August 04, 2015

Tax Increase Would Leave Heavy Impact

By:  Andy Ashby
Memphis Business Journal
Last week, Memphis Mayor A C Wharton proposed a one-time, 47-cent property tax rate increase for completing the city’s obligation to Memphis City Schools funding.
While the city council is expected to whittle this down or find cuts elsewhere, it highlights the city’s high property tax rate, an issue that many commercial real estate professionals see as a long-term economic development impediment.
Currently, the Memphis city property tax rate is $3.19 per $100 of assessed value, well above what other cities in Shelby County and peer cities pay.
While a 47-cent tax increase would mean a few hundred dollars for most homeowners, it would have a larger impact for owners of office towers, warehouses and shopping centers across the city. There could still be some property tax bump, however, if the council can’t find the money elsewhere.
“This tax increase was dead on arrival when it was presented, but I wouldn’t be surprised if there was some increase,” Kemp Conrad, city councilman and principal in Cushman & Wakefield Commercial Advisors LLC, says. “I’d say a tax increase on the magnitude of 47 cents could have a chilling impact on economic development.”
The issue probably won’t be decided until summer and the gap could be addressed through budget cuts or other means.
It probably won’t follow what happened in 2008, when the council reduced the city’s property tax rate by 18 cents when it cut MCS funding.
At a recent industrial real estate conference, Conrad heard a lot of praise for the Bluff City’s recent successes, which are often accompanied by payment-in-lieu-of-taxes benefits. Even with these tax abatements, many companies are picking DeSoto County and Marshall County across the state line in Mississippi due to lower property taxes, available land and an easy-to-acquire benefits package.
“There’s a limit on how high you can raise your costs and still be competitive,” Conrad says. ”One reason we have to resort to these PILOTs that everyone complains about is to equalize our tax rate with neighboring states that we compete with for scarce jobs and capital. If we had a more efficient tax structure, we wouldn’t have to abate so many taxes.”
While Memphis property owners pay a higher tax rate than many peer cities, commercial property owners bear most of the burden.
“Commercial and industrial real estate is assessed at a higher rate than residential real estate for the purpose of calculating property taxes owed to local taxing jurisdictions,” Roland McElrath, director of the city’s finance division, says.
For tax purposes, commercial and industrial properties are assessed at a rate of 40 percent of fair market value; residential properties are assessed at 25 percent, according to McElrath.
“Based on the Shelby County Assessor’s 2012 certified property tax rolls for the city of Memphis, commercial and industrial properties comprise 55 percent of the total assessed value of taxable property located in Memphis,” he says.
That translates into $6.4 billion of the total $11.7 billion of assessed property value in Memphis.
Mark Halperin, executive vice president with Boyle Investment Co., says if a 47-cent tax increase passed, it would cost the Memphis-based company hundreds of thousands of dollars.
Halperin, who is also a member of the new Economic Development Growth Engine board, heads Boyle’s office division, so he often works with company leaders looking for office space.
“It doesn’t handcuff you on a deal which is internal to Memphis,” Halperin says. “We don’t have a bigger tax hill to climb than Highwoods, In-Rel or Hertz. We’re all dealing with the same things. But we might lose an opportunity to Little Rock, Nashville, Atlanta or Dallas.”
Memphis’ city property taxes are double those of Nashville and the cost is ultimately passed on to tenants and to the landlord’s return on investment.
“I’m not saying that it is the single determining factor, but it is a factor,” Halperin says. “To a comparable building in Nashville, we may have a $250,000 difference in real estate taxes.”
High property taxes on commercial properties doesn’t just affect large local companies like Boyle and Belz Enterprises Inc. It hurts owners of smaller properties and inhibits outside investment to boot, according to James Rasberry, principal broker with Rasberry CRE.
“The real problem is we have very low rental rates in the city,” he says.
Typically, properties in highly taxed cities can offset the cost with higher rents. While that may work in New York City, it doesn’t in the Bluff City.
High property taxes are “stealing equity” from commercial buildings over the long term, according to Rasberry.
If a property is paying $1,000 more a year compared to a peer city, that can add up quickly over the long-term life of a commercial building. Since investors value buildings on their income stream, it’s a long-term cost that diminishes their return on investment. This can have a dramatic effect over time.
“You’re stealing equity out of the building stock in the city and driving investment out of the city,” Rasberry says.
A 47-cent tax increase would cost Rasberry $10,000 to $15,000 a year.
“I don’t think I can pass that on,” Rasberry says.
Rasberry does business in Chattanooga and Nashville and often sees Memphis investors in those markets.
“There is money moving across the state,” he says. “When it leaves Memphis, it’s not coming back easily.”