apartments are hardly an architect’s dream. The five-building complex, however, is one of the largest in Chicago by number of units, according to Crain’s Chicago Business, which broke the news that they’re for sale, too, and estimated they could fetch $150 million.

Today’s tax hit: $1.1 million. Tomorrow’s: about $4.5 million.

Johnson is imposing the higher taxes on buyers of these properties, as if that somehow doesn’t affect the price the sellers get.

Here’s a safe prediction. That slow commercial property sales market is about to speed up. . Look for a lot more of this.

Which brings us to another worrying sign of how business is responding to the Johnson agenda.

Customers and workers were shocked at the recent news that Grand Lux, a highly visible, spacious restaurant on Michigan Avenue, will close before the year is out. The owners gave no reason for their sudden decision to shutter this high-volume eatery.

Let us suggest one possible motive. Johnson has pushed through the City Council two initiatives he claimed would help workers but which will hit restaurants particularly hard. The first was applying the city’s minimum wage to laborers who make tips. The second was passage of the nation’s most generous minimum paid time-off policy.

Few oppose reasonable standards for treatment of service workers. But when those strictures get tough enough, and far enough out from competing locations, some business owners just conclude that continuing isn’t worth it. It’s the job of government to strike a balance that preserves a healthy economy while also protecting workers.

We don’t know if these measures tipped Grand Lux over the edge. After all, downtown Chicago isn’t exactly thriving at present.

But the highly theatrical menu at Grand Lux was a longtime draw for tourists and suburbanites and widely perceived as emblematic of a fun day in the big city. Its loss is a real blow to Michigan Avenue and, of course, to the 130 or so union workers who have now lost their jobs.

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