It has been a banner year thus far for the St. Louis industrial market with yet another milestone achieved. Mid-year absorption totaled 2.5 million square feet of space, a number more closely suited for the entire year versus the halfway point.
Fueled by continued absorption, the market has more than 5 million square feet of space under construction with vacancy of approximately 4.9 percent. The continued success is no surprise. But economic incentives, often overlooked and underappreciated, are the unsung heroes behind each industrial development around town.
Vince Bajardi, Sansone Group
Gaining knowledge
Economic incentives have been a prerequisite in attracting or retaining businesses like Amazon, World Wide Technologies and Best Buy. But they do not just benefit large corporations; local and regional users are able to enjoy new Class A real estate in these developments as well. Why? Incentives help bridge the gap for the developer and the user to account for being in a low-rent, high-construction cost market, which is not a great recipe for new development.
Yes, St. Louis boasts some of the lowest asking rents in the Midwest, currently averaging $4.70 per square foot for available industrial space. One would think that businesses would flock here because of the low rents. But it’s the occupancy cost that drives the deal in today’s market.
Simply stated, occupancy costs are the total costs a user will pay to occupy a space, including the base rent, operating expenses (real estate taxes, common area maintenance and insurance), and utilities. The combined total of these costs is the only way to arrive at a number that can be used to evaluate spaces equally.
For site selectors, understanding the dynamics of how occupancy works is crucial. Outside of base rent, the second-largest real estate expense for users in St. Louis is the cost of real estate taxes. The cost of taxes can vary anywhere from 50 cents per square foot in St. Louis City to $2 per square foot or more in St. Louis County. The variance comes in the way of building age, condition, office percentage and varying tax rates for each municipality. With 90 municipalities in St. Louis County alone, the difference in location can have a lasting impact on occupancy cost.
Local developer examples
Without a doubt, economic incentives in the form of real estate tax abatement are helpful tools in attracting new businesses and assisting developers in bridging gaps. Local developers including NorthPoint Development, Panattoni Development, Clayco and Duke Realty have had incredible success working at the local level to achieve abated or reduced property taxes.
For instance, with its Hazelwood Logistics Center, NorthPoint was able to offer 100 percent tax abatement for leases of 10 years and an additional eight years at 50 percent. If taxes were assessed at $1.50 per square foot, then the result for a 200,000-square-foot user would save approximately $300,000 annually or $3 million over a 10-year lease (note taxes are abated on real property only). The abatement allows the developer to charge a higher base rent amount to close the gap on returns required on the construction cost while reducing operating costs for the tenant.
NorthPoint filled approximately 2 million square feet of space in just over two years at Hazelwood. This was unprecedented in St. Louis and a win-win for the user, the developer and the region.
Programs that incentivize
What follows is a look at just a few of the programs being successfully utilized in St. Louis and how they work.
Missouri Chapter 100 industrial revenue bonds allow local governments to offer personal property and/or real property tax abatement to eligible companies looking to expand in or relocate to Missouri. The amount of the abatement and the length of the term are subject to local review and vary by community.
Under Chapter 100, construction materials and certain tangible personal property may be purchased sales tax-exempt by the city or county and then leased back to the company. While the lease of personal property is still subject to sales tax, the state of Missouri has the ability to exempt that sales tax through its program. The lease of real property is not subject to sales tax.
Tax-increment financing is a development tool designed to help finance certain eligible improvements to property in designated redevelopment areas (called TIF Districts) by utilizing the new, or incremental, tax revenues generated by the project after completion. Under TIF, property taxes within the TIF District are frozen for up to 23 years. The property owners then make Payments in Lieu of Taxes (PILOTS) to a special allocation fund.
Additionally, 50 percent of any new local Economic Activity Taxes (EATS), such as local sales taxes and earnings and payroll taxes, are also paid into the special allocation fund. The proceeds of the special allocation fund are then used to reimburse the developer for eligible project costs or to retire indebtedness incurred to cover those costs.
Another program allows the city and state to offer tax incentives to businesses that invest in certain geographical areas of the city, called the Enhanced Enterprise Zone. The minimum threshold to receive both city and state incentives is a capital investment of at least $100,000 and the creation of at least two new jobs.
The city offers 10-year real estate tax abatement to businesses that meet those requirements. The state offers a myriad of benefits, including job credits, investment tax credits, 50 percent corporate income tax exemption and a personal property tax incentive to qualifying businesses.
Numerous other economic incentives are offered at the state, regional and zonal level. Site selectors and business owners should consult a local economic incentives professional for full-service evaluation of how to maximize the offerings. Third-party consultants often work on contingency, taking only a portion of the incentives earned as the incentive is collected.
Often, incentives come with a “clawback” provision, which requires compliance with job creation and investment promised by the user. An added benefit of utilizing a third-party consultant is that the consultant stays in the process to administer the program after the benefit is received. For a full list of incentives that may be available for your business, visit https://ded.mo.gov.
— By Vince Bajardi, Executive Director of Industrial Services, Sansone Group. This article originally appeared in the September 2018 issue of Heartland Real Estate Business magazine.