The City of Edmonton released its draft operating budget today, and to no one’s surprise, they are setting the stage for yet another large increase in property taxes. While it’s just a draft at this stage, it’s worth noting that the proposed increases does not even take into account other projects such as the Lewis Farms rec centre or the Terwillegar Drive upgrade, both of which would be funded with debt, interest payments and even higher tax increases.
If you’ve read any of our previous articles on property taxes, you’ll know we feel city spending is an important topic.
To provide a bit of context, we’ll first give a refresher on how the commercial real estate leasing process works. Unlike the residential market, where tenants typically pay a single rental amount (ignoring whether or not the cost of utilities is included), commercial tenants pay two distinct amounts to the landlord. One amount goes directly to the landlord in the form of rent, and the second is collected by the landlord to be applied specifically towards the operating costs of the building. The operating costs (sometimes referred to as additional rent) includes building insurance, management fees, common area maintenance, and property taxes. This arrangement, which encompasses virtually every commercial lease, is often called a triple net lease, or simply a net lease.
If you’ve shopped for commercial real estate in the past, you would have seen a property quoted along the lines of the following:
In this example, the tenant would pay $15.00 / sq ft (which is quoted per annum) as rent, and an additional $3.50 / sq ft towards the costs that are required to operate the building.
[The total rent would be $18,500 / month, calculated as following: $15,000 (12,000 sq ft * $15.00 / sq ft / 12 months) + $3,500 (12,000 sq ft * $3.50 / sq ft / 12 months)].
The important takeaway here is that commercial property taxes are paid by the tenants.
With the realization that taxes are paid for by the tenants, it becomes painfully obvious that increases in taxes also flow through to the tenants. So when the City of Edmonton increases spending by over 100% in the past decade, that burden falls largely. on the shoulders of the businesses in town.
Consider Antrim Industries in south Edmonton. In 2000, their property taxes were $20,000 / year. Fast forward to 2018, and that bill is now $78,000 / year. No major changes to the building, but a nearly 400% increase in taxes.
To dive even deeper into the subject, let’s take a look at how property taxes in Edmonton compare to other cities in Western Canada:
This graph show how much a commercial property owner pays in tax for every $1,000 in assessed value. Out of the major cities in Western Canada, Edmonton has the highest commercial tax rate. This is clearly problematic for a few reasons. One, Edmonton is still recovering from the worst provincial recession in decades. While many businesses have had to make sacrifices in recent years, the City of Edmonton has been spending at a pace double what the combined rate of inflation and population growth. Second, it makes Edmonton less competitive compared to other major cities, and even to the surrounding municipalities.
To quote Mike Nickel, it has created the Edmonton Disadvantage.
There is a window to fix this issue, but it does take a bit of elbow grease. 2 – 3 minutes of elbow grease, to be more precise. City Council will be debating the operating budget over the coming weeks, so we need to convey to city councillors how big of a concern this issue is.
Prosperity Edmonton has a website that allows you to search who your councillor is, then populate a form letter and the councillor’s email address. It’s more impactful if you could write a quick personal note about how important this is, but even sending the form letter will help.
Click here to go to the website.
Please take the time for this. It is critical for the future prosperity of our entire city.
Altus Group, Prosperity Edmonton
Operating costs are often quoted as an estimate for the upcoming year (ie/ $3.50 / sq ft [2018 estimate]). A landlord sets a budget at the beginning of the year and collect the amount they believe will cover all the expenses. If they collect more than the actual amount, there should be a refund to the tenant. If they do not collect enough, they invoice for the difference.
Chad GriffithsPartner, SIOR, CCIM
Chad is a partner with NAI Commercial Real Estate and focuses on the Greater Edmonton area. Chad entered the industry in 2004 and has completed over 400 commercial transactions with clients ranging from small, local companies to large institutional owners. Chad has been a top 15 producer with NAI Canada-wide since 2013.
Ryan BrownPartner, BCom, SIOR
Ryan is a partner with NAI Commercial Real Estate in Edmonton and is currently ranked nationally as one of NAI's top advisors. Having executed in excess of $100 Million worth of sales transactions and over 2 Million square feet of lease transactions, Ryan has developed a firm understanding of asset evaluation and an aptitude for building design, functionality, and long-term practicality.
Darcie is a licensed Commercial Real Estate Agent in the Province of Alberta with a focus on the Edmonton market and its surrounding areas. Darcie accomplishes custom solutions for her clients through her personable nature and results driven attitude. Darcie can help if you are looking to invest in commercial real estate or are looking for representation for a sale or lease transactions.
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