What are some of the implications for the owners and renters of commercial buildings? Let's take a look.
|Commercial lease taxes money down the drain
A recurring theme the last few years around Tampa is the desire for corporate headquarters to relocate here, particularly to downtown Tampa. Tampa Bay did not make the short list for Amazon HQ2, but things move on.
Jeff Vinik and his team have been working since 2014 to land a corporate headquarters for his Water Street Tampa development.
TBBJ: After the initial 2014 announcement of your real estate plans, there was a major focus on your efforts to attract a corporate headquarters to the district. There's been significantly less chatter on that front in recent years — what is the status of that initiative?
Vinik: There are many conversations behind the scenes. These things take time, probably more time than I would have imagined in 2014.
We do have a good amount — a major amount — of interest in the district, and we’ll be talking about that in the years ahead, but we’re still in a full-court press for bringing a corporate headquarters here. I personally believe it’s a matter of time, and probably some of those decision makers want to see buildings come out of the ground before they approve that kind of commitment. But as we improve ourselves as a community, it’s going to get noticed.
TBBJ: So it’s taking longer than you expected?
Vinik: Yes, but maybe I just had unrealistic expectations. But when we’re done with this whole thing seven years from now, and we’re done with half of it three or four years from now, it’ll still be one of the fastest, largest urban development jobs that’s ever happened.
TBBJ: You’re going forward without an anchor tenant in place? I know the goal was to get a corporate headquarters as an anchor.
Vinik: We have a good amount of office demand, so buildings will go forward because we have the demand.Demand is there, so the development is there. A couple of recent HQ relocation successes include the Mosaic Company relocating to Tampa, since most of its employees are already in Florida at its phosphate mines.
Bank of America Plaza in downtown Tampa will be the new corporate headquarters of the Mosaic Company, the first Fortune 500 firm to relocate to the Tampa Bay area.
The phosphate mining giant announced in May that it was moving its corporate offices from Minneapolis to Hillsborough County but the exact site had not been known until today.
Banyan Capital, owner of the 42-story tower at 101 Kennedy Boulevard, said Mosaic will rent 20,000 square feet on the 25th floor. The move-in date has not been announced nor has the number of employees who will work out of the space.Unfortunately for Vinik, Mosaic did not choose Water Street Tampa.
Also, Axogen is moving to Heights Union, a new office building near Armature Works.
Coming soon from the developers who brought you the Armature Works: Heights Union, two high-end office buildings next door to the trendy food hall, event space and co-working complex overlooking the Hillsborough River.
Developers said Friday they plan to go in for city permitting on the $102 million project in coming days. The equity and financing are in place. Construction is scheduled to start by the end of the year. Occupants — including a publicly traded regenerative medicine company, AxoGen, which is taking a quarter of the space — are expected to move in the first quarter of 2020.
That schedule would deliver Heights Union ahead of other Class A office projects recently announced at Water Street Tampa and Midtown Tampa, two other ambitious mixed-used projects.Unfortunately for Vinik, Axogen did not choose Water Street Tampa.
Demand is increasing, rents are rising for Class A office space in Tampa.
Rents for Class A office space during the second quarter of this year were up 4.5 percent in the Tampa Bay area compared with the same three months last year, the real estate firm Cushman & Wakefield reported this week.
Asking rents for Class A office space averaged $28.07 per square foot in Pinellas and Hillsborough counties and were as high as $39 per square foot for so-called "trophy" buildings — typically, the tallest, best-appointed downtown office towers.
Meanwhile, Hillsborough County’s overall office vacancy rate has fallen over the past year to 10.9 percent, its lowest level since the end of 2006.
And the county’s Class A vacancy rate is down to 7.8 percent — the lowest rate in more than 20 years.
Cushman & Wakefield analysts project that rents for Class A office space could rise to the $33- to $35-per-square-foot range within the next eight to 12 months, which could strengthen the case for financing new construction.
"One of the interesting things about the Tampa Bay market is the vacancy rates are now at a level that indicates to developers that the market can sustain new speculative construction," said Chris Owen, Cushman & Wakefield’s director of research for Florida.That helps explain the announced office space developments such as Water Street Tampa, Midtown Tampa, Heights Union, and redevelopment around Westshore Plaza Mall.
However, there has been a little change recently that has been underreported until now that may impact these plans. The increase in the commercial lease tax in Hillsborough from 6.7% to 8.2% due to the All For Transportation tax hike.
What are some implications to the office space development market due to this tax increase? Let's start off with some math, based on a corporate HQ relocation needing 100,000 square feet of Class A office space.
At $30 per-square foot per month, a 100,000 of Class A office space runs $3,000,000 per month. A ten year lease is $360,000,000.
At the current tax rate of 6.7%, the monthly tax due is $201,000. At the new rate of 8.2%, the monthly tax is $246,000, or a monthly increase of $45,000. That adds up to $5,400,000 tax increase over a 10 year lease that the lessor has to pay, collected from the tenant.
For most businesses, $5.4 million is real money, even if spread out over 10 years. But it is especially important in the competitive commercial real estate markets.
Corporations seeking to relocate headquarters will be searching several locations regionally if not nationally. They will have many evaluation criteria, but one certainly is overall cost to the business. If all criteria being equivalent between say, Tampa and Orlando, but Tampa is $5.4 million more expensive over 10 years, which one will win the new HQ?
But then what happens after a couple of "Lost Another Headquarters" headlines?
How long will it be before the development community will start lobbying the Hillsborough BOCC for tax breaks to compensate for the lack of competitiveness due to the tax hike? Billion dollar subsidies turned out to be a big component of Amazon HQ2 decision to settle in high tax locations. Recall locally the millions in subsidies for Bass Pro Shops... and Jeff Vinik's Water Street Tampa.
Or, will developers re-evaluate their plans for this speculative developments? They develop economic models to recapture their capital investments based upon the rents they forecast. Now they have to consider the negative impact of an additional 1.5% of costs they may not be able to recover from their tenants. This means the payback for the capital will take longer, and be more costly. Most of these developers are leveraged, so time is literally money. This will likely reduce development, and hinder Hillsborough's ability to attract corporate headquarters and other major company operations.
The Tampa Bay Partnership donated $250,000 for the All For Transportation tax hike, recently released its 2nd annual Regional Competitiveness report. Yet somehow it overlooked the negative competitive impact of the tax hike.
Ironically, Jeff Vinik, who funded the All For Transportation tax hike for nearly a million dollars, still has not reported any tenant for his Water Street Tampa office space.
He's not making it any easier for himself.