BOMA Mulls Tax Revision Impact

The office building industry, hit by tax code changes, overbuilding, rising insurance costs and other problems, is undergoing dramatic changes in its financing, ownership and design, speakers reported at the 79th annual convention of the Building Owners and Managers Assn. (BOMA).

Even some city governments are changing their building programs because of revenue losses, according to a panel of mayors.

“The real estate industry is today in its most dynamic position in contemporary history and facing enormous challenges that will result in great hardship for some and great opportunity for others,” said Harold A. Ellis Jr., president of Grubb & Ellis Co., a commercial real estate investment and management firm.

Ellis noted that insurance companies’ and developers’ shares in investable office space rose from 30% in 1980 to 49% last year and will reach 60% by 1990, he predicted.”

Tax reform, by eliminating real estate tax shelters, will make more commercial real estate available to foreign buyers and pension funds and to such investment vehicles as real estate investment trusts, low-leveraged public syndications and private placements, Ellis said.

“As overbuilding and the elimination of federal tax subsidies reduce new construction, the inevitable result is lower vacancy, improved income streams and higher property values,” Ellis concluded.

House Ways and Means Committee Chairman Dan Rostenkowski (D-Ill.) predicted that under the new tax legislation, developers “will not begin a project without a commitment from tenants.”

Municipal governments are changing their approaches to buildings and downtowns, according to a panel composed of three mayors--William H. Briare of Las Vegas, Harold Washington of Chicago, and Kathryn J. Whitmire of Houston.

“We’re seeing two trends going on--finding new revenue sources and cost containment, getting more done with less,” Whitmire said. The latter trend includes involving the private sector in an attempt to be more cost effective.

“The days of a city building a new city hall, a new jail or a new courthouse are over,” Briare said. “In the future the private sector will build them and the cities will lease them.”

Washington mentioned the growing interest in, and debate over, linking downtown development with neighborhood improvements. “There should be some type of linkage,” he said. “The question is the form it takes.”

Building Rehabilitations

Although speakers agreed that tax reform also will make rehabilitation of buildings less attractive, they could not agree whether it would bring rehab activity to a halt or simply lead to changes in approaches.

Developer Gerald Levin said that in 1981, when generous tax benefits were provided to rehabilitation, an “attractive rate of return” had to be offered for rehabilitation projects because “money market interest rates were at 17%.”

But today the return on a rehabilitation project “doesn’t have to be much more than 10%” to be attractive to developers, Levin said.

Chicago real estate attorney Alan Schuh noted that developers today, after having taken advantage of the 1981 tax benefits, are thoroughly experienced at rehab work.

“People are not as afraid of rehabilitation as they were in the early ‘80s when they were concerned about exposing defects as they worked,” he said.

Changes in the buildings themselves will take place as owners and managers cope with escalating insurance costs, speakers at a panel on insurance problems said.

Installation of sprinkler systems, not undertaken when insurance rates were low because of the cost, “all of a sudden might be cost effective,” Helen Terry of the Equitable Life Assurance Society said.

Insurance companies might even take the position of “do it or else,” she warned, adding, “The argument that it is not cost effective will not work any more.”

The design of office buildings, and the spaces around them, also is changing, two leading architects reported.

The steel-and-glass design philosophy of Mies van der Rohe is not dead, but is simply one part of a growing diversity of architecture, said Dirk Lohan, a senior partner in the Chicago architectural firm of Lohan Associates.

“What concerns us more and more is not just the space within buildings, but the space between buildings,” he said. “Our plaza designs have drastically changed.”

“There’s a change in attitude from the ‘50s,” said Adrian D. Smith, a general partner in Skidmore, Owings & Merrill, Chicago. “We’re now activating the street level for retail.”