The 15-year real estate tax abatement for the Superblock in West Baltimore raises important policy issues that need to be addressed. Specifically, should the city — and in certain cases, the state — grant economic incentives for real estate developments that 1) create competitive disadvantages for existing property owners and 2) reduce the city's property tax revenues from large-scale commercial developments?
From my private-sector perspective, the answer to the question is simple: Granting tax abatements that disadvantage existing taxpaying properties is wrong and will lead to an overall loss of tax revenues for the city. It is bad public policy that penalizes existing property owners, lowers the city's overall assessable tax base, and reduces badly needed tax revenues generated by commercial and multi-family (as opposed to residential) property owners.
If the owner of an apartment building must compete with Superblock apartments paying no real estate taxes, he will have to lower his rents to attract and retain tenants, which will lower his net operating income — which in turn will lower the assessable value of his apartments. As a result of this chain reaction, the city will get less tax revenue from him and no property tax revenue from his Superblock competitor. This dynamic also exists in the office market and is relevant for discussion in light of Exelon's proposed headquarters building on Harbor Point. However, it should be clearly noted that this issue is not exclusive to Exelon, as demonstrated by the following example.
Franklin Street Properties purchased 120 E. Baltimore St. (the Sun Trust Building) in the summer of 2007 for $192 per square foot. When it purchased the building, it was more than 90 percent leased. Due to the loss of several tenants, the building is now 43 percent vacant, and its value (depending on whom you ask) is more like $132 per square foot. That loss in value of about $60 per square foot translates into a potential loss of taxes of $1.43 per square foot. Since the building is 325,978 rentable square feet, the city stands to lose as much as $450,000 in real estate taxes. However, there is a silver lining to this particular cloud.
The tenants leaving 120 E. Baltimore Street moved to existing properties downtown that already pay real estate taxes. The increased value generated in those properties will result in an increase in their property taxes. In short, the city should recapture the real estate taxes previously lost due to the lower assessment at 120 E. Baltimore.
But what if those tenants moved to a building that did not pay real estate taxes? The answer is painfully simple. Not only would the city lose tax revenue from the location experiencing the vacancy and lost rental income, but there would be no new (or substantially less) taxes paid by the building to which they moved, thereby magnifying the loss. And that brings us to Exelon and why the current law and process for granting tax abatements represents dangerous policy.
Exelon will be moving out of 150,000 square feet of space it currently leases at 750 E. Pratt and an additional 290,000 square feet leased at 111 Market Place. Based on 1) the tax burden per square foot in those two buildings, 2) the amount of total leasable square footage, and 3) the square footage currently leased by Exelon, more than $980,000 of Exelon's current rent payments covers real estate taxes. Unless the vacated square footage is immediately re-leased when Exelon moves out — an unlikely prospect — the real estate taxes paid by those buildings would be reduced to reflect the loss in rental income and a reassessed value (downward) created by the Exelon vacancy.
Since Exelon's new headquarters pays only 20 percent of property taxes for five years due to enterprise zone tax abatements, the city could lose nearly $2 million to $3 million per year in real estate taxes from the three buildings involved (two existing, one new) until the abatement expires (in 10 years) and the space vacated is re-leased, most likely in three to five years. Granted, in 10 years taxes would no longer be abated for Exelon's Harbor Point headquarters, and the space vacated at 750 E. Pratt and 111 Market Place will have been re-leased. But the arithmetic shows that the current policy can create a multimillion-dollar loss in property tax revenues, from Harbor Point to the Superblock.
Granting tax abatements like those for the Superblock and Harbor Point can create unfair competition subsidized by the taxpayer and unnecessarily reduce the assessable tax base. It is bad public policy. At a time when Mayor Stephanie Rawlings-Blake wants to reduce real estate taxes in the city to attract and retain residents, it makes no sense to give these kinds of tax breaks for large-scale commercial developments.
Robert A. Manekin is managing director and principal in the Baltimore office of Colliers International, a global real estate services firm. His email is firstname.lastname@example.org.Copyright © 2015, The Baltimore Sun