November 23, 2015

Hartford leaders urge CT to privatize its city realty

Oz Griebel, CEO, MetroHartford Alliance
HBJ PHOTO | Gregory Seay
The state of Connecticut owns Hartford’s Connecticut River Plaza.
PHOTO | Pablo Robles
The state of Connecticut owns the building at 55 Farmington Ave. in Hartford.
Luke Bronin, Hartford Mayor-Elect

A leading promoter of the Hartford region's economic development and the city's incoming mayor are urging the state to bundle and sell to private investors — and lease back from them — its city office and other buildings to ease the city's property-tax burden.

MetroHartford Alliance CEO Oz Griebel has sent a letter to Gov. Dannel P. Malloy urging the Democratic governor to consider removing state-owned Hartford properties from reliance on "payments in lieu of taxes,'' or PILOT payments, which many argue don't adequately reimburse the city for tax-exempt property.

The sale-leaseback proposal pitched by Griebel is one of a number of ideas that Gov. Dannel P. Malloy solicited during a mid-October meeting with a select group of MetroHartford Alliance executives and members.

"… Such an action,'' Griebel wrote in his Oct. 29 letter to Malloy, "would complement the significant housing and other real estate investment made by the state in the city over the past 20 years by increasing the city's woefully weak grand list and thereby help to reduce the horrific mill rate that essentially eliminates private investment in real and personal property in Hartford.''

Hartford Mayor-Elect Luke Bronin, who during his campaign pledged to pursue efforts to broaden and equalize the city's property-tax base, agrees. As the state capitol, Hartford is home to the bulk of the state's administrative, executive and legislative offices and customer-service centers. Hartford, too, is base for a large number of nonprofit organizations, churches and hospitals — none of which, except in rare circumstances, are legally required to pay property taxes. About 51 percent of the property in the city is tax-exempt.

"I strongly support and will aggressively advocate for anything that would fairly compensate cities such as Hartford for the disproportionately high percentage of non-taxable properties,'' Bronin said via email. "In the absence of full funding of the PILOT formula, I would urge the state to consider the kind of sale-leaseback arrangements that the MetroHartford Alliance suggests."

Meantime, Malloy reacted coolly to their sale-leaseback idea, noting the city's office market benefitted from the state's purchase in recent years of mid-town's 55 Farmington Ave. office building and downtown's Connecticut River Plaza office complex.

Both Class-A buildings were largely vacant or being vacated before the state invested more than $100 million to buy, renovate and outfit them. Those purchases helped decrease Hartford's office vacancy rate into the mid-teens, boosting property values of nearby buildings. They also will bring more state workers downtown, potentially helping restaurants and other small businesses.

In addition, the state, through the Capital Region Development Authority, has invested tens of millions of dollars in recent years, to help convert vacant downtown office buildings into apartments now owned by private developers.

"There are strengths and weaknesses of sale-leasebacks,'' Malloy said during a recent HBJ interview. "I've encouraged people to consider them in some instances and not encouraged them in others."

"We took a lot of property off the rolls that would apparently still be available if we hadn't done it,'' Malloy added. "Part of the recovery of Hartford's rental base is the moves that we took. So now we're supposed to, you know, dissipate that?"

In 2012, Hartford Business Journal reported on the state's strategy to reduce its real estate costs by consolidating more expensive leased space into facilities owned by Connecticut taxpayers.

Searching for answers

Griebel said the sale-leaseback proposal was among a half dozen ideas that the MetroHartford Alliance submitted in response to Malloy's call during his Oct. 22 visit with the organization for their input into dealing with the state's overall fiscal challenges.

Griebel repeated his letter's assertion that the alliance and the private sector "stands ready to participate in helping identify and exploit opportunities'' to boost employment and quality of life for Connecticut residents." Griebel emphasized that the push to revise how the state reimburses Hartford for PILOT does not diminish steps the state has already taken to improve Hartford's fiscal and economic-development prospects.

Hartford's onerous property-tax structure has been the subject of much discussion among home-, office- and other commercial-property owners who view the city's mill rate of $74.29 for every $1,000 of assessed value as a barrier to investing in or upgrading property. Hartford is the only city that taxes commercial and residential property owners different rates: Residential property is assessed at about 30 percent of value while commercial property is assessed at 70 percent of value.

In fiscal 2015, the state's PILOT payments to the city totaled $14.8 million for its 158 properties, or an average $93,000 per property, according to state Department of Administrative Services data. In fiscal 2009, the city collected PILOT sums totaling $12.7 million, or $89,000 for each of the 148 properties the state owned then.

Some brokers say the sale-leaseback of office space and other commercial properties is a viable concept that is regularly applied in the private sector by corporations that want to focus on their business models, not managing real estate. It also has been used sparingly in the public sector, brokers and others say.

However, whether Connecticut policymakers embrace and apply the concept to the state's urban property holdings hinges on a myriad of factors, brokers said.

"It certainly is a viable alternative as long as it meets the objectives the state originally developed when they bought those office buildings,'' said Christopher Ostop, executive vice president in investment realty broker-adviser Jones Lang Lasalle LLC's Hartford office.

Two of Hartford's biggest employers/taxpayers, Aetna Inc. and The Hartford Financial Services Group Inc., in past years used sale-leasebacks to manage several of their former office-space assets. Aetna's former sprawling Middletown office complex and The Hartford's former Simsbury office building at one time were sold, then leased back from their owners.

Both insurers later reclaimed title to their office properties, a typical contractual end in such deals. Aetna has since razed most of the Middletown complex; The Hartford sold its Simsbury campus.

In Connecticut's case, for example, a sale-leaseback of the state's Hartford office holdings could generate millions of dollars in upfront cash. However, one question brokers have privately is what would the state do with the sale proceeds?

They note that the state and taxpayers would have to commit to at least 25 years or so of lease payments to remain in the spaces that were part of the sale-leaseback. With its fiscal pressures, they ask, would the state be willing or able to earmark the sales proceeds to cover those future lease payments?

Pending a long-term solution to more equalize the city's property-tax apparatus, a sale-leaseback of the state's city properties is merely a stop-gap measure, Griebel said.

"The idea doesn't solve the problem. Somebody's going to pay,'' Griebel said. "But the concept is to build a broader [tax] base.''

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