" I like a 3 or 4 star hotel (no more two star hotels)... It seems like Berlin has a lot of the big chains...but with all due respect, I can get those here in Chicago. "
There's your dilemma. Due to historical factors, Berlin has far fewer of the kind of "boutique" hotels that you seem to want. Communism didn't permit the sort of private ownership that would have allowed those types of hotels to flourish, and after the wall came down, the big boys were the ones that rushed in to fill the void. Likewise, West Berlin was too isolated to thrive as a middle class holiday destination, so the types of lodging that developed there reflected the needs of the visitors- business class for government and industry types, cheap hostels for the counter-culture. Actually, in my research, I haven't really found any luxury options that aren't chains, with the notable exception of the historically important but incredibly expensive Hotel Adlon.
Berlin is really more a city of districts, and these districts aren't tightly joined to any one historical core (like you find in many other prominent European cities). Mitte is not necessarily the best area for evening strolls, if that's what you're looking for. Yes, it contains Unter den Linden and Museum Island, but these two areas are kind of dead at night. Alexanderplatz is more lively, but if you have an aversion to chains... well, that's mostly what you'll find. I've stayed at the Maritim Hotel right by the Friedrichstraße Bahnhof. A very elegant hotel, but because this is mostly a government and business district, there's not a whole lot of restaurants in the neighborhood that stay open at night.
The area around Kurfürstendamm and the zoo might offer more of what you're looking for.
If you're willing to swallow the chain experience, I can recommend the Steinberger hotels (hey, it's a German chain... does that count as "local"?). I've only had good experiences with this company. I think they have two hotels in Berlin. I stayed at the one right by the Hauptbahnhof. Nice hotel, but not a very good area for strolling.