For tenants, the demand for loft office in the Atlanta market hasn’t missed a beat in spite of three straight years of double digit rent growth. As many of these loft redevelopment projects are filling up, a dynamic that is new to Atlanta’s loft office boom is starting to impact tenants.
Loft office projects are typically rehabilitation efforts on older warehouse buildings where the highest and best use has been missing for years. Developers are buying these buildings at a relatively low price (under $100 per square foot) and investing another $100 per square foot to create unique but functional loft office space. The investment in these redevelopments increases the tax basis and when the finished product is reassessed, the increased tax burden is passed through from the Landlord to the tenants.
Based on initial projections, some of these developments will more than triple in value from their previous assessment as an unoccupied warehouse. Most loft office conversions operate on net leases meaning that all of the operating expenses associated with the development are passed through to the tenant based on the actual cost to operate the building. Even for the landlords who offer a gross or full service lease to tenants, there is almost never a cap on expenses that are “uncontrollable” for the landlord, like taxes. What does this mean? Our projections suggest that tenants of these loft office conversions can expect an increase in occupancy costs of anywhere from $2-$4/sf based solely on an increased tax pass through from the landlord. That is roughly a 10% percent increase and it is possible that loft office conversions located in up and coming areas (like those near the Beltline) will see multiple tax reassessments during the term of a tenant’s lease.
It will be interesting to see how this new trend impacts the negotiations around operating expense caps in leases. For our part, we have been hard at work coming up with creative tax language to protect our clients from what can be an unexpected real estate expense.