A proposed tax on commercial offices in Palo Alto has met an outcry from real estate brokers and landlords as city officials go about figuring how much tenants would be charged by the square foot.
“I’m not sitting here to cry wolf or to say, ‘Oh, if you pass it, all these businesses are going to leave,’” said Jon Goldman of Palo Alto’s Premier Properties, which manages about 70 commercial buildings in the Silicon Valley city. “The reality is, we’re half vacant now. All it would have to be is nobody new comes and the town is practically going to be out of business.”
Members of Palo Alto City Council are slated to consider the specifics of the levy at their April 18 meeting and are expected to vote in June on whether to put it to voters on the November ballot. The tax would apply to commercial tenants occupying more than 5,000 square feet, excluding grocery stores and hotels. They’d pay between 5 and 20 cents a square foot, depending on which option the city chooses. Tenants with smaller offices or storefronts would pay a flat $50 annual fee under the tax, which could add as much as $43 million to the city’s coffers.
The proposed levy would be a mistake at any time but even more so now as the city’s economy attempts to rebound from a wave of business closures and new commercial vacancies during the pandemic, said Goldman, who serves as board president of the 500-member Palo Alto Chamber of Commerce alongside his job as a broker.
Raise Commercial Real Estate’s Jon Moeller, whose firm provides brokerage and consultancy services to clients, told The Real Deal the measure comes at the wrong time for an office market that saw a significant decline in occupancy during the pandemic. Raise’s Silicon Valley team, which Moeller oversees, is based in the city’s downtown, where some restaurants haven’t reopened for lunch while others aren’t taking reservations due to staffing issues, he said.
“It’s already expensive to operate in Palo Alto, but I think what it’s going to do is better position other cities” to compete on attracting and retaining businesses in the region, Moeller said.
The backdrop of the debate over the tax is a recent rough patch for the commercial landscape of Palo Alto, once one of Silicon Valley’s tightest office markets. The city’s office vacancy rate was about 14 percent at the end of last quarter, with negative net absorption of 20,500 square feet for the period, according to Newmark data.
Mayor Patrick Burt and other city leaders, meantime, are looking to rebound from a $40 million budget cut and the loss of many services and positions during the pandemic. Several elected officials have said they believe many of Palo Alto’s large companies — the city is home to the headquarters of VMWare, Houzz and Varian, to name a few — can afford to pay more in taxes.
The office market is starting to show some signs of recovery — vacancies are down from 18 percent a year ago, Newmark data show — and Goldman worries that a tax on tenants could halt any momentum in its tracks.
“Every single person I’ve asked said, ‘Yes, if it was onerous, they would start looking at ways to move people out,’” Goldman said. “No one said to me, ‘We love Palo Alto, we’re committed for the long haul.’ Not a single company I asked said that.”
He declined to name the companies he asked because they answered in confidence.
The Palo Alto City Council’s Finance Committee supported a proposal by its chair last month to set the rate at about 12 cents a square foot a month when it takes effect in January 2024, assuming it passes. Under that proposal, the amount would gradually go up over the next few years to potentially as high as 20 cents, Palo Alto Online reported.
Uncertainty about the tax will hurt Palo Alto’s ability to attract new businesses in any case, Goldman said. And despite the signs of recovery in Newmark’s data, there are about 130 empty offices in the city’s downtown alone compared with about 10 vacancies there during a “typical” time, he said, citing CoStar figures.
How the tax would be used is still unclear, which is another reason why Moeller opposes it. The city plans to allocate its revenue to its general fund, meaning it can be used to finance affordable housing, transportation measures or restore services cut over the past two years.
“If you’re going to tax businesses, I think the businesses would want to understand what the taxes are going towards,” he said. “If there’s a tax, shouldn’t there be a reason for it?”
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Palo Alto pols back ballot measure for per-square-foot office tax