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03/31/95 MONROE DEARBORN LIMITED PARTNERSHIP v.

March 31, 1995

THE MONROE DEARBORN LIMITED PARTNERSHIP, AN ILLINOIS LIMITED PARTNERSHIP, PLAINTIFF-APPELLANT,
v.
THE BOARD OF EDUCATION OF THE CITY OF CHICAGO, DEFENDANT-APPELLEE.



APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY. HONORABLE LESTER D. FOREMAN, JUDGE PRESIDING.

Rehearing Denied May 1, 1995.

Presiding Justice Hoffman delivered the opinion of the court: Cahill and Theis, JJ., concur.

The opinion of the court was delivered by: Hoffman

PRESIDING JUSTICE HOFFMAN delivered the opinion of the court:

The plaintiff, the Monroe Dearborn Limited Partnership, appeals from the dismissal with prejudice of its complaint under section 2-615 of the Code of Civil Procedure (735 ILCS 5/2-615 (West 1992)), for failing to state a cause of action against the defendant, the Board of Education of the City of Chicago. We consider whether the plaintiff alleged facts in its complaint to show that it was entitled to a rent reduction under its lease of the defendant's property because the tax assessment on its leasehold lawfully included the defendant's tax-exempt interest in the land. For the following reasons, we reverse and remand.

On March 21, 1993, the plaintiff filed a verified complaint, which was subsequently amended, against the defendant for declaratory judgment, injunctive relief, and other relief. In the amended complaint, the plaintiff alleged that the defendant owned the property at 30 West Monroe, in Chicago, Illinois, which it leased to the Inland Steel Company (Inland) for a term of almost 99 years beginning on November 10, 1954, and ending on October 31, 2053. The lease provided that during its term, the lessee would have title to and ownership of any improvements made on the property, but the improvements would pass to the lessor at the end of the lease term without compensation to the lessee. Also, rent under the lease would be paid solely for the land and the demise of the land and not for the improvements.

Pursuant to the lease, Inland built an office building on the property in 1958. Subsequently, as allowed under the lease, the LaSalle National Bank, as trustee under a trust, purchased the leasehold and improvements from Inland on September 8, 1989. The plaintiff is the beneficial owner of the trust.

The plaintiff also alleged that the defendant's property was exempt from general taxes, but because it was leased to a non-exempt entity, the Assessor of Cook County has assessed and taxed the leasehold of the property during the lease term under section 26 of the Revenue Act of 1939 (35 ILCS 205/26 (West 1992), now35 ILCS 200/9-195 (West Supp. 1994)). That section provides that in such circumstances the taxable leasehold estate shall be listed as the property of the lessee. Section 20(2) of the Revenue Act of 1939 requires that "each taxable leasehold estate shall be valued at 33 1/3% of its fair cash value." 35 ILCS 205/20(2) (West 1992), now 35 ILCS 200/9-145(b) (West Supp. 1994).

As alleged in the complaint, section 2.6 of the lease reflected the parties' understanding that because the defendant was a taxing body which levied taxes against property within its boundaries, including the property the plaintiff was leasing, the defendant would receive income from taxes assessed against the plaintiff's leasehold in addition to the rent under the lease. Also, taxes would be levied and paid by the lessee solely "on account of the buildings or improvements located on the [property]." Section 2.6 provided, in part, that the rent would be increased "in the event that, for any reason, no taxes shall be levied on, or on account of, the buildings or improvements at the time located on said demised land, by the State of Illinois or any political subdivision thereof ***." On the other hand, section 2.6 also provided that the rent would be reduced if taxes were assessed on or on account of the lessor's interest, as stated in the following excerpt:

"In the event that, for any reason and regardless of who owns the demised land, any taxes shall be lawfully levied by the State of Illinois or any political subdivision thereof, at any time during the term of this lease, on, or on account of, the demised land or the interest of the Lessor therein or the reversionary estate therein, then, and in such event, if such taxes are paid by or for the account of the Lessee, the rental hereinabove reserved for each full year, for which any such taxes shall be so levied, shall be reduced ***."

The plaintiff alleged that when the parties entered into the lease, the law provided that the interest of a lessor in the premises was the value of his reversion with the rents added and the interest of lessee in the premises was the value of his term subject to the rents, citing Corrigan v. City of Chicago (1893), 144 Ill. 537, 33 N.E. 746. Also at that time, the assessor assessed value on long-term taxable leaseholds based only on the value of the improvements and not on the land and as a result, the assessed value of a leasehold was less than the value of the fee simple interest in the property.

However, subsequently, according to the plaintiff's allegations, the law changed regarding assessing the value of a leasehold of otherwise tax-exempt land for tax purposes in People ex rel. Korzen v. American Airlines, Inc. (1967), 39 Ill. 2d 11, 233 N.E.2d 568. The plaintiff alleged that in American Airlines, the supreme court held the assessed value of a leasehold of otherwise tax-exempt property "included both the equity value of the lessee's interest (if any) and the value of the lessor's interest in the rents reserved under the lease."

Applying the formula of American Airlines, the plaintiff alleged the value of the leasehold in this case, with a remaining term of 60 years, is substantially identical to the value of the property in fee simple. The plaintiff alleged that valuing the leasehold at substantially the same value as the fee simple interest was now lawful under American Airlines and was a higher assessment than the assessment of the same taxable leasehold under the assessor's prior policy. Also, the assessor has followed American Airlines, as he is required to do, and has valued the plaintiff's leasehold at the same amount as the fee simple value. As a result, the value of the demised land and the value of the defendant's interest in it are included in the value of the leasehold. Because the assessment of the leasehold includes the value of the defendant's interest in the demised land, the plaintiff alleged that part of the taxes paid on the leasehold were "on account of" the defendant's interest. The plaintiff alleged that the value of the leasehold has been assessed in this manner since at least 1970 through 1991. The plaintiff requested, among other relief, a declaratory judgment that it has overpaid rent on the property because the value of the defendant's interest as lessor has been included in the assessment of the plaintiff's leasehold from 1970 to 1991, and will continue to be assessed in that manner in the future.

The plaintiff attached two affidavits as exhibits to its complaint. One of the affidavits was from a real estate appraiser, Michael J. Kelly, who was familiar with the valuation, assessment, and taxation of leaseholds under the formula set in American Airlines. The appraiser explained the formula and concluded that for leaseholds with extremely long remaining terms, such as 50 years, "since the rental used in the American Airlines formula reflects rental for both improvements and land, the taxable leasehold value produced by the formula includes a value for the improvements and the land." The appraiser also reviewed the 1991 ...


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