The Financial Benefits of Chicago's Class "L" Designation for Historic Properties

Wrigley Building | Photo Credit: Jon Miller of Hedrick Blessing Photographers

Chicago appreciates its architecture more than most cities. And it should. This city was the crucible for arguably the most influential American architectural events in the late 19^th and early 20^th centuries:  the 1893 World’s Columbian Exposition which sparked a renaissance of neoclassical architecture throughout the country, and birthplace of the skyscraper, a product of “Chicago School” engineering, innovation, and design.

Chicago is also a leader in creating developer incentives for the preservation and reuse of historic buildings. Acknowledging the positive impact of the City’s historic built environment on the local and regional economy, the Cook County Class “L” Property Tax Incentive Program was created in 1997 to offer specific financial incentives for rehabilitation of buildings designated as Chicago Landmarks. 

Under the Class “L” program, owners of qualifying commercial and industrial properties designated as “landmarks” and undergoing “substantial rehabilitation” can have their property tax assessment levels reduced for a twelve-year period.  Where commercial and industrial properties are typically assessed at 25% of market value, Class L buildings are assessed at only 10% for ten years, 15% in year 11 and 20% in year 12.

To qualify, owners must invest at least 50% of the Assessor’s full market value of the landmark building in an approved rehabilitation project and must be determined a Class “L” property prior to the commencement of construction. The ordinance is intended to foster projects that contribute to long-term growth in the economy, employment opportunities, and property tax base of the city and Cook County.

The incentive applies to the assessment of the building only. The land continues to be assessed at the standard levels of assessment for commercial property and industrial property (i.e., 25% of market value), except where the entire building has been vacant for at least 24 continuous months prior to application for the incentive, in which case, the incentive assessment levels apply to the land as well as the building.

In Chicago, developers frequently utilize the Class “L” incentive in conjunction with the federal 20% historic rehabilitation tax credit as the two programs share many of the same requirements:

• Both require that a building be designated as historic (that means Chicago Landmark status for the Class “L” program and National Register designation for the federal program).  
• Both require a baseline investment in the rehabilitation work (that’s 50% of the Assessor’s opinion of the building’s full market value for the Cook County program and 100% of the building’s adjusted basis for the federal tax credits).  
• And under both programs, the rehabilitation work is required to meet the Secretary of the Interior’s Standards for Rehabilitation.

In our experience and in that of our clients, these incentive programs generally complement each other and there is often an economy of scale in pursuing concurrent applications and coordinating project reviews with the applicable local, state, and federal agencies.

The programs are also complementary in how they deliver financial incentives for a rehabilitation project. The federal program provides a tax credit equal to 20% of total qualifying rehabilitation expenses (both hard and soft costs) that can be monetized to bring equity into a transaction while the project is under construction.  The Class “L” is a benefit that impacts annual operating expenses.

It is worth noting, that the proceeds of federal historic tax credits may not be used to satisfy the Cook County investment requirement.

Given these considerations, it is clear why developers are actively utilizing the Cook County Class “L” Property Tax Incentive, a powerful preservation tool for the City of Chicago that is much more carrot than stick.

Post by Allen F. Johnson, Partner | Director, MHA Midwest and special contributor Elizabeth L. Gracie, Partner in the law firm, O'Keefe Lyons & Hynes