Lower taxes for businesses could create new demand for commercial space in the state.
Florida is the only state in the country that levies a tax on commercial leases. This commercial rate applies to rental amounts, property taxes, maintenance fees, and other expenses associated with leasing these properties. Basically, if you’re leasing a commercial property in Florida, the government wants its cut from renters. And these taxes can make it more challenging for investors to price properties and find suitable tenants.
There’s relief on the horizon, though, as the current commercial rental tax of 5.5% is decreasing to 2%, a move that could see Florida-based businesses save about $1 billion per year overall. The state has a mechanism in place to recover this revenue, too, as out-of-state online retailers will now have to collect sales tax on all purchases made by Florida residents.
Here’s what you should know about Bill 50 and what this CRE tax reduction could mean for local businesses and the commercial real estate industry.
The benefits for businesses
It goes without saying that lower taxes will reduce costs for many businesses in the region. Commercial rent is an expensive portion of overhead, and a tax reduction of 3.5 points offers significant savings for companies. If a business is struggling with thin margins, the lower tax rate can offer a lifeline. It could allow more organizations to stay open and save jobs, and ensure these companies continue contributing to the economy. Paying less tax can open up growth opportunities, too. The bottom line is that healthy companies with more affordable access to commercial space in Florida are good for the economy, and this new bill could influence those factors.
The more money Florida-based businesses have on hand, the more they can drive economic growth. And when you’re talking about $1 billion annually, it’s easy to see how this tax reduction could benefit the state.
Bill 50 and CRE
From a commercial real estate perspective, Bill 50 is good news for a couple of reasons. First, this tax reduction makes it a bit easier for tenants to afford their existing commercial properties. We could see fewer companies eliminating or downsizing space, lowering turnover, repurposing, and vacancies for investors.
There could also be an opportunity for some property owners to charge more for commercial real estate leases. However, businesses will be wary of sudden rent increases after Bill 50 comes into effect.
It’s also a positive for investors because of the effect lower prices may have on the region’s new demand for commercial properties. Florida is already an attractive destination for many startups and out-of-state companies who see the benefits of lower prices, taxes, and a business-friendly regulatory environment. Sweetening the deal with even lower commercial rental taxes could contribute to this trend.
It’s tough to see any negatives for Florida-based property owners regarding Bill 50—unless they are a reasonably sized Florida-based online retailer.
Some criticisms of Florida Bill 50
Of course, not everyone is happy with Bill 50 because of how the CRE tax money is being replaced. The gist is that Florida’s consumers will foot the bill because they’ll have to pay tax on items purchased from online retailers around the country.
This provision isn’t out of line with what we see in other states, and the growth of the online shopping industry has almost made it a necessity. Over 230 million people have already conducted an online purchase in 2021, and numbers will continue to grow every year.
In addition, this isn’t a new law; it’s just being enforced differently. Before Bill 50, online shoppers were supposed to pay sales tax on items purchased from another state or country. However, they were responsible for making the payments themselves through an online form. Few Florida residents knew about this law and largely ignored it. And some estimates suggest that failing to enforce these sales tax laws costs the state about $700 million annually in revenue.
Bill 50 puts the onus on retailers with over $100,000 in remote revenue to collect the state income tax of 6%, so there’s little way to avoid it. But proponents say the change is more of a modernization of tax collection than an overhaul of the existing system, and many Florida businesses will ultimately benefit from it.
Getting to know Bill 50
It’s worth noting that Bill 50’s tax reduction won’t kick in immediately. The mechanism only commences after the online sales tax raises $4.07 billion to replenish the Unemployment Compensation Trust Fund to its pre-pandemic levels. It’s estimated that it will take until 2023 or 2024 to raise these funds, at which point the tax savings for Florida businesses will begin.
Morris Southeast Group is standing by to answer any question you have about Bill 50 and how it could change the future of commercial real estate in Florida. We can also assist as you develop ways to get the most from your CRE portfolio. Give us a call at 954.474.1776 to learn more. Ken Morris is available directly at 954.240.4400 or kenmorris@morrissegroup.com, as well.
