HARP – On This. . .

Category: Illinois commercial real estate

  • HISTORIC PRESERVATION TAX CREDITS

    HISTORIC PRESERVATION TAX CREDITS

    Real Estate Development – Illinois

    Efforts to preserve the historical heritage of the United States have been ongoing for more than 200 years.[i] The National Historic Preservation Act of 1966,[ii] which created the National Register of Historic Places (“National Register”),[iii] formalized a national policy of preserving historic properties.[iv] 

    In 1976 Congress for the first time provided tax incentives for rehabilitation of historic buildings by allowing a tax deduction for certain expenditures to rehabilitate buildings listed in the National Register. In 1978 Congress enhanced the incentive by adopting a 10% historic preservation tax credit (F-HTC).[v]  

    A tax credit is a direct dollar-for-dollar reduction in taxes owed,[vi] making it significantly more robust than a tax deduction which serves to reduce taxable income.

    The F-HTC program has evolved over time. Effective December 22, 2017 the Internal Revenue Code of 1986, as amended[vii] (IRC) was further amended to increase the F-HTC to 20% of qualified rehabilitation expenditures in respect to a “qualified rehabilitated building.”[viii] The F-HTC is ratably allocated over a period of five (5) years.[ix] 

    To qualify for a rehabilitation tax credit, rehabilitation must comply with The Secretary of the Interiors’ Standards for the Treatment of Historic Properties.[x]

    The F-HTC Program, officially known as the Historic Preservation Tax Credit Incentive Program, is administered by the National Park Service (NPS) jointly with the U.S. Department of the Treasury.[xi] It is considered one of our nation’s most successful and cost-effective community revitalization programs, having leveraged $131.73 billion in private investment to preserve more than 49,000 historic properties since its inception.[xii]  The program has shown widespread bipartisan support,[xiii] with legislative efforts to expand the F-HTC Program continuing.[xiv]

    The F-HTC Program has become an effective source of funds for rehabilitation and adaptive reuse of historic buildings[xv] and has benefited projects in every state and the District of Columbia.[xvi] It is administered in each state through NPS delegation of authority to a State Historic Preservation Office (SHPO).[xvii]  In Illinois the SHPO is the Illinois State Historic Preservation Division of the Illinois Department of Natural Resources.[xviii]

    In addition to F-HTC, state level historic preservation tax credits are available in 39 states,[xix] including the State of Illinois. State historic preservation tax credits may be used in tandem with F-HTC. State tax credits can be applied as a credit against state income taxes and are not treated as income under the IRC.[xx]

    Illinois has enacted two state level historic tax credit programs, each administered under substantially the same rules as the F-HTC Program.

    • The River Edge Historic Tax Credit Program (RE-HTC)[xxi] enacted effective January 1, 2012 provides a state income-tax credit equal to 25% of a project’s qualified rehabilitation expenditures on certified historic structures located within River Edge Redevelopment Zones (Aurora, East St. Louis, Elgin, Peoria, and Rockford); and
    • The Illinois Historic Preservation Tax Credit Program (IL-HTC)[xxii] effective January 1, 2019 provides owners of certified historic structures a state income-tax credit equal to 25% of a project’s qualified rehabilitation expenditures, not to exceed $3 million per project.

    The F-HTC, RE-HTC, and IL-HTC programs (collectively, HTC) have had a positive economic impact in the State of Illinois with historic tax credit projects undertaken in 49 out of 102 counties.[xxiii] To name a few, in Peoria a vacant church has been transformed into a brewery, and a 27,000-square-foot factory in Peoria’s downtown warehouse district has be rehabilitated to provide office space and 18 luxury apartments; in Rockford an industrial building has been redeveloped as a hotel; and in Aurora a former hospital is now home to affordable senior housing.[xxiv] Close to 58% of all Illinois residents live within five miles of a historic tax credit project.[xxv]

                IMPORTANT DEFINITIONS

                As noted above, to qualify for historic preservation tax credits, the rehabilitation expenditures must be for a qualified rehabilitated building. 

    “Qualified rehabilitated building” [xxvi] means any building (and its structural components) if: (a) the building has been substantially rehabilitated; (b) the building was placed in service before the beginning of the rehabilitation; (c) the building is a certified historic structure; and (d) depreciation (or amortization in lieu of depreciation) is allowable with respect to the building.

    “Substantially rehabilitated” [xxvii] means that the qualified rehabilitation expenditures during an allowable 24-month period selected by the taxpayer (at the time and in the manner prescribed by regulation) must exceed the greater of:  (a) the adjusted basis of the building and its structural components as of the first day of the allowable 24-month period; or (b) $5,000.

    Alternate rules for substantial rehabilitation apply in the case of “phased rehabilitation[xxviii] or rehabilitation by lessees.[xxix] 

    “Rehabilitation” includes renovation, restoration, or reconstruction.[xxx]

    A “qualified rehabilitation expenditure” (subject to certain exclusions including notably, costs of acquisition and costs of enlarging an existing building),[xxxi] is an expenditure that is: (1) properly chargeable to a capital account for property subject to depreciation under IRC §168 (meaning, generally, an expenditure used in computing tax basis), which property must be: (a) nonresidential real property; (b) residential rental property: (c) real property which has a class life of more than 12.5 years: or (d) an addition or improvement to (but not an enlargement of)[xxxii] property described in sub-clause 1(a), (b), or (c); and  (2) the expenditure is made in connection with the rehabilitation of a qualified rehabilitated building.

    A “certified historic structure” means any building (and its structural components) which is: (a) listed in the National Register; or (b) located in a registered historic district and is certified by the Secretary of the Interior to the Secretary of the Treasury as being of historic significance to the district.

    TRANSFERABILITY

    An attribute that renders F-HTC, RE-HTC, and IL-HTC particularly valuable to developers is that historic tax credits under each program are transferrable,[xxxiii] making them available as a source of equity capital for historic preservation redevelopment projects. Neither federal historic tax credits nor Illinois historic tax credits may not be bought or sold directly, but may be transferred through syndication using an appropriate pass-through entity such as a limited partnership or limited liability company.[xxxiv]  

    While historic tax credits are a valuable source of capital by themselves, they can also be coupled with low income housing tax credits (LIHTC).[xxxv] Together they present an extraordinary opportunity to address the existing shortage of affordable housing in our communities, and provide jobs for community residents.  

    Even small projects can benefit from historic preservation tax credits.  Roughly fifty percent of all HTC projects involve qualified rehabilitation expenditures of less than $1,000,000, while twenty-five percent involve less than $250,000.[xxxvi]

    CONCLUSION

                Historic preservation tax credits have proven to be an attractive financial incentive to encourage developers and investors to commit private capital needed to preserve and revitalize our communities.

    [i] https://www.dhr.virginia.gov/wp-content/uploads/2018/04/Historic-Preservation-in-America_2014_FINAL.pdf

    [ii] Now found at: 54 USC Division A—Historic Preservation (§ 300101 to § 307108)

    [iii] 54 USC § 3021

    [iv] https://www.nps.gov/subjects/archeology/national-historic-preservation-act.htm

    [v] https://www.irs.gov/pub/irs-mssp/rehab.pdf

    [vi] https://www.irs.gov/credits-and-deductions

    [vii] 26 USC  – Internal Revenue Code (IRC)

    [viii] IRC § 47(a)(2)

    [ix] IRC § 47(a)(1)

    [x] https://www.nps.gov/orgs/1739/secretary-standards-treatment-historic-properties.htm

    [xi] https://www.nps.gov/subjects/taxincentives/index.htm

    [xii] https://www.nps.gov/subjects/taxincentives/index.htm

    [xiii] https://savingplaces.org/historic-tax-credits/updates/senate-finance-committee-hearing-highlights-bipartisan-support-for-expanding-the-historic-tax-credit

    [xiv] https://savingplaces.org/historic-tax-credits/updates

    [xv] https://law.duke.edu/sites/default/files/clinics/cec/cote.pdf

    [xvi] https://savingplaces.org/tax-credit-projects-by-state

    [xvii] https://dnrhistoric.illinois.gov/preserve/taxcredits.html

    [xviii] 35 ILCS 5/228 and 35 ILCS 31/1 et seq.

    [xix] As of June 15, 2023, all states except Alaska, Arizona, Florida, Idaho, New Hampshire, Nevada, Oregon, Tennessee, South Dakota, Washington, and Wyoming have enacted state historic preservation tax credits.  https://savingplaces.org/state-historic-tax-credits

    [xx] https://www.irs.gov/pub/irs-wd/13-0009.pdf

    [xxi] 35 ILCS 5/221

    [xxii] 35 ILCS 5/228 and 35 ILCS 31/1 et. seq.

    [xxiii] See Report: The Impact of Historic Tax Credit Investment in Illinois https://dnrhistoric.illinois.gov/content/dam/soi/en/web/dnrhistoric/preserve/documents/illinois-and-river-edge-htc-economic-impact-report-2023.pdf

    [xxiv] https://search.app/KrxnBEjDGmnn8cCe9

    [xxv] See Report: The Impact of Historic Tax Credit Investment in Illinois, id.

    [xxvi] IRC § 47(c)

    [xxvii] IRC § 47(c)(1)(b)(i)

    [xxviii] IRC § 47(c)(1)(b)(ii)

    [xxix] IRC § 47(c)(1)(b)(iii)

    [xxx] IRC 47(c)(1)(C) https://www.irs.gov/pub/irs-sbse/qualified-rehabilitation-expenditures.pdf

    [xxxi] IRC § 47(c)(2)(B)

    [xxxii] IRC § 47(c)(2)(B)(iii).

    [xxxiii] IRC § 6418

    [xxxiv] See: Safe Harbor provisions in Rev. Proc. 2014-12 https://www.irs.gov/pub/irs-drop/rp-14-12.pdf

    [xxxv] https://www.irs.gov/pub/irs-sbse/Rehabilitation%20Credit%20and%20Low-Income%20Housing%20Credit%20Compared.pdf

    [xxxvi] https://www.hudexchange.info/programs/environmental-review/historic-preservation/tax-credit/

  • TAX INCREMENT FINANCING – ILLINOIS

    TAX INCREMENT FINANCING – ILLINOIS

    A Valuable Development Tool For Developers

    Tax Increment Financing (TIF) is a development tool often misunderstood by real estate developers and the public at large.  TIF is authorized in every state (except Arizona) and the District of Columbia. TIF is authorized in Illinois by the Tax Increment Allocation Redevelopment Act.[i]

    WHY TIF?

    TIF is a public funding mechanism designed to help municipalities overcome and prevent commercial blight.[ii] Commercial blight leads to commercial properties becoming a drain on public revenue by producing a smaller share of taxes,[iii] and requiring excessive and disproportionate expenditures of public funds for crime prevention, public health and safety, fire and accident protection, and other public services.[iv] The eradication and prevention of commercial blight and the construction of redevelopment projects financed by private capital with financial assistance from governmental bodies is a public use essential to the public interest.[v]

    Areas of commercial blight are often situated in older and centrally located areas of town and, once existing, spread unless eradicated.[vi] Though intended primarily as a tool for municipalities to eliminate and prevent blight within its territorial boundaries, TIF can benefit real estate developers and investors as well by bridging the financial gap to make otherwise marginal projects feasible for development.

    COMMERCIAL BLIGHT

                Blighted areas are described as “areas where a major portion of the commercial buildings and structures are detrimental to the health, safety and welfare of the occupants and the welfare of the urban community because of age, dilapidation, overcrowding or faulty arrangement, or lack of ventilation, light, sanitation facilities, adequate utilities or access to transportation, commercial marketing centers or to adequate labor supplies.”[vii]  Use of TIF may be available if a blighted area encompasses at least 1½ acres.[viii]

    TIF can be also be used to prevent commercial blight through redevelopment of “conservation areas” – which are areas that do not yet constitute a blighted area but in which 50% or more of the structures have an age of 35 years or more and risk becoming a blighted area through the presence of 3 or more (out of 13) listed factors detrimental to the public safety, health, morals or welfare.[ix]

    PUBLIC PURPOSE

    Public funds may be used only for a public purpose.[x] Economic development to eliminate or prevent commercial blight is a legitimate public purpose.[xi]

    Before a redevelopment project[xii] can qualify for TIF reimbursement of redevelopment project costs[xiii] (“TIF Eligible Costs”) the municipality must have a comprehensive program (“Redevelopment Plan”)[xiv] for development or redevelopment to reduce or eliminate the existing conditions that qualified the redevelopment project area[xv] (“TIF District”) as a blighted area or a conservation area, or a combination of both.[xvi] TIF Districts have a statutory maximum duration of 23 years[xvii] but can be extended by the General Assembly for an additional 12 years[xviii].

    THE “BUT FOR” TEST

    A condition to using TIF funds for commercial development is that “but for” the TIF incentive the development project will not proceed. If the project will proceed in all events, no public purpose is served by allocating public funds.  The fact that the TIF incentive will also benefit private interests will not disqualify its use as a proper public purpose.[xix]

    HOW TIF WORKS – A (VERY) SIMPLE OVERVIEW

    TIF (Tax Increment Financing) allocates only incremental taxes generated within the TIF District for use in reimbursing TIF Eligible Costs. This means that if the equalized assessed valuation (“EAV”) of all property within a TIF District on the date the TIF District is established totals, for example, $1,500,000, property taxes derived from that EAV (the “Base EAV”) will continue to support local taxing districts throughout the term of the TIF District. Only taxes generated from EAV in excess of the Base EAV can be allocated to reimburse the developer for TIF Eligible Costs.

    Hypothetical Example:  

    • Assumption #1: The combined property tax rate in the county is 5.7% of EAV.

    Based on that assumption, the Base EAV ($1,500,000) multiplied by the assumed tax rate will generate $85,500 per year in property taxes.

    • Assumption #2: The TIF District is in Cook County, Illinois. Commercial property located in Cook County is assessed at 25% of fair market value (FMV).[xx]
    • Assumption #3: The state equalization factor (multiplier) for Cook County is three (3)[xxi]; resulting in commercial property in Cook County having an average EAV of 75% of FMV.[xxii]
    • Assumption #4: Developer proposes to build a new project within the TIF District at a cost of $20,000,000, with $6,000,000 of those costs incurred for demolition of functionally obsolete buildings, clearing the land, remediation of environmental contamination, installation of new sidewalks and drives, upgrading or replacing existing utility systems, resolving existing drainage and flooding issues, and adding a public gathering area as requested by the municipality. The project can be completed and stabilized within 36 months from the date the TIF District is established, leaving a remaining term of 20 years.
    • Assumption #5: Upon completion and stabilization the fair market value of the newly developed commercial property will be $24,000,000, implying a new EAV of $18,000,000 (“Total EAV”) based on 75% of FMV.

    Applying the Assumption #1 property tax rate of 5.7% to the Total EAV would generate total estimated annual real estate taxes of $1,026,000.

    Because TIF allocates only taxes from the incremental increase in EAV to pay TIF Eligible Costs, the annual TIF increment would be $940,500 ($1,026,000 on Total EAV minus $85,500 on Base EAV) – with the tax revenue from the Base EAV still reserved for the combined local taxing districts.

    • Assumption #6:  Developer has established to the satisfaction of the municipality that it cannot proceed with the project unless it receives reimbursement for $6,000,000 of the TIF Eligible Costs plus interest[xxiii] at 9% per annum (approximately $8,000,000 through full repayment), for a total TIF payout to developer over the life of the TIF District aggregating $14,000,000, with 100% of the incremental taxes applied to the TIF payout until full reimbursement.
    • Assumption #7: The first TIF payment will be 24 months after substantial completion of the project.[xxiv]
    • Assumption #8: If redevelopment does not occur, the commercial blight will continue, limiting property taxes to those generated by the Base EAV.

    If everything goes as planned, the developer will receive the full TIF reimbursement in approximately 15 years ($14,000,000/$940,500 per year = 14.88 years) once TIF payments commence, which in this hypothetical is 17 years after substantial completion and 20 years after the TIF District was established. After full reimbursement or expiration of the TIF District all real estate taxes generated by the property will inure to the combined taxing districts encompassing the TIF District.

    If the TIF District were to rapidly increase in value generating an average of, say, $1,100,000 per year in taxes on the incremental EAV during the remaining 20-year life of the TIF District, the TIF Eligible Costs could be fully reimbursed in approximately 13 years after substantial completion.[xxv]

     If real estate taxes on incremental EAV were to, instead, average only $640,000 per year, the developer would recover only $12,800,000 over the 20 year post-completion period without further recourse against public funds because the sole source of payment of the TIF reimbursement obligation is the incremental increase in property taxes during the life of the TIF District.[xxvi]

    CONCLUSION

    Elimination of commercial blight within Illinois communities is in the public interest. Tax Increment Financing is a valuable tool to eradicate and prevent commercial blight.    

    [i] 65 ILCS 5/11-74.4-1 et seq.   

    [ii] 65 ILCS 5/11-74.4-2(b)

    [iii] 65 ILCS 5/11-74.2-1(c)

    [iv] 65 ILCS 5/11-74.2-1(d)

    [v] 65 ILCS 5/11-74.2-1(f)

    [vi] 65 ILCS 5/11-74.2-1(b)

    [vii] 65 ILCS 5/11-74.2-1(a); the indices of which are detailed in 65 ILCS 5/11-74.4-3(a).

    [viii] 65 ILCS 5/11-74.4-3(p)

    [ix]  65 ILCS 5/11-74.4-3(b)

    [x] Illinois Constitution, Article VIII § 1(a)

    [xi] Kelo v. City of New London, Connecticut 545 U.S. 469 (2005); People ex rel. City of Urbana v. Paley, 368 N.E. 2d 915, 920-21 (Ill. 1977).

    [xii] 65 ILCS 5/11-74.4-3(o)

    [xiii] 65 ILCS 5/11-74.4-3(q).  Not all redevelopment costs qualify for reimbursement.  In fact, Illinois is significantly more restrictive than many other states, including the nearby states of Indiana and Wisconsin, in that, generally, Illinois does not permit reimbursement for the cost of construction of any new privately-owned buildings while other states do. 65 ILCS 5/11-74.4-3(q)(12).

    [xiv] 65 ILCS 5/11-74.4-3(n)

    [xv] 65 ILCS 5/11-74.4-3(p)

    [xvi] 65 ILCS 5/11-74.4-3(n)

    [xvii] 65 ILCS 5/11-74.4-3.5(a)

    [xviii] 65 ILCS 5/11-74.4-3.5(c)

    [xix] Clayton v. Village of Oak Park; 453 N. E. 2d 937, 943 (Illinois 1st Dist. 1983).  

    [xx] Property Classification Codes  https://www.cookcountyassessor.com/classifications-real-property  

    [xxi] In 2023 the Cook County equalization factor was 3.0163

    [xxii] 35 ILCS 200/17-25 requires average property values in each Illinois county to be assessed at 33 1/3% of Fair Market Value (FMV).  To provide uniformity between counties, the Illinois Department of Revenue (IDOR) is required to calculate an equalization factor for each county. Unlike all other Illinois counties, Cook County is permitted to assess property at different levels based on differing property types (Property Class). In Cook County, there are numerous Property Classes. At the low end are residential and vacant properties assessed at 10% of FMV; and at the higher end, commercial and industrial properties assessed at 25% of FMV. With much more residential property than commercial/industrial property in Cook County, the weighted average assessment of all Cook County property is roughly 11% of countywide FMV.  IDOR has assigned an equalization factor of just over three (3) for Cook County, meaning that whatever the determined assessed value is for any property, the equalized assessed value (EAV) will be roughly three (3) times that amount.

    [xxiii] The developer would have incurred most or all the TIF Eligible Costs early in the construction period. It is typical to reimburse Developer for the time value of money (interest) as permitted at 65 ILCS 5/11-74.4-3(q)(6). Interest at 9% per annum accrues during the 24 to 36 month construction period on the $6,000,000 in TIF Eligible Costs as incurred (estimated. $1,000,000) and another estimated $1,000,000 in interest between substantial completion of the project and the first bi-annual payment from TIF proceeds 24 months after substantial completion, and then an estimated $6,000,000 in interest paid during the reimbursement period = $14,000,000 total payment amount from incremental taxes.

    [xxiv] Property taxes will be based upon the completed project, which in the hypothetical is assumed to occur 36 months after creation of the TIF District. Illinois taxes are assessed one year in arrears – and Cook County taxes are payable to two installments.

    [xxv] Assumes the taxes average the higher amount throughout the first 13 years, which may not be likely, but any material increase in taxes over the projected $940,400 per year will shorten the payment period.

    [xxvi] 65 ILCS 5/11-74.4-8

  • New Year, New Office – Chicago

    R Kymn Harp Joins Buchalter – January 2025

    Buchalter is pleased to announce the opening of its newest office in Chicago, Illinois
    with the addition of lawyers and staff previously comprising the Chicago office of Robbins DiMonte, Ltd joining Buchalter. The Chicago office has 25 attorneys and support staff, including Shareholders Thomas Jefson, Steven Jakubowski, Patrick Owens, David Resnick, R. Kymn Harp, James Mainzer, Justin Weisberg, and Thomas Yardley Jr. Joining them are Jennifer Barton, Emily Kaminski, Teresa Minnich, Christine Walsh, Marko Van Buskirk, Timothy Hameetman, and Richard Stavins. In addition, Shareholder Pamela Webster will also spend a significant amount of time in the Chicago office. The team of highly experienced attorneys have deep roots and a long history of achieving exceptional results for clients.

    “As the third-largest city in the country, having a Chicago office has been a long-term goal for the firm,”
    said Adam Bass, President and Chief Executive Officer of Buchalter. “The city’s thriving real estate,
    financial services, private equity, and technology sectors, along with its ideal geographic location,
    present tremendous opportunities and strengthens Buchalter’s national presence. Finding the right
    lawyers was essential, and the highly respected group joining us in Chicago are an excellent business and
    cultural fit.”

    Buchalter’s expansion into Chicago marks a strategic move as the firm continues to bolster its national
    footprint in key markets across the country. The firm established a presence in the Southeast with the
    opening of its Nashville office in 2023 that has grown to 25 lawyers, followed by an office in Atlanta in 2024.

    With the additions of the new lawyers in Chicago, the firm offers clients a deeper bench in practices it is well-known for, including real estate, banking and finance capabilities, trusts and estate matters, and complex litigation.

    As the Office Managing Shareholder of Buchalter’s Chicago office, Thomas Jefson has extensive experience handling all aspects of complex trust and estate matters including, estate planning for High and Ultra-High Net Worth families, asset protection, probate and trust administration services, complex litigation involving disputed trusts and estates, claims against decedents as well as designing strategies to maximize tax savings. As a trusted legal advisor for over 22 years, Jefson regularly represents families, business owners and executives, investors, and individuals in sophisticated matters to preserve wealth and protect assets that help achieve their objectives for years to come. Additionally, he counsels financial institutions, business leaders within diverse industries in the areas of tax planning, charitable endeavors, fiduciary duty compliance, and other business transactional matters. 

    “We are thrilled to join Buchalter, and I’m honored to lead the Chicago office,” said Jefson. “Joining
    Buchalter provides us with the perfect opportunity to strengthen the support we provide to our clients, expand the services they count on, and collaborate with an impressive team of attorneys.”

    R. Kymn Harp has over 40 years of experience representing investors, developers, business owners, and
    other stakeholders in all aspects of commercial real estate transactions and development. He applies a
    practical approach to project and transaction management through clear identification of transaction
    objectives and challenges, focused due diligence and creative problem-solving, and personal hands-on
    transaction management. He also is actively engaged in the complementary practice of business
    management law, representing businesses, and business owners and investors.

    James Mainzer also has over 40 years of experience practicing in the areas of taxation, business
    representation, real estate, and trusts and estates. His federal tax practice includes a heavy emphasis on
    sophisticated partnership taxation and tax deferred exchanges. He represents private sector clients in
    tax collection defense, audit, income tax, and estate tax matters. He also has substantial experience
    dealing with IRS agents, revenue officers and IRS tax counsel regarding audits, tax appeals, and Federal
    Tax Court matters.

    David Resnick maintains a national practice concentrated in commercial real estate development, and
    leasing and finance matters. He has over 24 years of experience handling all facets of commercial real
    estate transactions, including the acquisition, sale, financing and leasing of industrial, office, residential,
    retail and mixed-use properties. He also provides legal services to hospitality clients with respect to their
    real estate, finance and operational matters.

    Steve Jakubowski concentrates his practice in distressed financings and workouts, bankruptcies,
    receiverships, and related ancillary litigation. He has been lead and co-counsel in bankruptcy cases
    nationwide, stretching from Delaware to Hawaii, including in multiple high profile cases nationwide on behalf of lenders, debtors, creditors and equity committees, acquirers, and litigation targets. These matters have involved a variety of industries, including: biotech; commercial real estate; premium fitness clubs; farming; department stores; restaurant chains; convenience stores; metal fabricators; equipment lessors; and wholesale food manufacturing, packaging, and distribution.

    Patrick Owens possesses extensive expertise in estate planning for young professionals to established
    high net worth clients.  This experience also extends to managing a diverse array of estates, from
    modest, nontaxable ones to those that are significantly large and complex, involving tax liabilities. His
    involvement spans the full spectrum of trust and estate administration and oversight. He expertly
    navigates these trusts and estates through their lifecycle, handling or overseeing all requisite income,
    gift, and estate tax filings with meticulous attention to detail.

    Justin Weisberg has over 30 years of legal experience with a national construction law and commercial
    litigation practice. He represents private, public, local, and international clients in a variety of
    construction-related transactions and litigation matters. His legal experience has included contract
    negotiation and drafting of design, design-build, IPD, P3, and construction contracts as well as
    mediation, arbitration and litigation including both bench and jury trials of numerous disputes involving
    design and construction matters.

    Thomas Yardley Jr. concentrates his practice in the areas of litigation, business transactions, creditors’
    rights and bankruptcy, and employment and construction law. With over 30 years of experience, he has
    handled diverse litigation matters for small business owners, high net worth individuals and
    corporations. He has successfully represented clients in both state and federal court including:
    commercial and contractual disputes, corporate litigation, minority shareholder oppression matters,
    other employment cases, construction matters, condominium and real estate disputes, bankruptcy and
    creditors’ rights matters, among others.

    “We are thrilled to welcome Tom and the entire Chicago team to Buchalter,” added Bass. “We have
    immediate plans to expand the office and are looking forward to the future.”

    The Chicago office of Buchalter is located in Chicago’s central business district, at 180 N. LaSalle St., Chicago, Illinois 60601 – temporarily in Suite 3300, while it awaits completion of its new ultra-modern suite of offices on the 23rd floor of the same building, expected to be ready for occupancy in late Spring 2025,

    Buchalter is a full-service business law firm representing local, regional, national, and international
    clients in a multitude of practice areas and their subspecialties, among them: Bank and Finance,
    Corporate, Health Care, Litigation, Insolvency and Financial Law, Intellectual Property, Labor and
    Employment, Real Estate, and Tax and Estate Planning. Buchalter has approximately 550 attorneys with
    offices in California, Arizona, Colorado, Georgia, Illinois, Oregon, Tennessee, Utah, and Washington. For
    more information about the firm, visit: buchalter.com.

  • MITIGATION OF DAMAGES IN IL COMMERCIAL LEASE DISPUTES

    MITIGATION OF DAMAGES IN IL COMMERCIAL LEASE DISPUTES

    Synopsis:

    An Illinois landlord under a commercial lease must take reasonable measures to mitigate damages,

    . . . but only if mitigation of damages is required – which is not always.

    The General Duty to Mitigate

    discussing and signing agreement contract with approved application form

          Illinois landlords and their agents are required to use reasonable measures to mitigate damages recoverable against a defaulting lessee. 735 ILCS 5/9-213.1. The term “reasonable measures” is not defined by statute, and Illinois courts have held that whether the landlord has complied with the reasonable-measures standard is a question of fact, to be determined on a case-by-case basis. Danada Square, LLC v. KFC National Management Co., 392 Ill.App.3d 598, 913 N.E.2d 33, 41, 332 Ill.Dec. 438 (2d Dist. 2009).

          Section 9-213.1 of the Code of Civil Procedure, 735 ILCS 5/1-101, et seq., is mandatory, however, and it is the responsibility of the landlord, when proving damages, to also prove that it took reasonable measures to mitigate damages, whether or not the landlord’s requirement to mitigate damages was raised as an affirmative defense by the tenant. St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d 285, 695 N.E.2d 503, 508 – 509, 230 Ill.Dec. 1013 (1st Dist. 1998); Snyder v. Ambrose, 266 Ill.App.3d 163, 639 N.E.2d 639, 640 – 641, 203 Ill.Dec. 319 (2d Dist. 1994).

          The landlord has the burden to prove mitigation of damages as a prerequisite to recovery. Snyder, supra, 639 N.E.2d at 641; St. Louis North Joint Venture v. P & L Enterprises, Inc., 116 F.3d 262, 265 (7th Cir. 1997). Losses that are reasonably avoidable are not recoverable. Nancy’s Home of Stuffed Pizza, Inc. v. Cirrincione, 144 Ill.App.3d 934, 494 N.E.2d 795, 800; 98 Ill.Dec. 673 (1st Dist. 1986); Culligan Rock River Water Conditioning Co. v. Gearhart, 111 Ill.App.3d 254, 443 N.E.2d 1065, 1068, 66 Ill.Dec. 902 (2d Dist. 1982).

          In dicta, the court in St. George, supra, stated that failure to take reasonable measures to mitigate damages may not necessarily bar recovery by the landlord, but it will result in the landlord’s recovery being reduced. 695 N.E.2d at 509. How this would work from an evidentiary standpoint, however, is not entirely clear. Presumably, the landlord could introduce evidence at trial that, although the landlord did not take reasonable measures to mitigate damages, if it had, damages would have been reduced by some specified amount. If the landlord fails to introduce even that evidence, however, the question appears to remain open as to whether the landlord adequately proved damages — since the burden of proof of damages remains with the landlord and there is no suggestion that the statutory requirement to prove mitigation shifts to the tenant.

          At least one recent case has, in dicta, questioned aspects of both St. George and Snyder, supra, disagreeing that proof of mitigation must be demonstrated by the landlord as a prerequisite to recovering damages and has suggested that the issue of mitigation of damages is an affirmative defense that must be raised by the tenant, or it is waived. Takiff Properties Group Ltd. #2 v. GTI Life, Inc., 2018 IL App (1st) 171477, ¶23; 124 N.E.3d 11; 429 Ill.Dec. 242.

          Further, as a matter of first impression, the court in Takiff went on hold that the landlord’s obligation to mitigate can be contractually waived by a commercial tenant Takiff, at ¶29, and, as determined by the trial court, was in fact contractually waived by the tenant, rendering the issue of mitigation moot. 2018 IL App (1st) 171477 at ¶31.

          Possession as a Condition Precedent to Landlord’s Duty to Mitigate.

          Notwithstanding any general duty of landlord to mitigate damages, a landlord has no duty to mitigate until the landlord comes into possession. 2460-68 Clark LLC v. Chopo Chicken, LLC, 2022 IL App (1st) 210119, ¶34; Block 418, LLC v. Uni-Tel Communications Group, Inc.  398 Ill.App.3d 586, 925 N.E.2d 253, 258 ((Ill. App. 2 Dist. 2010); St. George Chicago, Inc. v. George J. Murges & Associates, Ltd., 296 Ill.App.3d at 290-91.

          Discussing the application of this principal, the Chopo Chicken court noted that an eviction proceeding is a summary proceeding to recover possession. Since a landlord has no duty to mitigate until the landlord is in possession, and, in an eviction action, a landlord is not in possession until the eviction court grants the landlord an order of possession and landlord recovers possession, landlord’s efforts to mitigate, or the lack thereof, are not relevant.  Chopo Chicken, supra ¶34

          Liquidated Damages Provision Makes Mitigation Irrelevant. 

          It is the general rule in Illinois that, in the case of an enforceable liquidated damages provision, mitigation is irrelevant and should not be considered in assessing damages. Chopo Chicken at ¶33. A liquidated damages provision is an agreement by the parties as to the amount of damages that must be paid in the event of default. Chopo Chicken at ¶33. Liquidated damages in commercial leases are not uncommon.

          In Chopo Chicken, the court considered a provision that included an itemization of damages recoverable by landlord from tenant including “a sum equal to the amount of unpaid rent and other charges and adjustments called for herein for the balance of the term hereof, which sum shall be due to Landlord as damages by reason of Tenant’s default hereunder” which, the court found, constituted a liquidated damages provision. 

          Similarly, in the St. George case, 296 Ill.App.3d 285; 695 N.E.2d 503, 507 the court found that a so-called “rent differential” formula (i.e. amount determined by the excess if any of the present value of the aggregate Monthly Base Rent and Operating Expense Adjustments for the remainder of the Term as then in effect over the then present value of aggregate fair rental value of the Premises for the balance of the Term the present value calculated in each case at 3%) constituted a liquidated damages provision.

                The Summary Rule regarding Mitigation

          Based upon the foregoing cases, the actual Illinois rule governing mitigation of damages in commercial lease disputes appears to be as follows: A landlord must take reasonable measures to mitigate damages, if mitigation of damages is required – but mitigation of damages is not required (i) until the landlord is placed in possession of the leased premises, or (ii) when the lease includes a liquidated damages provision.