US Regional Real Estate 2021

Last Updated May 14, 2021


Law and Practice


Polsinelli PC is an Am Law 100 firm with 21 offices and over 140 lawyers servicing the real estate industry. The firm's Chicago, Denver and Kansas City offices include some of Polsinelli’s top real estate lawyers who provide practical solutions, as well as experience that cuts across all segments of the real estate industry. The firm has been involved in hospitality, industrial, office, retail, residential, student and senior housing transactions in virtually every state in the country, and has developed teams focusing on emerging sub-markets such as healthcare, alternative energy and data centers. Polsinelli handles all aspects of a real estate transaction from acquisition through development, ownership structure and financing, leasing or disposition. The firm takes pride in being an integral part of clients’ teams and collaborating for their success.

The main substantive skills required of real estate law are the ability to:

  • communicate clearly both orally and in writing;
  • negotiate effectively;
  • analyze legal requirements effectively and efficiently; and
  • communicate those requirements clearly and succinctly to non-lawyers. 

One skill that has become essential to the practice is an ability to effectively coordinate a team of attorneys and other specialists in order to consummate transactions that span multiple jurisdictions and areas of expertise, as well as to meet increasing client demands for efficiency.

The most significant recent trends in the Illinois real estate market are increased investment in Opportunity Zones and institutional private equity investment in established developer platforms. 

The most significant deals in the last 12 months include zoning and TIF approval for Lincoln Yards and The 78 (including the innovation center), along with evolving plans for the former Michael Reese Hospital site. All three will be transformative developments for the City of Chicago.

Bonus depreciation, limits on interest deductions and opportunity zones have been the most significant developments in US tax law. Opportunity zones have significantly increased transactions and development in those areas. Implementation requires expertise in tax, real estate development, corporate law (for drafting agreements), securities (relating to raising funds), and real estate finance.

The Biden administration is expected to release proposals which could generally increase the tax burden on investors, and could include increases to the individual and corporate tax rate and changes to the taxation of capital gains by high net worth taxpayers. It is unclear whether any of these proposals may be adopted. The Covid relief bill passed in March 2021 contains some relatively minor changes to the tax code, including limits on the deduction of certain losses and accounting changes.

The most prevalent ownership structure for real estate transactions is limited liability companies and limited partnerships. There have not been any changes in strategy with respect to the use of these structures, except with respect to structuring for opportunity zone deals.

Transferring title to real property in Illinois is subject to real estate transfer taxes at various municipal levels in order to record the deed. Municipalities may also require evidence that utilities have been paid through closing and bulk sales rules apply in Illinois, which expose a buyer of real property to liability for seller’s unpaid taxes.

A transfer of title to real estate is effectuated by the execution and delivery of a deed by the seller in favor of the buyer. Although recording is not necessary for a valid conveyance between such parties, deeds should be recorded in the recorder’s office of the county where the real property is located in order to provide notice to third parties and to obtain the benefits of the recording statute. 

Real estate diligence is a complex and integral part of purchasing real property and typically includes physical, economic and legal review. Attorneys are typically tasked with reviewing the vesting deed, title commitment, underlying title documents, survey, and certain third-party reports, including a zoning report, environmental reports and property condition assessments, in order to understand the marketability and the risks/liabilities to be assumed by the buyers. Attorneys also review all unrecorded leases or contracts that affect the real property. 

Representations and warranties in a commercial purchase agreement depend on the type of property involved (eg, retail, industrial, residential), whether it is improved or vacant, whether it will be developed or redeveloped and its proposed use. The most typical representations and warranties contained in commercial purchase agreements include:

  • organization and authority of the seller;
  • seller conflicts or required consents;
  • the accuracy and completeness of the documents and records;
  • existence of litigation;
  • disclosure of leases and service contracts affecting the property;
  • disclosing any third-party rights or interests in the property;
  • inventorying personal property that is to be transferred;
  • property and use comply with applicable laws;
  • seller knowledge of any change contemplated in any applicable laws that would affect the property or use thereof;
  • disclosure of any uncured notice from an insurance company;
  • seller knowledge of the presence or release of hazardous material;
  • pending or threatened bankruptcy of the seller or property; and
  • compliance with the rules and regulations of the office of Foreign Assets Control, Department of the Treasury.

Buyer’s customary remedies against a seller for a breach of representations and warranties prior to the closing include termination of the contract with a return of buyer’s earnest money and sometimes reimbursement of due diligence costs or seeking specific performance. Buyer remedies after closing are often subject to a cap on and/or deductible for damages to be pursued during a specified survival period. The scope of remedies are determined on a case-by-case basis.

One important regulation for a foreign investor to consider when purchasing real estate is the Foreign Investment Risk Review Modernization Act of 2018 (FIRRMA), which changes the process by which the Committee on Foreign Investment in the United States (CFIUS) reviews foreign investment in US businesses. 

It is important to understand how US government national security concerns can impact proposed transactions. CFIUS’ jurisdiction was traditionally over “covered transactions,” which were defined as transactions that could result in the “control” of a US business by a foreign person. Prior to FIRRMA, the decision of whether or not to undertake the CFIUS process was mostly voluntary unless CFIUS elected to undertake a review of its own initiative. Under FIRRMA, more types of transactions now fall within CFIUS’ regulatory purview.

Generally, the buyer of a real property is responsible for any environmental contamination or pollution on that real estate (or migrating from it), even if the buyer did not cause the problem. There are several ways to minimize risk of a buyer, and a buyer should comply with federal guidelines on environmental diligence (referred to as All Appropriate Inquiry, or AAI) to take advantage of innocent landowner protections to superfund liability before closing. The most important step in complying with AAI is to order a compliant Phase I Environmental Site Assessment of the property. 

A buyer can best ascertain the permitted uses of a parcel of real estate under applicable zoning law by engaging a lawyer to research applicable zoning laws or commissioning a professional zoning report describing the property’s compliance with zoning laws.

It is generally possible to enter into specific development agreements with relevant public authorities as discussed in more detail in 4.5 Agreements with Local or Governmental Authorities.

Governmental takings (or eminent domain) for public use are common in Illinois. The process begins with the filing of a complaint, which must state:

  • that the plaintiff has right to take such property;
  • what property is to be taken;
  • the nature of the interest to be taken;
  • who the parties of record are;
  • the public use of the property to be taken;
  • the necessity of the public use; and
  • that compensation cannot be agreed upon.

After the complaint and motions are filed, there is a trial which will determine whether the property will be taken and what will be paid as “just compensation” for the taking.

Real estate transfer taxes are prevalent, both for transfers by deeds and indirect transfers of ownership interests. Costs are often split, but it is a negotiated item. The Illinois tax rate is USD0.50 per USD500 of value, the county tax rate is USD0.25 per USD500 of value and certain municipalities also impose transfer taxes.

Tax on partial ownership changes applies where there is a change in control (50% or more). Certain exemptions exist. There are no leasing, mortgage recording or intangible taxes, as may be found in other states.

The most common regulations affecting real estate transactions are federal rather than Illinois and include the Foreign Investment in Real Property Tax Act (FIRPTA). The Internal Revenue Code provides that a transferee of a United States real property interest must withhold taxes if the transferor of the property is a foreign person. If FIRPTA is not applicable, the transferor will provide a FIRPTA Affidavit at the closing, certifying that the transferor is not a foreign person or entity.

Foreign companies "transacting business" in Illinois must obtain authority from the Illinois Secretary of State, but simply owning real estate in Illinois does not constitute transacting business. Additionally, under the Agricultural Foreign Investment Disclosure Act: 765 ILCS 50/1 to 50/8, any foreign person (including corporations) who acquires or purchases agricultural land must report the purchase to the State Director of Agriculture within 90 days.

Acquisitions of commercial real estate are generally financed with equity, debt or some combination of the two. The most commonly used lenders on these transactions are balance sheet lenders, CMBS lenders, bridge lenders and insurance companies. An acquisition financed with equity can take various forms, the most common of which are:

  • all cash purchase;
  • co-investments;
  • joint ventures;
  • preferred equity; and
  • syndicated equity. 

Acquisitions financed using debt are typically secured by a mortgage and assignment of rents and leases (term and construction loans), pledge of ownership interests (mezzanine loans), control within the ownership entity (preferred equity) and debt guarantees. 

The most common financing options are:

  • loans from a single lender (or a syndicate of lenders) secured by mortgages recorded against each of the properties;
  • corporate credit facilities to the parent (usually also secured in part by mortgages against the individual properties);
  • op-co/prop-co structure;
  • master lease structure;
  • sale-leasebacks; or
  • acquisition and financing of the equity owners (ie, mezzanine financing or private equity), rather than the property owning entities.

Security interests in real estate in Illinois are created and perfected through recording a mortgage and UCC fixture filing in the county in which the property is located. 

An investor may also pledge the equity in the entity that owns title to the real estate. A lender can perfect its security interest in such membership interests by taking possession of the membership certificates (if certificated) under Article 8 of the UCC or by filing a financing statement under Article 9 of the UCC (if the membership interests are not certificated).

The Foreign Corporation Lending Act (the “Act”) applies to foreign lenders. Under the Act, except for entities that are required to be licensed or regulated under Illinois law (other than the Business Corporation Act of 1983), a corporation (which includes any bank or insurance company) formed under another state or in another country may, without qualifying to transact business in Illinois, invest or loan money and purchase notes or other evidence of indebtedness, secured by a security instrument. 

Notwithstanding any other Illinois law, a foreign corporation that has purchased notes or other evidence of indebtedness, will have the same rights that a citizen of Illinois would have to recover, service, protect and enforce such note or other evidence of indebtedness, by foreclosure or otherwise. The foreign corporation will have the power to acquire, hold, lease, mortgage or convey Illinois property that is assigned, transferred, mortgaged or conveyed to it as security for indebtedness purchased or owned by such foreign corporation. 

Further, a foreign corporation may purchase property offered for sale under foreclosure of a mortgage, provided, the foreign corporation shall not sell the real estate within five years after acquiring title.

No transfer, documentary or mortgage taxes are payable in connection with granting or recording a mortgage or security agreement in Illinois. Nominal recording fees do apply. A deed issued to a mortgage holder pursuant to a foreclosure proceeding or transfer in lieu of foreclosure is exempt from transfer tax. If a sale of real property is made subject to a mortgage, the outstanding balance of the mortgage shall not be included when calculating the Illinois transfer tax. 

There are no specific rules that must be complied with before an entity can grant a valid mortgage or security interest in its real estate. 

Before a lender is able to judicially enforce its rights over real estate against the defaulting borrower, the lender must file a complaint. Next, the lender must serve the borrower with a summons and complaint. If no answer is filed by the borrower, lender may file for a motion for summary judgement, and if the lender’s motion is granted, a judgment of foreclosure will be entered. For Illinois cases filed after May 1, 2013, in order to receive a foreclosure judgment, the lender must file a “prove up” affidavit, and, in some cases, the Lender may be required to file a “loss mitigation” affidavit.

The borrower has the right to reinstate the mortgage within 90 days from the date the borrower was served with the summons or was otherwise submitted to the jurisdiction of the court. Reinstatement requires bringing the loan completely “current” by paying all past due amounts, including accumulated principal, interest, escrow, costs and fees. If the borrower successfully reinstates, any foreclosure proceeding will be dismissed. Such right to reinstatement shall be available only once in any five-year period.

Additionally, the borrower may have a right to redeem the amount secured by the mortgage by paying the entire remaining balance, including interest, costs and fees. The redemption period ends the later of seven months from the date the borrower was served with a summons or three months from the date of entry of judgment of foreclosure. The lender may not proceed with a judicial sale until the redemption period expires. Up to 30 days after the judicial sale is confirmed, borrowers may have a “special right of redemption” if the purchaser at the sheriff’s sale was a mortgagee that was a party to the foreclosure and the judicial sales price was less than the total amount required to redeem.

Existing secured debt may become subordinated to newly created debt by an agreement between the two lenders. In rare instances, a senior lender’s debt may be wholly subordinated by a court if the senior lender substantially impairs the position of the junior lender by modifying the terms of the senior loan without junior lender consent (at least in the absence of intercreditor agreement explicitly allowing such modification). 

There are limited instances when a lender can be held liable under environmental laws for pollution even if they did not cause it. Prior to foreclosure, lenders can be held liable under environmental laws, such as the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), when found to have acted more like an owner or operator by participating in the management of the property.

In addition, if foreclosure is necessary, lender environmental liability risks can intensify since statutory protections may disappear if a lender fails to sell or divest itself of the real property at the earliest practicable, commercially reasonable time, on reasonable terms, taking into account market conditions and legal requirements.

Lenders minimize borrower bankruptcy risks by requiring borrowers to agree that, if the debt is not paid in accordance with the mortgage or other security instrument, the lender will be able to take the property subject to such mortgage and sell it at auction, and then use the proceeds of such sale to pay down the outstanding balance of the loan. If the auction price is less than what’s owed, the borrower will remain liable for the outstanding deficiency balance.

Lenders also protect themselves from bankruptcy risk by requiring that a creditworthy party provide a full payment guaranty in the event that the borrower seeks bankruptcy protection before the loan is fully repaid.

Illinois does not impose any recordation or similar tax in connection with mezzanine loans related to real estate.

In Illinois, the State and most local governments have enacted ordinances to provide for zoning and subdivision controls and have adopted building codes that have the effect of regulating land use. The regulations apply to the design, appearance and method of construction for new construction and redevelopment of existing buildings.

Responsibility for regulating the development and use of individual parcels of real estate in Illinois is determined by the physical location of any such parcel. The hierarchy of review authority is as follows: primacy goes first to home-rule municipalities and non-home rule municipalities that have adopted a zoning ordinance or building code, followed by the home rule units of county government are next and, finally, if a parcel is not located within any of those jurisdictions, State law controls.

An exception applies to parcels that may be located within a non-home rule municipality or are not within a municipality’s boundary and are located within a county that has not adopted a zoning or building code, but lies within a township. In such instance, the township’s code will apply.

In order to obtain entitlements for a new project or major refurbishment, the process usually involves either the rezoning of already zoned property, or the initial zoning of newly annexed property. The applicable process for either is substantially the same, with a few notable exceptions. Subordinate thereto is the process of obtaining a “variation” or a “variation in the nature of a special use” which may be required to achieve certain design or use requirements applicable to the proposed project.

Rezoning can be accomplished by changing the applicable zoning map, assigning or creating a new zoning classification for the property, changing the text of the zoning ordinance, imposing new site restrictions, or some combination of the foregoing and rezoning is a legislative act.

With respect to “variances”, many zoning ordinances permit variances in cases in which strict adherence to the zoning regulations would cause economic hardship or prevent reasonable use of a parcel of land. Variances are generally granted through administrative proceedings, Chicago being a notable exception. In addition, most ordinances permit non-conforming uses that existed at the time the ordinance was adopted to continue until the property is sold, the use of the property changes, improvements on the property are altered, or an amortization period has expired.

In every case of a requested variance, a public hearing pursuant to notice is required. An applicant must satisfy all the requirements stated in the ordinance which allows the variance. Even if the application is not opposed, the burden is on the applicant to plead and prove all of the elements contained in the enabling ordinance. The legislative authority must make specific findings of fact based upon the evidence placed in the hearing record to support its determination.

A constitutional challenge of whether land use restrictions have gone too far rests on two important factors: the reasonableness of the existing restrictions and the proposed use. The owner/developer whose proposal has been rejected must seek a court order invalidating the application of the existing zoning restrictions to the subject property. Two elements must be pled and proven to validate the owner’s right to use the property as desired. 

The owner must establish that the proposed use is reasonable and does not adversely impact the neighborhood or the public’s health, safety and welfare. If the use is determined to be reasonable, then the owner must plead and prove that the existing restrictions are unreasonable and the public health, safety and welfare do not justify the adverse impact on the owner. This applies to situations where a rezoning change or a variance or special use permit has been rejected.

Local governments in Illinois have authority to enter into development agreements with private parties to facilitate a development project. Illinois upholds the validity of development agreements if such agreements reserve some governmental authority over the agreement and do not contract away the police power and instead constitute a valid present exercise of that power. Annexation agreements represent one type of development agreement frequently used in Illinois.

Such agreements frequently address the review of building permits, the payment of impact fees, utility access, signage and special services. Similarly, applications for large scale residential projects in Chicago require the owner to enter into a redevelopment agreement with the City. Planned developments are subject to redevelopment agreements.

Illinois municipalities, counties and townships possess a wide variety of enforcement remedies. These remedies can be administrative or can involve litigation. Decisions related to selection of remedies are within the sole and absolute discretion of the governmental authority. Typical examples consist of any and all of the following:

  • a building permit may be suspended or revoked;
  • a “stop work” order may be issued suspending or terminating ongoing construction activity;
  • the business license of a general contractor or a subcontractor may be suspended or revoked; and/or
  • financial security delivered to the government to secure the performance of an owner’s obligations may be forfeited.

Monetary fines may be imposed and, in addition, municipalities may seek to recover late fees and interest penalties based upon the amount of the fines. They may pursue an action to seek money damages for nonconformance and Chicago and other Illinois municipalities have the authority to file a notice of lis pendens against the property, to seek collection of all outstanding obligations.

Illinois law contemplates the use of many different types of entities, those organized under the laws of Illinois and those organized under the laws of other jurisdictions, to hold real property. These entities include, but are not limited to, limited liability companies; limited partnerships; corporations; and trusts.

Limited Liability Companies

A limited liability company (LLC) is the entity most commonly used to acquire, own, manage and finance commercial real property in Illinois. Many attorneys prefer the use of an LLC organized under the laws of the State of Delaware in lieu of a LLC formed under Illinois law when the transaction includes parties or other assets outside of Illinois.

Limited Partnerships

Prior to widespread adoption of LLC statutes, the limited partnership (LP) was the entity most commonly used for the ownership of commercial real property in Illinois.


Corporations are rarely used for the acquisition of commercial real property in the State of Illinois primarily due to “double taxation” issues; however, an “S Corp” may be effectively used under certain circumstances as it is subject to “pass-through” taxation similar to a partnership.


Trusts are used most often for estate planning purposes, but can be used for ease of transferability of beneficial interests and privacy of ownership. The Illinois land trust was historically used to help decrease transaction costs.

Limited Liability Companies

LLCs are entities separate and distinct from their members and, with limited exceptions, members’ liability is limited to their respective investments in the LLC. They may be governed directly by the members or by a manager(s) appointed by the members. There may be any number of members and transferability of ownership interests may be permitted or limited in accordance with preference of the members, subject to applicable securities laws. LLCs may elect to be treated as partnerships or corporations for purposes of taxation and distributions of income or capital events may be made to the members as agreed by contract, usually a distribution “waterfall” specified in the operating agreement.

Limited Partnerships

An LP is created by filing a Certificate of Limited Partnership (“Certificate”) with the Illinois Secretary of State. The primary governance document is the partnership agreement.

Next to the LLC, the LP is the most flexible form of entity able to be formed under Illinois law. LPs are entities separate and distinct from their partners and, with limited exceptions, the limited partners’ liability is limited to their respective investments in the LP while the general partner’s liability is unlimited. An LP is governed by its general partners but certain decisions may be reserved to the limited partners. There may be any number of partners and transferability of ownership interests may be permitted or limited in accordance with preference of the partners, subject to applicable securities laws.

Distributions of income or capital events may be made to the members as agreed by contract, usually a distribution “waterfall” specified in the partnership agreement. One negative with an LP is that it requires a general partner with full recourse liability for the debts and obligations of the partnership.


Illinois corporations are created by the filing of Articles of Incorporation (“Articles”) with the Illinois Secretary of State. The primary governance documents are the Articles, bylaws, and shareholder and director resolutions.

The corporation is an entity separate and distinct from its shareholders and, with limited exceptions, shareholders’ liability is limited to their respective investments in the corporation. Corporations are governed by a board of directors that are elected by the shareholders. Shareholders may have differing rights and privileges based upon the class of stock owned, voting or non-voting, preferred or common. Certain matters may be reserved to the vote of the shareholders. Distributions to shareholders are taxed as dividend income to the shareholder.

Some negatives associated with corporations are that there are certain formalities which need to be observed, such as annual shareholder meetings and periodic director meetings, and C Corps are taxed on their income and then the shareholders are taxed on dividends received from the corporation, resulting in so-called “double taxation”. However, S Corporations are pass-through entities and are treated similarly to partnerships for tax purposes.


Common law trusts in Illinois are created by the execution and delivery of a trust agreement by a grantor or settlor and often accepted by the trustee. The trust agreement need not be recorded or filed with any Illinois governmental authority. The trustee manages the assets of the trust in accordance with the terms of the trust agreement. The benefits of a land trust include ease of transferability of the beneficial interests and privacy of ownership.

The beneficial interest in an Illinois land trust is personal property and as such, may eliminate ancillary probate in Illinois for a non-resident individual. It is not generally effective for insulation from liability. Illinois law does not provide for the formation in Illinois of a statutory trust or business trust entity, but recognizes such entities formed in other jurisdictions.

The negative aspects of real property ownership by a trust include lenders and practitioners being less familiar with this form of ownership, periodic review of tax provisions to ensure the original intent and tax benefits are maintained, more complexity in formation, and the fact that it is not a statutory entity. Revocable trusts do not provide meaningful protection against liability.

Limited Liability Companies

The main tax benefit of a LLC is its pass-through taxation, which avoids  “double taxation” with only the members of the LLC paying tax, unless an election to be taxed as a corporation is made by the members.

Limited Partnerships

The tax treatment of an LP is comparable to a LLC. The LP’s main tax benefit is its pass-through taxation, which also avoids “double taxation”, with only the partners of the LP paying tax.


A C corporation is taxed at the entity level and neither income nor losses are directly passed through to shareholders. There are specific tax benefits of corporations that are beyond the scope of this article.


How income earned by a trust is taxed depends on who receives it or whether the grantor or power holder has retained an interest in the trust. Generally, trusts are "pass-through” entities. Trust income retained by the trust is taxed to the trust (but not if it is a charitable remainder trust), while distributed income is taxed to the beneficiary who receives the income.

In general, trusts are taxed like individuals for income tax purposes. General tax principles that apply to individuals also apply to trusts.

Limited Liability Companies

The governance of, and the rights and obligations of an LLC are determined by the provisions of its operating agreement. The LLC may be managed either by one or more of the members themselves or by an appointed manager (which manager may be one or more of the members or a non-member third party). Unless the operating agreement states otherwise, all members have the right to participate in the business' management. An LLC may have an unlimited number of members.

Limited Partnerships

The governance of, and the rights and obligations of an LP are determined by the provisions of its partnership agreement. The normal and customary formalities of corporate governance such as periodic meetings and resolutions are not generally observed. The LP is managed by its general partner or partners who control the business of the partnership, and the limited partners have little or no authority to direct the business of the LP or participate in the day-to-day operations of the LP. The general partners have unlimited personal liability for the debts and obligations of the LP. A limited partner generally does not have personal liability for partnership obligations. To avoid the personal liability of a general partner, an entity such as an LLC or a corporation is often created to serve as the general partner of an LP.


A corporation is governed by its Articles, bylaws and its board of directors. The shareholders of the corporation elect a board of directors, which is responsible for directing the business of the corporation. The board of directors also appoints officers of the corporation to carry out the day-to-day business of the corporation.


A trust is governed by its trust agreement and is managed by a trustee.

Illinois law will allow a person or entity to occupy and use real estate for a limited period of time without buying it outright. The most common arrangements in Illinois are lease agreements, license agreements, and easement agreements.

A lease is an agreement under which one party (“tenant”) is given the right to use all or a portion of real property owned by another (“landlord”) for a specific term in exchange for some form of consideration, like rent. A lease may provide for an exclusive or non-exclusive possessory interest. In Illinois, a lease must be in writing if it is for a term greater than one year.

A license entitles one party (“licensee”) to use all or a portion of the real property of another (“licensor”) for a limited term in exchange for some form of consideration, like a fee. However, unlike a lease, a license does not confer any possessory interest in such real property. A licensee’s use of real property may be exclusive or non-exclusive.

An easement agreement confers upon the holder (“easement holder”) the right to use or enter the real property of another party for a specified purpose, or the right to restrict or prohibit the real property owner from using the real property in a certain manner. An easement conveys an interest in the real property to the easement holder, can be express or implied, and may run with the land.

There are several different types of commercial leases, the most common include the following.

  • Gross Lease – with few exceptions, all of the costs to operate and maintain a leased premises are borne by the landlord. The landlord pays for all taxes, insurance and maintenance costs of the leased premises. The tenant, in return, pays a single gross rent.
  • Triple Net Lease – the tenant’s base rent is “net of” all of the landlord's costs to operate and maintain a leased premises, including taxes, insurance and maintenance, the costs of which are passed down to, and payable by, the tenant as additional rent. However, landlord’s typically remain obligated to bear the cost of major repairs to the leased premises, such as repairs to the roof, foundation, footers, building structure, building systems and exterior walls.
  • Modified Gross Lease – both landlord and tenant pay some specified portion of the costs to operate and maintain a leased premises, including taxes, insurance and/or maintenance. The specific costs paid by tenant and landlord vary.
  • Absolute Net Lease – the tenant is solely responsible for all of the costs to operate and maintain the leased premises, including taxes, insurance and maintenance costs (as well as major repairs to the leased premises). This lease structure is most common in single-tenant properties.

Term under commercial leases are not generally regulated in Illinois. Excepting the common law’s rule against perpetuities, there is no limitation on the duration of a lease term.

Excluding longer term ground leases, lease terms for other forms of commercial leases generally range anywhere from one to twenty-five years. Tenants are usually responsible for the maintenance and repair of the interior, non-structural portions of the their leased premises, whereas landlords are generally responsible for the maintenance and repair of the common areas and major repairs (such as the roof, foundation, footers, building structure, building systems and exterior walls) of the building of which the leased premises is a part. A landlord’s maintenance and repair obligations are often borne by the tenant as an expense pass-through on a pro rata basis. Rent payments are most often due and payable by tenants monthly in advance.

Rent under most commercial leases in Illinois constitutes a base (or gross) rent with periodic increases at specified intervals (eg, annually). Those increases may be at a fixed percentage or dollar amount increase, based on the consumer price index and/or calculated upon some other variable, such as the then fair market rent.

In addition, except under a Gross Lease, a tenant may be obligated to pay additional rent such as its proportionate share of taxes, insurance and maintenance costs for the real property, which will usually vary over the lease term by fixed increases or changes in actual costs. Illinois retail leases often include percentage rent, which most often is a fixed percentage amount of tenant’s gross sales derived at the leased premises over a certain sales threshold or “breakpoint.”

Adjustments in rent may be made by reference to an index, like the consumer price index. However, it is more customary for rent escalations to rely upon a certain percentage or specified increase amount.

No VAT applies to rent derived from commercial leases in Illinois. However, commercial landlords are liable to pay state income tax based upon, eg, gross receipts for the building.

Depending on the creditworthiness of a tenant, the tenant may be required to place a security deposit with landlord, which may reduce over the term of the lease.

Alternatively, a landlord may require a tenant to deliver a guaranty from its parent company or other creditworthy party guaranteeing the tenant’s payment and/or performance obligations under the lease. 

Some commercial leases in Illinois require tenants to deliver to the landlord the first month’s rent upon execution of the lease.

Depending on the circumstances, a landlord may agree to fund a portion of the construction of improvements made to a leased premises in preparing the same for the tenant’s initial occupancy, with any excess costs required to be funded by the tenant.

Payment for maintenance and repair work is negotiable under Illinois commercial leases. Under most Absolute Net Leases, the tenant bears all common area maintenance and repair costs, in addition to maintenance and repair costs for the leased premises. Under most commercial leases in Illinois, landlords are obligated to pay the cost of major repair obligations pertaining to the roof, foundation, footers, building structure, building systems and exterior walls of the building in which the leased premises is located. In multi-tenant properties, landlords are usually responsible for maintaining and repairing common areas, but, except in Gross Leases and sometimes Absolute Net Leases, all, or a portion, of the costs thereof are proportionally paid by tenants, as additional rent.

In multi-tenant buildings in Illinois, landlords usually arrange for some or all services and utilities, and tenants bear the obligation to pay for such services and utilities, by billings that are based on meters that measure usage at the leased premises or as a part of such tenant’s proportionate share of common area maintenance and repair costs.

In many multi-tenant office buildings in Illinois, water (and sometimes electricity) is usually not separately metered and the costs of water (and electricity), as well as services (like janitorial, landscaping and trash), are included in the common area maintenance and repair costs for the building, for which the tenant pays its proportionate share. In multi-tenant retail buildings, water may be separately metered, particularly if a particular tenant is anticipated to use an excessive amount of water (such as a restaurant or salon).

Under most Illinois commercial leases, landlords and tenants are typically required to obtain special form property coverage for the full replacement cost (or full value) of the insured property, and insuring against casualty events (eg, fire, flood, etc). Under most commercial leases in Illinois other than an Absolute Net Lease or a Ground Lease, landlords are, typically, responsible for insuring the building, any common areas, and any improvements to the leased premises performed by the landlord and/or existing as of the date the premises is delivered to the tenant, against damage resulting from a casualty.

However, the costs associated with procuring and maintaining such insurance by the landlord are usually passed through to, and proportionally borne by, the tenant as additional rent, based upon a fraction, the numerator of which is typically the rentable square feet leased of the tenant, and the denominator of which is the total rentable square feet of the applicable building. Tenants are usually responsible, at their cost, for insuring any improvements they install in, and personal property located in, the leased premises. In an Absolute Let Lease or a Ground Lease in Illinois, tenants, at their cost, are usually responsible for procuring and maintaining all insurance covering the real property from casualty damage.

Landlords can impose any number of restrictions on how tenants use their real property under commercial leases in Illinois and leases include a permitted use and prohibited uses. Some commercial leases will also include an exclusive use. 

Most commercial leases in Illinois contain a list of prohibited uses to restrict a tenant from undesirable or illegal uses.

Landlords of retail buildings may grant to a tenant an exclusive use which prohibits or restricts the permitted uses. 

Tenants are generally permitted to alter or improve their leased premises, subject to certain conditions and approvals imposed by a landlord (including, without limitation, performing such work, at the tenant’s sole cost, in a good and workmanlike manner, in compliance with all laws, by a licensed contractor approved by  the landlord, using new high quality materials, the landlord’s approval of plans and specifications and project supervision, etc). In most commercial leases in Illinois, the landlord’s prior approval of alterations and improvements is required.

Real property in Illinois is subject to certain zoning/land use regulations. Residential leases are subject to a number of state and local statutory regimes, including Illinois’ Landlord and Tenant Act, and most other types of leases are not heavily regulated. 

If a tenant’s insolvency results in the filing of a bankruptcy case, the US Bankruptcy Code governs. Commercial leases in Illinois are considered executory contracts. The debtor is given the statutory right to either “assume the lease”, making its obligations under the lease binding on the bankruptcy estate, or reject the lease. If assumed, the lease may be assignable to third parties, notwithstanding any contrary provision in the lease.

Assumption is often favorable to landlords because it assures continuance of the lease, and requires that the debtor cure all pre-petition defaults. If the lease is rejected, the landlord is entitled to an unsecured claim for all unpaid rent that was due as of the date of the filing of the bankruptcy petition. In addition, the landlord will have a claim for future damages resulting from rejection, which claim will also be an unsecured claim for damages resulting from the termination of the lease.

A security deposit and guaranty are the main type of security for commercial leases.

As it pertains to the tenant’s obligation to perform initial improvements to its leased premises, landlords may require tenants to deliver performance (or surety) bonds or deposit funds to cover the costs of such improvements into escrows.

Under Illinois law, the termination of one’s lease and the surrender by a tenant of its premises are two separate events. Any tenant who holds over automatically becomes a tenant at sufferance. A tenant at sufferance may be evicted in accordance with Illinois’ eviction statute or treated as a holdover tenant. If a landlord elects to treat the tenant as a holdover tenant, then, subject to contrary lease terms, the holdover tenancy would be governed by the same terms as the original lease.

To ensure that a tenant vacates its leased premises upon the expiration of the lease term, it is good practice to include a holdover provision in the lease, and in Illinois commercial leases, such provisions usually include rent increases equal to 150% or more of the rent for the last full month of the lease term and subjects the tenant to potential liability for damages caused by such holdover.

Generally, a tenant does not have a right to terminate a commercial lease in absence of language granting such right, other than limited rights to terminate the lease in the event of a casualty or condemnation. 

Generally, landlords have the right to terminate a commercial lease in the event that tenant fails to cure an event of default under the lease provided that Landlord satisfies the requirements under the Illinois Forcible Detainer Act and in the event of a casualty or condemnation. Any failure by a tenant to perform any monetary or non-monetary covenant and obligation under the lease, following any applicable notice and cure period set forth in the lease, can generally result in a right to terminate the Lease and other remedies. 

Under Illinois law, landlords are prohibited from exercising self-help by reentering and taking possession of a leased premises on their own following a tenant default. However, a tenant under a commercial lease can be forced to abandon its leased premises prior to the expiration date of the lease term in the event of a tenant default, so long as Landlord properly files (in compliance with all requirements) for an ejectment, or more commonly, a forcible entry and detainer under the Illinois Forcible Detainer Act. 

Forcible entry and detainer typically can take three to four months (or longer) in Illinois, depending on the jurisdiction.

A landlord’s real property may be encumbered with liens such as mortgages or a Ground Lease. Unless a landlord’s lender or ground lessor is bound to recognize the rights of a tenant under a lease, the lease may be terminated following a default by landlord under the mortgage or ground lease.

Private property in Illinois is subject to takings by condemning authorities for public purposes. Although condemning authorities have the right to take real property subject to a lease, the termination of the lease is effected by the parties to the lease. Unless the fee owner of the property and condemning authority agree on the subject property’s fair market value, a court will determine the property’s fair market value payable by the condemning authority to the Landlord.

There are three primary pricing structures in construction contracts:

  • fixed price (also known as lump, or stipulated sum);
  • cost plus a fee with a guaranteed maximum price; and
  • pure cost plus a fee (or “time and material”) without a guaranteed maximum price. 

There are three traditional methods of allocating design and construction responsibility on a construction project:

  • traditional design-bid-build;
  • design-build (including engineering, procurement and construction contracts, a variant of the design-build contract); and
  • construction management.


In the traditional design-bid-build contract, the owner separately engages the architect (or engineer) to prepare the design. When design is finalized, the project is often competitively bid or proposals are requested from select contractors. The architect is responsible for the design, and the contractor selected is responsible for construction.


The design-build shifts design responsibility to a design-build contractor who is responsible for both design and construction. Owner contracts only with the design-builder who either contracts for the design work with an architect (or engineer), or performs the design work in house.

Construction Management

Finally, construction management alters traditional design-bid-build by shifting the contractor role to a construction manager at-risk role, or bringing in a new party, the construction manager as an advisor to the owner.

Construction risk on a project is generally managed through contract provisions that manage, or shift particular risks to one or another party. Typical devices include: indemnity, insurance, limitations of liability, damage waivers or limitations and warranties.

Contracts almost always have an established fixed date for “substantial completion”, meaning the date the owner may occupy and use the project for its intended purpose. If the contractor fails to meet this date for reasons attributable to the contractor, the owner may be entitled to recover delay damages, or, if the contract so provides, liquidated damages. If the contractor completes before the substantial completion date, the contractor may, if the contract so provides, be entitled to an early completion bonus.

Construction contracts sometimes include collateral devices which shift risks to third parties, but such devices are less common on private projects than other risk mitigation tools. Payment and performance bonds are the most common security mechanism employed, and on public projects they are generally required by law.

An increasingly common alternative to bonds from subcontractors is subcontractor default insurance, through which the general contractor procures a policy insuring the contractor against the defaults of its own subcontractors.

Owners may also protect themselves by employing escrow, or construction disbursing agents, who for a fee will manage the construction draws and disbursements, assure that all lien waivers are in place, and that the job does not generally get out of balance (ie, that construction in place matches the money going out).

Guarantees and letters of credits are sometimes required by owners.

Contractors, subcontractors and design professionals will generally have the protection of state mechanic’s lien laws, provided the statutory requirements are met. Mechanics liens often enjoy priority over loan security interests and in many states, including Illinois, lien rights cannot be waived in advance. In Illinois, and many other states, an owner or contractor can substitute a surety bond for and, thus, remove a filed mechanic’s lien. The lien claimant is then protected under the substitute mechanic’s lien bond.

Occupancy permits in Illinois are typically issued by the local government agency charged with administering the local building codes for compliance. Occupancy permits are required for new construction and major reconstruction and, typically, when a structure is re-purposed to a different use or changes are made which alter egress and ingress (and often merely due to a change in ownership).  Often, a structure may be occupied under a temporary occupancy permit while minor items are completed.

In connection with the sale of the property located in Illinois, there are typically state, county and sometimes municipal transfer taxes that arise.

For real estate that is “inventory” in the hands of the seller (ie, property held for sale to customers in the ordinary course of the taxpayer’s trade or business), the gain arising from the sale is subject to US federal income tax at ordinary rate.

A somewhat different set of rules apply to the sale of real estate that is either held for use in a trade or business or held for investment. The gain on this type of sale, which is generally subject to US federal income taxes, is measured by the total consideration received in respect of the sale less that seller’s adjusted tax basis in the property sold.

If the property was held for investment and held by the seller for more than 12 months, the taxable gain arising from the sale of the property will be subject to tax at capital gain rates.

In the case of a sale of real estate that is held for use in a trade or business, the rate of tax imposed on this gain for non-corporate taxpayers is determined under the somewhat complex rules of Section 1231 of the Internal Revenue Code.

For both state and US federal income tax purposes, the taxable gain arising from a sale of real estate is reported on the seller’s income tax return for the year in which the property is sold. Accordingly, any income tax arising from a sale will be paid in the same manner as the taxpayer’s other income tax liabilities.

Transfer tax applies to real estate and not personal property, so purchasers often seek to allocate as much of the purchase price of a portfolio as practical to the personal property in order to reduce the tax. 

There are generally no municipal taxes on rent payments for office leases or similar occupancy tax. Illinois and certain municipalities do impose a tax on leases of personal property.

The US income tax withholding rules that apply to foreign investors depends largely on the type of entity used by the foreign investor to hold the property. If the foreign investor held the property directly or through a single member LLC that was a “disregarded entity” for US federal income tax purposes, the buyer is required under applicable US federal tax law to deduct and withhold a tax on the total amount realized by the foreign investor on the disposition.

In addition, if the foreign investor held the property directly or through a single member LLC that was a “disregarded entity” for US federal income tax purposes, the foreign investor would generally be subject to US income tax in the same manner as a US citizen and would be required to file an annual US federal income tax.

If the foreign investor held the property through a US LLC, limited partnership or other entity that is treated as a domestic partnership for US income tax purposes, no FIRPTA withholding should generally arise from a sale of the property by the LLC. However, in general terms, the LLC would be required to pay US withholding taxes on the portion of the gain arising from the sale of the property allocable to the foreign investor.

If the foreign investor held the property through a US corporation, no FIRPTA withholding should generally arise from a sale of the property by the LLC. In these circumstances, the US corporation would incur the US income tax arising from the sale. However, if the foreign investor were to sell the stock in the US corporation while the US corporation owned the real estate, there are circumstances in which FIRPTA withholding could be required.

In the case of a foreign investor who holds the property through a US corporation, non-liquidating distributions are subject to US withholding taxes at a flat rate of 30% of the dividend distribution. This rate can be reduced by an applicable US income tax treaty. However, liquidating distributions should be free of this 30% withholding. In addition, there are circumstances in which the liquidating distribution would not be subject to any FIRPTA withholding.

The US federal income tax benefits of owning real estate are numerous, and include, without limitation, depreciation deductions, long term capital gains rates, Section 1231 treatment for certain losses, like-kind exchange treatment, deferral of gains under Opportunity Zone Rules and tax credit transactions.

In the 2017 tax act, the bonus depreciation rules were revised to expand the application of these rules to include property that was not acquired directly for “original use”. Because of this tax law change, the portion of the costs incurred to acquire certain depreciable tangible property can be treated as “bonus depreciation” which allows for a depreciation deduction in the year of acquisition equal to 100% of the acquisition cost. The CARES Act, which was recently enacted as part of the COVID-19 stimulus packages, expanded the types of improvements to real property that are eligible for this bonus depreciation treatment.

The 2017 tax act also placed limits on a real estate business’s ability to deduct interest costs. Deduction of business interest is limited to 30% of EBITDA for tax years before 2022, and 30% of EBIT for tax years beginning on or after January 1, 2022. Real estate businesses can opt out of these limits, at the cost of longer depreciation schedules (and the elimination of bonus depreciation). The CARES Act increased the deduction limit to 50% of EBITDA for tax years 2019 and 2020.

The effect of the bonus depreciation is to create a large deduction in the year of acquisition, which if not fully utilized in the current year, can generally be carried forward to future years. The additional benefit of this accelerated depreciation deduction is that under the CARES Act, if the bonus depreciation creates a net operating loss in 2020, the net operating loss can be carried back to offset an investor’s taxable income in 2018 and 2019.

The effect of the limitations on interest deductions will be to increase taxable income of real estate investments, partially offsetting the increased deductions from bonus depreciation. If a party elects to opt out of the interest limits, it (and its investors) will have to apply longer general depreciation schedules and will not be able to take bonus deprecation.

Investing capital gains in Opportunity Zones provides three significant tax benefits. First, recognition of capital gains properly invested in an Opportunity Zone is deferred until as late as December 31, 2026, with tax payable as late as March 2027. Second, the amount of tax recognized in 2026 can be reduced by as much as 10%. Finally, if an investment in an Opportunity Zone is held for ten years, it can be sold with no additional tax due. This is true whether the business is sold for USD1 million or USD100 million; no tax will be due when the investment is sold. This includes any “recapture” of depreciation previously taken.

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Polsinelli PC is an Am Law 100 firm with 21 offices and over 140 lawyers servicing the real estate industry. The firm's Chicago, Denver and Kansas City offices include some of Polsinelli’s top real estate lawyers who provide practical solutions, as well as experience that cuts across all segments of the real estate industry. The firm has been involved in hospitality, industrial, office, retail, residential, student and senior housing transactions in virtually every state in the country, and has developed teams focusing on emerging sub-markets such as healthcare, alternative energy and data centers. Polsinelli handles all aspects of a real estate transaction from acquisition through development, ownership structure and financing, leasing or disposition. The firm takes pride in being an integral part of clients’ teams and collaborating for their success.

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