Bill proposes tax breaks for Class A office space outside King County

A bill that would create tax breaks to build Class A office space in Tacoma and other cities outside King County is being pushed by Tacoma’s economic development team and the City Council, who say creating more high-quality office space in the downtown core would help bring good-paying jobs to Tacoma.

Class A office space — high-quality commercial space with at least 50,000 square feet, three stories, professionally managed and centrally located in a city with close access to public transportation — is scarcely developed outside of Seattle and King County, proponents of House Bill 1495 say.

The last Class A office space added to Tacoma’s inventory without the city’s help was the Umpqua Bank Building downtown, built in 2004.

“The fact is, the cost of construction far exceeds the ability for the developer to get a reasonable return on investment,” Elly Walkowiak, a business development manager with the city, told the council economic development committee last week.

The bill, sponsored by Rep. Jake Fey, would create a local property tax exemption and local sales and use tax exemption for developers who build such office space in Tacoma and other cities. Cities of 50,000 or more people in counties of 1.5 million or fewer people would be eligible for the tax breaks — essentially excluding Seattle and King County. Fey said the city approached him about the bill.

Councilman Ryan Mello said the legislation has benefits beyond economic development.

“We also talk about this as a transportation bill, because we can’t keep sending 40 percent of our workers to downtown Seattle and clogging the freeway,” he said during an economic development committee meeting. “We’ve got to keep people closer to home.”

The property tax break, which would last 10 years, is modeled after the state’s multifamily tax exemption program. The city’s economic development team has credited that incentive with encouraging developers to build thousands of new units of market rate housing in Tacoma, with hundreds more coming online in the next year or so. It also has helped motivate developers to build affordable housing in different parts of Tacoma, since they get a longer property tax break for doing so.

Under the Class A office space tax break, the jobs created would have to pay at least $18 an hour, and the tax breaks could be used on new construction or renovations.

Some in the development community don’t think the incentive will be enough to overcome a lack of demand. Tacoma’s rents are still too low to justify building when construction costs here match Seattle’s, said Tacoma developer Michael Hickey, principal of Neil Walter Co.

“Current rents in the market, when capitalized, they don’t equate to what it costs to build a new building today, so rents in the market must go up — either you’re going to have to bring the cost of building a building down or increase rents or both in order to make it a financially sound investment,” Hickey said. “Will it help close the gap? It helps close the gap. Will it close the gap? No.”

John Bauder, vice president of brokerage office services with CBRE Inc., said the vacancy rate for Class A office space in Tacoma is just under 5 percent. That’s a good sign, but doesn’t necessarily mean that the market can support more office space yet. But a tax break can only help.

“It’s a sign that the city is pro-development and wants to work to do what they can to encourage that development,” he said.

This story was originally published February 7, 2017 at 7:12 PM with the headline "Bill proposes tax breaks for Class A office space outside King County."