States Tap Real Estate
To Bridge Budget Gaps

Higher real-estate taxes and fees may be heading your way, courtesy of state and local governments.

With many states nearing the end of their rope over budget shortfalls, they're increasingly eyeing real estate as a huge potential source of revenue. After all, real-estate values have more than held their own during the economy's downturn, though some sectors have slipped recently. Many commercial properties -- despite falling occupancy and rental rates during the past few years -- have traded hands at surprisingly high prices. And residential prices have soared.

So now, more states are trying to slip in tax increases on both commercial and residential real-estate transactions. And more local jurisdictions, contending with their own state cutbacks, are increasing property taxes and slapping on things like real-estate development-related fees.

States also are considering their own internal real-estate moves to raise cash and trim costs, such as centralizing the management of their properties or consolidating the amount of space they occupy. And they're selling off properties or giving long-term leases to developers not only to generate revenue, but to eliminate costs of maintenance and security. In some cases, states are pulling in cash by selling buildings and then leasing back the space from the buyer.

States are "trying to rationalize their use of real estate -- how they can use their space more efficiently, or more to the point, use less of it," says Peter S. Brooks, a principal in the real-estate advisory services practice of Ernst & Young LLP.

In an effort to shore up its finances this year, New York City raised its property tax rate 18.5%. Rates in some areas of New York's Westchester County have gone up 13% during each of the past two years.

The property-tax rate in local jurisdictions within South Carolina increased nearly 10% this year. Eddie Tantoco, president of Meridian State and Local Tax Services Inc., a tax consulting firm in Potomac, Md., says one of his clients, a real-estate investment trust that owns seven apartment properties in South Carolina, will be paying an additional $100,000 in property taxes this year because of the change. Mr. Tantoco's client is budgeting for another 15% to 20% tax-rate increase next year.

Nevada enacted a real-estate transfer tax of $1.30 for every $500 of assessed value due upon the transfer of residential and commercial property. The tax goes into effect next year. In July, New Jersey raised its real-estate transfer fee by as much as 56% depending on the sale price of the property.

Some states are using a different route, raising money through fees, says Howard Menell, a tax adviser at the National Multi Housing Council, a Washington, D.C., trade group representing apartment owners and managers.

Earlier this month, commissioners in Maryland's Carroll County approved increases in fees that developers pay when they submit plans for residential and commercial projects, part of an overall plan to make developers and homebuyers pay for the infrastructure costs created by growth. They also will raise impact fees paid by developers for new projects and recording taxes on property transfers.

Ron Terwilliger, chief executive of Altanta-based Trammell Crow Residential Co., says Raleigh, N.C., has added a $1,000-per-apartment-unit school fee. And in southern Florida, builders must now pay a fee of $10,000 per apartment unit in addition to a $16,000 water and sewer fee. "If the budget deficits continue," he says, "I see more and more impact fees coming."

Internally, meantime, states are taking steps with their own real estate -- including hiring real-estate services firms to help them manage their portfolios. Virginia hopes to save about $90 million from the effort over the next two years, according to its request for bids. Michigan expects to eke out a more modest $12.6 million in savings from the effort, according to state officials. Illinois and Colorado are looking to do the same, and possibly Maryland and Florida.

"We are looking at how much space we occupy and how to use that more efficiently and find out what properties are in the state's best interest to hang on to and which aren't," says Towson Fraser, a spokesman for Florida's Department of Management Services.

Illinois is consolidating under a single department the management of government-owned and occupied facilities from 46 agencies that are currently responsible for those facilities. "We're looking at all the properties in the state to find a better way of managing our facilities," says Bruce Washington, chief of Illinois's Bureau of Property Management. That effort is expected to save the state nearly $45 million over the next two years. Illinois owns about 50 million square feet of property and leases another nine million square feet in about 7,200 buildings throughout the state, says Mr. Washington. The state spends about $117 million on rent each year and about $305 million to maintain properties it occupies and owns

Much of the activity within state governments may be due to the fact that "we have had quite a few new governors elected and it seems like it's easier for them to say, 'We have a big mess here. What can we do to fix it?'" says Ernst & Young's Mr. Brooks.

This year, Michigan began selling off surplus properties, working from a list of its top 10 most valuable assets, which Mitch Irwin, director of the Michigan's Department of Management & Budget, expects will generate at least $100 million in total to state coffers. "When you're $900 million in the hole," says Mr. Irwin, "you have to look everywhere to not only save dollars but be more efficient. It's an opportunity for changing the way we do business and manage our public assets."

Email your comments to rjeditor@dowjones.com.