Tenants Get Break From Soaring South Florida Costs With Rent Tax Repeal
BisNow Discusses Market Response to Rent Tax Repeal with Lee & Associates South Florida Principal, Bert Checa
'Tenants Get Break From Soaring South Florida Costs With Rent Tax Repeal'
Companies leasing office, retail and industrial space in South Florida have endured some of the fastest-rising commercial rents in the nation, but starting in October, their real estate costs will actually go down.
The state passed a law this summer that repeals its 2% annual tax on commercial rents, which takes effect Oct. 1. In Miami, where office rents have climbed more than 50% since 2020, the legislation is a welcome, albeit mild, breath of relief for businesses, brokers told Bisnow.
Gov. Ron DeSantis in June signed into law the $1.3B bill entirely eliminating state and local taxes on business rents. House Bill 7031 also added tax holidays for hunting, fishing and camping equipment between September and December and expanded item exemptions for things like batteries and fire safety equipment.
Florida is the only state to have a dedicated commercial lease tax, and CRE professionals have been pushing for years for its repeal.
The state introduced the tax in 1969 at 6% and began gradually reducing it in 2017 until dropping it to 2% by last June. The tax applied not only to base rent but also to additional rent charges passed through to tenants. This made fees like common area maintenance, utilities, insurance and property management fees subject to the tax, according to Holland & Knight.
On top of that, most counties also tacked on a local levy of 1% to 1.5% on commercial leases, which is also being removed by the state law, brokers said.
The savings from the tax aren’t seen as big enough to change the math for companies on space decisions, but the bigger the square footage in a deal, the bigger the savings.
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Miami’s office market activity has slowed from its wave of migration during the pandemic. But its average rent still increased by nearly 10% year-over-year to $63.34 per SF, according to a second-quarter report. It is now one of the five priciest office markets in the U.S., which would have been unthinkable before the pandemic.
Many leases already include an automatic 3% annual rent increase, but this year both landlords and tenants can use the tax repeal to help offset the bump, Lee & Associates South Florida principal Bert Checa said.
“I'm coming to the tenants from the landlord side with the great news that we're still going to have the same cost per month as we had last year, because the annual increase on rent is offset by the reduction renewal of the sales tax,” Checa said. “Then I'm going back to the landlord and I'm saying, ‘We've got to increase the 3%, and the tenant doesn't even feel it because they got the reduction from the sales tax.’”
Landlords, who are ultimately responsible for paying the tax, typically pass it on to their tenants. But they were still liable for calculating the costs and forking over the funds to the state.
The repeal also removes that extra layer for brokers and landlords, especially when dealing with tenants that weren’t aware of the tax.
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The tax was sometimes a factor in the negotiation for clients who were expecting to pay a base rent, instead of base rent plus tax, Checa said. Now, it’s one less thing brokers have to worry about.
“Conversations sometimes get started on the wrong foot, because you started off with the question about, ‘Why is there sales tax on rent?’” Checa said.
