Crack down on businesses that rent from government but don’t pay taxes

If leasehold taxes aren’t paid, school districts, park districts and other local government entities don’t get money they were counting on.

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Hashbrowns Cafe leases this space from the University of Illinois Chicago at 731 W. Maxwell St

Hashbrowns Cafe leases this space from the University of Illinois at Chicago at 731 W. Maxwell St. and has seven years of unpaid real estate tax bills that now top $114,000, plus interest. UIC is required by law to take steps to help make sure its tenants pay these taxes, but hasn’t done so.

Anthony Vazquez/Sun-Times

For some businesses in Cook County, having property tax bills fall through the cracks might seem like a good deal.

For all the school districts, park districts and other governments, though, not so much. If leasehold taxes aren’t paid, they don’t get money they were counting on.

A new Sun-Times Watchdogs report by Tim Novak and Lauren FitzPatrick has turned the spotlight on a long-running problem in the county: for-profit businesses that lease property from government agencies but don’t pay required taxes.

This problem needs to be fixed, once and for all.

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Governmental agencies and nonprofits such as hospitals don’t have to pay taxes on properties they own. But if they lease out part of their property to a for-profit business, the business is supposed to pay a leasehold tax. The county is supposed to “split code” the property, sending no tax bill to the part of the property used for nonprofit purposes but billing the part that is leased out to a for-profit.

Yet the Sun-Times investigation found that $89.7 million of leasehold taxes have gone unpaid since 2001, $13 million of that in just the past year. Last year, Cook County Treasurer Maria Pappas sent tax bills to 1,220 leasehold properties that owed a collective $88 million. But one in four businesses leasing space from government bodies and nonprofits didn’t pay up.

In just one example, Hashbrown’s Cafe, a breakfast business whose owners have political connections, has run up seven years’ worth of unpaid tax bills totaling more than $114,000, plus interest, while leasing space from the University of Illinois at Chicago.

That’s unfair to everyone whose taxes then go up because some didn’t pay their fair share. It’s also unfair to businesses that must compete against rivals that don’t pay taxes.

Government agencies and nonprofits should be making sure their tenants pay up. The tenants should pay without waiting for investigators to knock on the door. And the county should go after businesses for unpaid back taxes.

A ‘frayed edge’ of the property tax system

Unpaid leasehold taxes have been a long-running problem for several reasons. First, they make up only a small percentage of the 1.8 million properties in Cook County, so they don’t get much attention. Second, the county doesn’t always know when a nonprofit decides to start renting out space or when tenants move in or out. Third, the county doesn’t have the same leverage to collect leasehold taxes as it does ordinary property taxes.

If ordinary property taxes go unpaid long enough, the county can sell the property for back taxes. But it can’t sell a government agency’s or nonprofit’s property because leasehold taxes haven’t been paid.

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The cost of going after unpaid leasehold taxes in court can eat up much or more of what’s due in taxes from a leaseholder. A spokeswoman for Cook County State’s Attorney Kim Foxx told the Sun-Times it’s been years since the state’s attorney’s office has sued to collect leasehold taxes from government tenants, because the amount that could be recovered did not justify the cost of litigation.

“It’s one of the frayed edges of the property tax system that does not get much attention,” one person familiar with the system told us.

Under state law, government landlords are supposed to report tenant changes within 90 days to the assessor. Often, that doesn’t happen, including when Metra didn’t report that Beggars Pizza is a tenant at the commuter rail system’s Loop headquarters until after Sun-Times reporters asked about it.

Next year, the Cook County assessor’s office will start using a new tool that will show where leaseholders are, making it easier for people to know who is paying and who is not. But it won’t force everyone to comply.

In the meantime, all the players need to work harder to ensure leaseholders are not dinging all other taxpayers in Cook County.

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