Guerard's Real Estate Blog
1) Assessment Of Development Land
a) The “Developer Exemption”
i) What is it?
(1) Qualifying land that is platted, subdivided and improved (sewer, water, streets, sidewalks, etc.) shall be assessed on the same basis as it was prior to platting (Cook County excluded).
ii) What are the requirements?
Section 200/10-30(a) states:
In counties with less than 3,000,000 inhabitants, the platting and subdivision of property into separate lots and the development of the subdivided property with streets, sidewalks, curbs, gutters, sewer, water and utility lines shall not increase the assessed valuation of all or any part of the property if:
(1) The property is platted and subdivided in accordance with the Plat Act;
(2) The platting occurs after January 1, 1978;
(3) At the time of platting the property is in excess of 5 acres and;
(4) At the time of platting the property is vacant or used as a farm as defined in Section 1-60.
i) When does the exemption end?
(1) upon completion of a habitable structure
(2) Use of any lot for business, commercial, or residential purposes
(3) Or initial sale of any platted lot
ii) Holding or offering a platted lot for initial sale shall not constitute a use of the lot for business, commercial or residential purposes unless a habitable structure is situated on the lot or unless the lot is otherwise used for a business, commercial or residential purpose.
iii) Applied on an individual lot basis
b) Land assessment should be prorated in the year the exemption ends: Partially under the development exemption and partially at fair cash value.
c) Valuation is determined each year “…based on the estimated price the property would bring at a fair voluntary sale for use by the buyer for the same purses for which the property was used when last assessed prior to its platting.”
d) Care must be taken to subdivide and replat the land, prior to reassessment, to receive relief See Mill Creek Development, Inc. v. PTAB, 345 Ill.App.3d 790 (3d Dist. 2003)
i) Must record any transfer of record prior to recording plat
ii) The issue is whether the transactions contemplated constitute an “initial sale” of the the property for purposes of the statute (10-30) which would disqualify the property for the continuation of the Developer Exemption Assessment. There is no definition of the term “initial sale” in the Illinois Real Estate Tax Code. Other than a recorded sale there is no case law in Illinois on this issue
(1) There is a Department of Revenue guidance that sates a sale from one developer to another one triggers the loss of the exemption. But there was no discussion of related entities.
(2) The assessors have also taken the position that a purchase by a bank at a foreclosure sheriff’s sale and deed in lieu transactions are sufficient “sales” to cause a loss of the exemption. There are no Illinois cases I am aware of on this issue.
(3) Section 10-30(c) Real Estate Tax Code does not state a “transfer” triggers the loss of the “Developer’s Exemption” but states that “ upon the initial “sale” of any platted lot, the provisions of the exemption shall no longer apply. I have, in the past successfully convinced a township assessor that a transfer from one developer entity to another related entity was not a “sale”, where the facts supported it (an exchange or reorganization or related entity).
iii) Consider structures to delay “initial sale” of lots:
(1) Use contracts, with either firm take down dates or put or calls and option agreements to structure transactions without creating an immediate transfer.
(a) the possible negative income tax consequences of the deferred transfer with deferred ability to utilize losses; and
(b) the necessity of an ongoing business relationship for the necessary time period to accomplish the deferred transfers, perhaps many years.
(2) Deeds placed in an escrow with a third party and recorded when the conditions of the escrow were satisfied.
(a) The conditions of the escrow would be structured along the terms of the agreement.
(b) Letter of Credit or cash escrow to guarantee payment of purchase price.
(c) While the lots probably might not be treated as transferred for IRS purposes, a transaction could be structured to compensate or indemnify each party and create the same economic effect at the end of the day, albeit perhaps with some timing differences.
(3) Is a Sec. 1031 exchange an “initial sale”?
(4) Consider Owner of record at time of Plat being a sole purpose LLC or Corp and transferring, membership interest or stock. However be aware of possible risks:
(a) A transfer tax is triggered under the Act by a transfer of a “controlling interest” of the “fair market value” of all ownership interests in a “real estate entity”. The applicable statute definitions are below:
(35 ILCS 200/31)
Sec. 31-10. Imposition of tax. A tax is imposed on the privilege of transferring title to real estate located in Illinois, on the privilege of transferring a beneficial interest in real property located in Illinois, and on the privilege of transferring a controlling interest in a real estate entity owning property located in Illinois….
Sec. 31-5. Definitions.
"Beneficial interest" includes, but is not limited to:
* * *
(3) the indirect interest in real property as reflected by a controlling interest in a real estate entity. "Controlling interest" means more than 50% of the fair market value of all ownership interests or beneficial interests in a real estate entity. "Real estate entity" means any person including, but not limited to, any partnership, corporation, limited liability company, trust, other entity, or multi-tiered entity, that exists or acts substantially for the purpose of holding directly or indirectly title to or beneficial interest in real property. There is a rebuttable presumption that an entity is a real estate entity if it owns, directly or indirectly, real property having a fair market value greater than 75% of the total fair market value of all of the entity's assets, determined without deduction for any mortgage, lien, or encumbrance.
The assessor receives a copy of all PTAX forms filed (“transfer tax”) but no deed is recorded. There was a transfer for purposes of a tax but was there an “initial sale” for purposes of the Real Estate Tax Act?
2) Assessment of Newly Constructed Buildings
a) Requirements of the Property Tax Code
i) Buildings Partially completed during the tax year
(1) Assess the value of that property in existence on January 1st of the tax year (35 ILCS 200-9-155 and 9-160).
(2) Buildings fully completed during the tax year
(a) Assess the building at its fair cash value the date a certificate of occupancy was issued or from the date the building was “habitable and fit for occupancy” (35 ILCS 200-9-180).
b) Practice in Collar Counties
i) Assessment practices vary from township to township. Generally, the property is assessed as vacant prior to issuance of a certificate of occupancy and at full value from and after issued of a certificate of occupancy.
ii) Some township assessors follow the requirements of the Property Tax Code and additionally assess improvements in the ground as of January 1st of the tax year. (More common with highly valuable properties).
3) Model Homes
a) What is considered a model home?
i) A residential building “…used as a display or demonstration model home, townhome or condominium unit for prospective buyers of the dwelling or of similar homes, townhomes or condominium units to be built on the property” (35 ILCS 200/10-25)
b) How are model homes assessed?
i) Assessed in the same manner that the property was assessed prior to construction of the home.
ii) Not affected by furnishings, appliances, offices, and office equipment to further sales activities
iii) The land only is to be assessed at its value prior to rezoning and improvement.
c) What are the requirements to obtain model home assessment treatment?
i) Not occupied for residential use
ii) No more than 3 model homes owned by a developer within a 3 mile radius can receive this favorable tax treatment.
(1) (TIP if more than 3 models use separate ownership entities)
iii) The center point of each radius shall be the display or demonstration model that has been used as such for the longest period of time.
iv) The developer must file for an exemption in Cook County by April 30 and in all other counties by December 31 of every tax year or it is lost for that year.
v) 35 Ill. Comp. Stat. Ann. 200/10-25
vi) Available for a 10 year period
vii)Property can be transferred as long as still used as a model
d) Condominium Buildings
i) Developers should contest assessments of newly constructed condominium buildings in their capacity as the Board of Managers.
e) Prorations for Newly Constructed Homes
i) Builder should give proration for land – no proration for building since building cannot be fully assessed until a certificate of occupancy has issued.
4) Farms(35 ILCS 200/10-110)
a) Farms are valued on a productivity standard and not a fair cash value standard (Taxes can be $8 to $10 per acre)
b) What is a Farm?
i) Land and buildings used for “agricultural use … solely for the growing and harvesting of crops, for the feeding, breeding and management of livestock, for dairying or for any other agricultural or horticultural use of combination thereof…”
ii) Farms do not include “…property primarily used for residential purposes even though some farm products may be grown or farm animals bred on the property incidental to its primary use…” But can be a farm if not “primarily used for residential”.
iii) Use as a farm must have occurred for the last two years preceding the tax year
(1) Must plant crops
(a) If fallow must introduce evidence it was an intentional farming practice
(2) (TIP) Must be careful that the plat is recorded prior to the reclassification of the property from agricultural. Mill Creek Development, Inc. V. PTAB, 345 Ill.App.3d 790 (3d Dist. 2004)
(3) In Oakridge Development Co. V PTAB 405 Ill.App.3d 1011 (2d Dist. 2010) Taxpayer readied land previously assessed as farm land for cultivation with herbicide but, because a sale of the property was pending, the taxpayer did not actually plant crops. Because no crops were planted, the local assessor reclassified the property and assessed it as urban land, resulting in a change of assessed value from $11,000 to over $3,000,000. The court upheld the assessment.
iv) Nonresidential farm improvements (barns, silos, etc.) is 33 1/3 % of their value, based on their current use and their respective contribution to the productivity of the farm
v) Farm dwellings and the land on which they are “immediately situated” are assessed same as other residential property.
Richard M. Guerard
Guerard, Kalina & Butkus
Real Estate Blog at http://guerardr.com/