Taxing Industry Resources

April 7, 2020 • By Liz Wolf

As Ben Franklin once said, the only two certainties in life are death and taxes. While property professionals are more than accustomed to paying commercial property taxes, there’s a national trend of increased taxation on the commercial real estate industry as state and local governments try to make up budget shortfalls and seek additional funding for programs and services.

“It used to be that you just worried about property taxes,” says Joe Markling, RPA, CPM, CRCMP, managing director and head of Real Estate Operations at USAA Real Estate in San Antonio. “It isn’t just property taxes anymore. That’s like the smallest issue to deal with. It’s the rest of these taxes that can catch you off guard really fast.”

Markling explains that jurisdictions are finding themselves unable to raise property taxes, because, in most jurisdictions, they need the vote of people to do that, so they’ve found other taxes.

“In a lot of major cities—like Los Angeles, Seattle, San Francisco and much of the East Coast—especially in the urban areas, governments are placing special, ‘almost’ sales taxes on specific issues,” Markling says.

Parking taxes are one example that many large metros are seeing. The city of Los Angeles, for example, enacted a 10 percent parking occupancy tax on all pay-parking facilities in the city.

“If you own a parking garage or charge for parking, there’s an automated 10 percent add,” Markling notes. “If you have a parking contract with a tenant in the lease at $200 a month, and the city now makes it $220, do you have to eat the $20 or can you pass it on to the tenant?” he asks. “It’s nebulous. Some of those leases are 10-years-old or more, and you have to go back and figure out how these apply.”

The city of Seattle also has started taxing parking, according to Coleen Spratt, BOMA Fellow, owner and CEO of Spratt Asset Advisory Services LLC in Edmonds, Washington. She says this is limiting people’s options for their commute. “If you make parking extremely expensive downtown, you force people to either find alternate means of transportation—like public transit—or you force them to avoid the downtown area altogether,” Spratt notes

“It’s an issue that we always have our eyes on and we’re always lobbying against because it really does impact us from a commercial real estate standpoint,” she explains. That’s not only from a revenue point of view, but also the effect on tenants.

“We want our tenants to have the best options,” she points out. “We want them to be able to afford to park in the buildings or take transit. When the city is driving up the cost of parking due to taxes, it impacts the overhead for our tenants.”

Such imposed taxes also can affect where companies choose to locate. For example, Bellevue, a small city across Lake Washington from Seattle, doesn’t have these same parking taxes.

“So, ultimately, people are making business decisions on whether to locate their offices to Seattle or Bellevue or other surrounding cities,” Spratt says.

If such taxes are applied municipality by municipality, it can put building owners on an uneven playing field, notes Sheldon Oppermann, BOMA Fellow, CPM, JD, RPA, executive vice president and general counsel at Compass Properties LLC in Milwaukee.

“A sales tax on parking, for example, would tax parking areas where users pay a fee, while not taxing parking areas that are provided for free as an incentive for shoppers,” says Oppermann. “This puts a greater burden on some industries.”

Rent Tax

Ultimately, states have to get revenue somewhere, says Oppermann, and that usually means a tax. If something isn’t explicitly a property tax, building owners and managers may not consider how a new tax affects them, but many taxes have the same impact that a property tax increase does. For example, Florida, Texas, New York, Arizona and Ohio have enacted some form of tax on rent.

“In Florida, it’s basically a sales tax effectively on the rent that landlords collect,” Oppermann explains.

Markling sees the rent tax becoming more popular, but, increasingly, a point of contention. Cities are saying, “We’re going to tax commercial rents—not residential rents—because the big bad businesses and the millionaires can afford it,” according to Markling.

However, when you do a “split roll” like that, he says it negatively impacts businesses.

“If the rent goes up 10 percent for a company that employs 30 people, automatically because of this tax, that’s less income they have to pay people to run their business,” he explains.

“It trickles down to the tenant,” Markling says. “They can’t hire more people or they have to lay somebody off.”

A service tax is another tariff that’s quickly gaining traction. Some states now require the payment of sales tax for services like landscaping and lawn care, another burden on building owners. The entire bill is sales-taxed—not just materials, but also labor.

“It’s an automated increase when you’re hiring a contractor to fix the sink,” Markling says. “All of a sudden, it’s a 7 percent increase on the labor charge. It sneaks up on you.”

Carbon taxes also are gaining momentum as part of a push for more sustainability. Some states have legislation to cut carbon emissions, which will cost property owners millions of dollars. Some states’ goals are to become carbon neutral by 2030.

Markling adds that many building owners are requesting tax credits to incentivize them to meet these standards.

The biggest example of this type of legislation is the proposed carbon tax in New York state. “Policymakers are saying, ‘We will be carbon neutral by a certain date, and if your building uses more than the amount of electricity we think it should use, we’re going to tax you as a penalty tax.’” However, property managers generally have little control over how much electricity their tenants use, causing a logistical headache.

Markling says many cities and states are imposing these types of taxes that voters didn’t necessarily vote on, and it’s raising the cost of doing business everywhere.

Impact on Operations

There are so many different taxes moving across different cities and states and some overlap. When they do come into play, property professionals almost feel like they need to be tax lawyers.

“You have to be an expert in a lot of areas,” Markling points out. “City and state governments are very creative in finding little nooks and crannies to put these taxes in, which puts a huge burden on the commercial property manager to keep track of.

“I cannot be an expert in every one of the 400 places I have buildings, so the burden of compliance is on the manager,” Markling continues. “Companies have to continuously train their property managers. It’s really tough right now.”

Spratt agrees: “As real estate managers, we have to be very involved at the local, county and state level as new taxes are coming out on a regular basis. We look to BOMA to keep us educated on what is happening in the industry and on how new taxes will impact our owners and tenants.”

One way this impacts commercial real estate is that these taxes are passed on to tenants through operating expenses, which then increases their rental rates.

From a hiring standpoint, Spratt says many companies are hiring community experts who are responsible for watching everything that’s going on at all levels of government and are tasked with lobbying for real estate efforts. “One of my clients currently has a consultant that he meets with on a regular basis to keep him informed of tax and other issues that arise at the state, county and city level,” Spratt reveals.

“Overall, this does put increased pressure on property managers,” she explains. “We’re now not only managing our properties, but we have to be tax experts.”

This kind of pressure adds costs beyond that of the tax itself, as property professionals spend time and resources parsing their tax responsibilities. Municipalities may find there is a tipping point at which these additional costs are simply no longer sustainable.

About the Author: Liz Wolf is a Twin Cities-based freelance writer with 30-plus years of business and commercial real estate reporting experience. She previously served as editor of the Minnesota Real Estate Journal.