With increasing real estate development activity, many owners and lenders of recently developed properties are experiencing problems ensuring the correct payment of real estate tax bills during the first year or two after the completion of construction. In many cases, owners are discovering a couple of years after they have purchased newly constructed property that adequate arrangements were not made to address the complexities of allocating responsibility for pre-construction and initial post-construction tax bills. This can become quite problematic when undivided tax bills cover parcels owned by multiple owners.
The problem is the result of an incongruity in the time line for the creation of tax parcels for a new project and Illinois practice of paying tax bills in arrears (i.e., tax bills paid in 2015 are for the 2014 tax year). In the case of newly developed property, this could mean that the tax bills payable in the calendar year after construction is completed could still relate to the property as it existed before construction.
To further complicate matters, if the redeveloped property results in a new ownership structure which does not match the pre-development ownership structure, the old tax bills will not correspond with the new ownership structure. For example, if a parcel of land which constitutes a single tax parcel (that generates a single tax bill) is redeveloped with two buildings that are sold to separate owners, then the new owners will face a single, undivided tax bill covering both buildings. Until the County Assessor creates separate tax parcels covering each of the newly constructed buildings, the owners would need to cooperate to cause the combined tax bill to be paid each year. This situation would lead to all manner of problems because it would not be immediately clear what portion of the tax bill would be attributable to each of the properties. Furthermore, if one of the owners refused to pay his proportionate share, the other owner might be faced with paying the entire bill to avoiding having the undivided tax bill become delinquent.
Unfortunately, the time line for creating new tax parcels does not correspond with the with the payment dates for real estate tax bills. For example, an application for a tax division (i.e., the procedure for creating new tax parcels) in Cook County, Illinois is filed a year in advance, meaning a division filed in 2015 will result in new tax parcels in 2016 which will not be payable until 2017. If the division (other than condominium properties) isn’t filed before the October 31st filing deadline, a division filed in November or December 2015 will result in new tax parcels in 2017 and initial tax bills payable in 2018.
In light of the foregoing, a prudent purchaser of newly developed real estate will need to make certain that adequate provisions have been made to assure the owner that (i) a new division will take place, (ii) that sufficient funds have been collected or will be available from the seller post-closing to pay the seller’s share of the undivided tax bill for the year of closing and any prior years, and (iii) sufficient steps have been taken or are available to protect the purchaser with respect to the payment of undivided tax bills in the periods occurring prior to the issuance of separate, divided tax bills. Without taking adequate steps to protect themselves, many property owners may be faced with significant real estate tax problems years after the initial construction of their properties. Thankfully, with some planning, these issues can be avoided.
For further information regarding the real estate tax issues involved in recently constructed property, the procedures which may be employed to address these issues and real estate development and related issues in general, please contact:
firstname.lastname@example.org or 312-368-0100.