Capital Plaza redevelopment is about to throw a 385,500-square-foot wrench into one of Franklin County’s biggest industries — office space.
Each year, state government pays $15.3 million to lease 1.5 million square feet of office space and 200,000 square feet of storage space from Franklin County property developers, according to a State Journal analysis of Kentucky Finance and Administration Cabinet data.
After the planned demolition of the Capital Plaza complex and construction of an estimated 385,500-square-foot office building in downtown Frankfort, many state agencies will wave goodbye to their old landlords. Some of those local landlords, however, are now crying foul over taxes.
“I believe the current plan will devastate our community as a whole,” said developer C. Michael Davenport, who estimates that he pays $230,000 in property taxes annually.
“If you take away my tenants, I can’t pay those property taxes, nor can any of the other local landlords,” said Davenport, who foresees a vicious cycle of defaults, foreclosures, depressed property values and rising tax rates.
The kicker, in Davenport’s eyes, is that the developer of the new downtown office building won’t pay property taxes.
Fashioned after the deal for the state office building at 300 Sower Blvd., the “built-to-suit” deal for the new downtown building would indeed exempt its future developer from property taxes.
“The buildings are built for the benefit of the Commonwealth, so property taxes aren’t paid and that determination was made in concert with the Finance Cabinet’s legal team, the Department of Revenue and the city and county attorneys,” said Finance Cabinet spokeswoman Pamela Trautner.
In the case of 300 Sower Boulevard, developers CRM and D.W. Wilburn of Lexington must lease the building to the state for 35 years, after which time the state will buy back the property. For the new downtown office building, the period is approximately 30 years. Because the state essentially controls the buildings, no property taxes are required, according to Trautner.
The arrangement has the added virtue of not being reliant on the General Assembly to allocate funds for office buildings in the state’s annual budget, depending instead on the private sector to construct buildings without up-front funds.
But taxpayers — especially local ones — may not necessarily be getting a good deal. Not only are developers exempt from taxes in these cases, but the state also appears willing to pay an above-average price per square foot for office space.
The state pays over $3.98 million for 300 Sower Boulevard’s 71,160 square feet of office space, or $10.73 per square foot, and the $4 million lease payment figure given “for example only” in the scoring section of the Capital Plaza redevelopment request for proposals would imply a cost per square foot of $10.38.
Excluding 300 Sower Boulevard, the average cost per square foot of office space leased by the state in Franklin County is $9.33, according to The State Journal’s analysis.
Davenport, who himself charges an average of $10.69 per square foot for the 102,634 square feet of office space he leases to the state, says he’s concerned that the downtown office building won’t even have the revitalizing effect many hope it will.
“They need people living downtown to create what they want to do,” said Davenport, who is encouraged by talks held by EnvisionFranklinCounty on the Capital Plaza redevelopment project.
Frankfort Mayor Bill May says his goal has always been to get more property on the property tax rolls, but that the city will benefit regardless from occupational tax revenues — taxes that those who work within the city limits must pay.
Moreover, the biggest beneficiary of more taxable property in downtown Frankfort would be the Frankfort Independent Schools district. Superintendent Houston Barber says he isn’t too concerned about the new office building being tax-exempt. He’s focused instead on the potential for new mixed residential and commercial space that could appear across the street from the new office building.
“There could be an extraordinary amount of taxable property in the community,” said Barber. “That is a very real possibility depending on how planning and development takes place. I think we could gain significantly if Frankfort chose to grab the plan and take it to the next level. The building blocks are there. It’s just going to take everybody coming together.”
The finance cabinet does not yet know which state agencies would relocate to the planned 1,500-person office building — nearly twice the capacity of the now-vacant 800-person Capital Plaza Tower, which will be demolished.
Among the factors being considered are space consolidation, age and condition of current space, accessibility and infrastructure, according to Finance Cabinet spokeswoman Trautner.
“The General Assembly has tasked the Finance Cabinet to reduce leased space and this project helps achieve that directive,” Trautner wrote in an email. “Even with the new office building, the Commonwealth will still lease more than one million square feet of space.”