With the arrival of COVID-19 vaccines, more employers are reviewing their plans for a return to the office. Those seeking new or expanded space in Cook County's burgeoning suburbs should take note of a lucky number: 7B.
Offered by the Cook County Tax Assessor's Office in conjunction with individual municipalities, the 7B tax incentive reduces the rate at which a commercial property is assessed -- dropping it from the normal rate of 25% of "market value" to a 10% rate for the first 10 years, 15% in the 11th year and 20% in the 12th year. This designation results in significant tax savings, most notably a reduction by 60% for each of the first 10 years (see Figure 1).
Properties with the 7B designation are not common, but as more companies contemplate moving to or expanding office space in the Cook County suburbs -- with their lower density, better proximity to a wealth of employee talent that has relocated to the suburbs and lower costs per square foot than the CBD -- such properties sweeten the appeal.
The incentive is meant to encourage commercial development -- namely, of struggling commercial corridors and empty office properties -- and it is available for new or existing facilities with project investment of $2 million or more.
Cook County and cooperating municipalities use the 7B incentive to help attract businesses and create jobs, keeping companies from moving to less expensive counties or bordering states; to realize real estate tax revenue they otherwise would miss out on; and to reduce blight or vacancies.
Golf Tower is one example of a suburban Cook County office property that offers tenants the opportunity for the 7B tax incentive. Located at 2550 W. Golf Road in Rolling Meadows, the 280,000-square-foot office tower is a well-located, headquarters-sized "blank canvas" that tenants can customize to their needs, and is near bike paths, shopping, hotels, restaurants, and public transportation.
After recently purchasing the property for $7.8 million, a joint venture managed by the principals of Marc Realty invested about $3 million into modernizing the building, including its five passenger elevators and one freight elevator, exterior facade, main entrance, lobby, lower level and parking lot. Notwithstanding this capital investment, the property's 7B tax designation means the owners can still offer tenants a lower overall cost of occupancy than comparable properties without such designation.
Tenants typically pay a base rent plus operating and real estate tax expenses ("T & O"). If a building's base rent is $15 per square foot ("psf"), and the building's T & O expenses are $8.00 psf for operating costs (OPX) + $6.25 psf for real estate taxes (RET), a tenant pays $29.25 per square foot.
But with a 7B designation, the RET are reduced markedly, and a tenant's occupancy costs fall accordingly. Per the example below, if the RET for a property are reduced from $6.25 per square foot to $2.50 per square foot (assessment going from 25% to 10%), a 100,000-square-foot tenant would normally pay $2.95 million in rent, but with a 7B it would pay $2.55 million. This would save a tenant $375,000 per year, or $3.75 million over the initial 10-year period.
Tenants can clearly save a lot of money by leasing a property with a 7B designation, and such tax protection lasts for 12 years before returning to the level of its peers.
Municipalities win as well, in the form of accelerating new commercial growth and real estate tax revenue, a new daytime population that shops, dines and otherwise spends dollars locally, and an attractive, refreshed commercial space in the landscape.
If you are a tenant looking for new space, 7B may just be your lucky number.
• Jack Reardon is a senior vice president at NAI Hiffman.