Estimating state and local revenue impacts from meeting Phase 1 space needs for HQ2 if (Pittsburgh had won) Part I. Property Taxes Center for Economic Development Spring 2019 2 Contents Introduction ................................................................................................................... 5 General approach ........................................................................................................... 5 Key findings ................................................................................................................... 6 HQ2’s real estate program ............................................................................................ 7 Sites featured in Pittsburgh’s bid ................................................................................. 8 Estimating the built cost of a new Phase 1 HQ2 building ........................................... 9 A benchmark: the Tower at PNC Plaza ................................................................... 10 What did the Tower actually cost to build? ............................................................. 11 What would the Tower cost to build in 2017? ......................................................... 12 Estimating the Tower’s escalated built cost per square foot .................................. 14 Estimated square foot and built costs of a Phase 1 HQ2 building ......................... 14 County assessed value of the Tower ........................................................................... 15 Methods for appraising commercial real estate ...................................................... 15 Unpacking the story of the Tower’s assessed value ................................................ 16 What accounts for the difference in the reported and originally assessed value? . 19 Are appeals for new commercial properties common? ............................................ 21 What was the nature of the evidence? ..................................................................... 21 Are such reductions typical? Should one expect an HQ2 building to receive a reduction? .................................................................................................................. 22 Assessed value of an HQ2 building ............................................................................. 27 Would the income approach produce a higher opinion value? ............................... 29 Could the HQ2 development be exempt from local property taxes? .......................... 33 Year 1 property taxes from of a new phase 1 building ............................................... 34 Millage rates ............................................................................................................. 34 Adjusting assessed values via the Common Level Ratio ........................................ 34 Amazon HQ1 office towers as benchmarks ................................................................ 38 About Heinz College .................................................................................................... 40 3 4 Introduction What might the revenue impact on state, county, municipal, and school district budgets have been if Amazon had come to Pittsburgh under the original terms of HQ2 (“winner takes all”)? To answer this question, we construct some plausible scenarios to illustrate direct revenue yields from one year of operations. The scenarios are based on: the contents of the original HQ2 RFP (heretofore “RFP”) released in the fall of 2017; Pittsburgh’s proposal (heretofore “bid”) released to the public a year later; relevant policies, prices, and assessed values as of 2017; and some guesswork. This report is the first in a series, and estimates a range of revenue yields from property related taxes. Future reports will examine other revenue impacts. General approach Our analysis assumes that only one city (Pittsburgh) would have “won” HQ2, as was originally advertised. Since precise predictions of how HQ2 would have unfolded in Pittsburgh are not possible, we use high and low values for certain factors to construct the scenarios. Some of these are derived from the RFP, others from the bid, or other sources of information. In some cases, they represent our best guess. Along the way, we use simplifying assumptions and calculations as needed. While we make no claim that what follows is 100% accurate, it is at least plausible, that is, if Amazon had followed through with the plans implied by the original RFP. We limit the assessment to the direct effects of Amazon’s direct capital investment in office space. This report focuses solely on the property tax related revenues that might be generated from the construction of an HQ2 building. In doing so we take into account state and local tax policies as of 2017. Our approach is intentionally limited in focus, simple, and transparent, and the reader is free to disagree with it. Interested parties should contact the CED at www.cmu.edu/ced. 5 Key findings This report estimates first year property tax yields for four municipalities and three school districts in Allegheny County related to five development sites featured in Pittsburgh’s bid to the RFP. Our estimates are limited to improvements for “new construction” scenarios; the impacts from leasing are not considered. We find that an HQ2 building’s assessed value would likely be significantly less than its built cost. This finding is based on our understanding of standard appraisal practice, state and county assessment policies, the likelihood of appeal, the state of the relevant local market for Class A office space (with or without a new building), and especially the analogous case of the Tower at PNC Plaza. That said we find that total local property tax yields would still be substantial, and could start out at $2.6M to $12M a year, depending on the size of the building, how the building is ultimately assessed and/or appealed, and the taxing districts in which it is located. For school district tax revenues alone, we estimate annual yields would range from $1.2M to $3M a year for Pittsburgh Public Schools, from $2.2M to $5.6M a year for the West Allegheny school district (if the building were located near the airport) and from $3M to $7.7M for Woodland Hills school district if the building were located at the Carrie Furnace site in Rankin/Swissvale. Given the information in the bid, we assume that a significant but unknown amount of these funds (up to 75%) could be diverted away from the general funds of relevant taxing authorities via mechanisms such as TIFs or TRIDs to meet the infrastructure needs of the development project. Our estimates are based on what we believe to be a reasonable application of the cost method of property appraisal. They likely represent an upper bound, in that under current local market conditions for Class A office space; we do not believe that the sales or income approaches would generate a higher opinion of value. Separately, we also estimate yields for local and state realty transfer taxes from a new building. We find that total yields from these taxes could range from $2.9M to $15.7M for one transfer of ownership for the structure, depending on the size, initial assessment value, and the municipality involved. Of the four municipalities, the City of Pittsburgh has the highest realty transfer tax rate and thus would receive the highest yields, from $3.5 to $8.7M. This is of note as the City recently designated this tax as a key revenue stream for its affordable housing trust fund. However, the City does not appear to be legally obligated to use these revenues for the fund. We also found plausible development scenarios in which transfer taxes could be avoided entirely. Meanwhile, due to lower rates, we estimate that 6 municipal yields for locations outside of the city would only range from $725K to $1.7M (none of which would be obligated to affordable housing needs). HQ2’s real estate program The RFP describes HQ2 as a project that could hire as many as 50,000 full-time employees within 10-15 years, and that could require up to 8M square feet of building space over 15-17 years. The RFP also indicates that it will fulfill its needs for building space through a large amount of capital investment, estimated to be over $5B dollars. According to the RFP this investment was anticipated to take place over four chronologically undefined phases, presumably ending in 15-17 years.1 As part of Phase 1 of the HQ2 project, the RFP indicated that Amazon would need at least 500,000 square feet of building space by 2019. It also indicated that “Building Phase I” of its capital investments could involve a building or buildings from 500K to 1M square feet and from $300M to $600M in capital investment.2 We assume this “capital budget” represents what Amazon intended to commit to building acquisition, rehabilitation, or new construction. The RFP does not preclude the possibility that some of Amazon’s space needs for HQ2 would be addressed through leased space. At the same time, the RFP does not provide much detail on Amazon’s expected plans for leasing. For example, it is not clear whether Amazon intended for the $5B capital budget to be used to fund operating or capital leases of office space, including its share of the cost of any required tenant improvements over allowances, or whether it would simply fund leases by other means.3 It seems likely that Amazon would have engaged in some leasing, either immediately or at least at some point in the process. However, this analysis