Recently the City of Chicago’s Department of Finance issued Real Property Transfer Tax Ruling #4, which clarifies the intent of the City’s Real Property Transfer Tax. The ruling details the application of the exemptions to the real estate transfer tax as it relates to assignments of mortgages and transfers of properties through deeds in lieu of foreclosure. The City differentiates the transferring party as either a bona fide lender, such as banks, credit unions and mortgage companies, and non-lenders, or those who take an assignment of a mortgage for the primary purpose of obtaining title to the property for developing, investing in or using the real property itself.

Under this ruling, a bona fide lender can continue to take advantage of the transfer tax exemptions when executing an assignment of mortgage or receiving a judicial sales deed or deed in lieu of foreclosure under either Exemption C (exempting transfers that secure a debt) or Exemption M (exempting transfers for deeds in lieu of foreclosure). The “non-lenders” cannot take advantage of such exemptions. This ruling and the City’s subsequent 2013 amendment to Exemption C to the ordinance now exempts transfers in which the deed, assignment or other instrument of transfer secures a debt—but that transfer must be to a mortgagee or secured creditor. The 2013 amendment was a harbinger of the City’s intent to tax qualifying assignments of mortgages and deeds in lieu of foreclosure as taxable transfers of interests in real estate.

Some of the first cases of the City’s enforcement of its position on mortgage transfers were decided recently in the Circuit Court of Cook County, Illinois: City of Chicago v. KTCP (decided August 6, 2015); and Halsted West v. City of Chicago (decided August 11, 2015).  Both cases were appeals by the City from an administrative law judge’s ruling that the assignment of a mortgage and the subsequent deed in lieu of foreclosure were exempt under the Transfer Tax Ordinance. In the KTCP Case, the deed in lieu of foreclosure was concurrent with the assignment of the mortgage, with a tri-party making the deed in lieu of foreclosure contingent upon the transfer of the mortgage to the new mortgagee.  In the Halsted West Case, the deed in lieu of foreclosure was conveyed to the new mortgagee that purchased the debt months after receiving an assignment of the mortgage.

Both cases held that an assignment of a mortgage is a transfer of a “beneficial interest in real property”. The Transfer Tax Ordinance does not specifically state that an assignment of a mortgage is an example of a transfer of a “beneficial interest” in real property.  However, the court noted that this term was ambiguous and held that an assignment of a mortgage is a transfer of a “beneficial interest in real property.”  

After reaching the conclusion that a mortgage assignment qualifies as a taxable transfer, the court reviewed the applicability of Exemption C and Exemption M under the Transfer Tax Ordinance.   In addressing Exemption C, the court found in the KTCP case that the deed in lieu tri-party agreement was not a transfer that secures debt. The court noted that granting a mortgage for debt was exempt under Exemption C, but further noted that an assignment of a mortgage was a “transfer of debt” and did not “secure a debt”, making an assignment of a mortgage inapplicable under Exemption C.  In the Halsted West Case, the court found that Exemption C is only effective upon the transfer of a mortgage to a “bona fide lender”, and that the transferee in the Halsted West Case was a “non-lender” as it acquired the mortgage to obtain title to the property. 

In addressing Exemption M, the Halsted West Case held that a transfer of property through a deed in lieu of foreclosure is exempt only if the deed of conveyance is to either the original mortgagee or an assignee of the original mortgagee. The KTCP case did not address Exemption M in detail.  In both cases, the court found that the transfers were not exempt and were taxable under the Transfer Tax Ordinance.

Presently, the City’s transfer tax is $7.50 per $1,000 of “transfer price” paid by the purchaser and $3.00 per $1,000 paid by the seller. The court in both cases remanded the question of the “transfer price” to the administrative level, which the City could argue that transfer price should be based on the amount of the mortgage transferred (notwithstanding the actual value of the mortgaged property)—potentially a significant sum to pay to assign a mortgage.  The amount of transfer tax on mortgage assignments is but one of many open questions raised by the decisions in the KTCP and Halsted West cases.

These recent district court cases, while only persuasive precedent, clearly reaffirm the City’s intent to tax what were previously thought to be exempt transfers under the Transfer Tax Ordinance. The veracity of the court’s reasoning aside, those who purchase mortgage debt for Chicago property should be aware of the City’s intent to assert this tax on those qualifying transfers and should attempt to structure the transaction accordingly. If City can establish that thesine qua non of the transaction results in the lender owning the mortgaged property (either in the concurrent transaction or soon thereafter) as a so-called ‘loan to own’ deal, the City may deem the transfer taxable under Chicago’s Transfer Tax Ordinance.