Denver proposes to raise taxes 20 times Boulders, real estate crash?

Denver City Council members are pushing a new tax on commercial real estate owners that is 20 times the rate set by Boulder County.  The new tax is called a “pollution tax”  targeting commercial property owners and their property usage.  What is the new pollution tax and what does this mean for property owners?  How will this impact property values?  One specific property group will feel the effects more than others

What is the “Pollution tax”?

The city council proposes taxing business electric users more than other users.  The tax would be 0.6 cents per kilowatt hour of electricity and 7 cents per therm of natural gas. The extra taxes theoretically would discourage energy usage, reducing the emission of greenhouse gases that warm the climate. Businesses would pay more for their energy, and the city would use the money to help residents and businesses cut their use of the energy grid.  The increased rates would be especially impactful on larger users.  According to a Denver Post study the average industrial user would see their bills jump by almost $3,200 per year. Boulder implemented a similar plan years ago, but Denver’s tax is about 20 times higher than Boulders commercial energy tax.

How does this impact property values in Denver?

Commercial real estate, like all businesses, is a zero-sum game.  Money does not go on trees and someone must eat the increase.  This tax will be paid by the tenants of the commercial property.  The tenants cost of business will increase due to this tax.  When leases come up for renewal tenants will use this new tax to negotiate lower rents.  With the slew of new taxes in Denver it is becoming considerably more expensive to do business in the city.  At some point many business users will look elsewhere.  For example, if you look at many of the recent large relocations (like Amazon going North of Denver for their distribution) they are focusing on locations outside of metro Denver.

The decrease in demand and increase in operating costs will translate into lower rents.  Lower rents will in turn translate into lower property values. Fortunately for now, the loss in property values on most properties will be nominal, but larger industrial properties will start to feel the heat.

Why will Cannabis properties be affected more?

When the Cannabis gold rush was beginning in Colorado.  Many growers migrated to Denver county for older class C/D industrial buildings.  They retrofitted these buildings with considerable power for lighting and HVAC (the lights produce considerable heat that must be cooled). With their high energy use, it will be next to impossible for most indoor grows to operate profitably as prices have also plummeted.  There will be a wave of failures in the indoor grows and the space that will become vacant will be difficult to lease and when released will be for considerably less than the Cannabis operators paid.  Property values of the class C/D buildings will plummet as a result of the pollution tax.

Summary?

It is getting expensive to do business in Denver.  Many businesses are unable to afford more taxes and continue to operate profitably.  The pollution tax will be yet another hit to businesses bottom line.   The increased taxes are already being seen impacting the market with many new businesses choosing to locate outside of Denver county.  Tenants and property owners will ultimately bear the cost of the new tax initiatives with values declining and tenants relocating to lower cost options.  Fortunately, there hasn’t been a mass exodus of businesses yet, but at some point, Denver will reach a tipping point with serious consequences for business and property owners.

Additional Reading:

https://www.denverpost.com/2019/08/08/denver-pollution-tax-climate-change/

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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