Municipal Incentives Bridge Real Estate Budget Gaps

The real estate sweet spot for the newly-funded and high growth technology firm is the 5,000-25,000 rentable square foot (“rsf”), move-in condition, $30/rsf, short-term sublease space in the Soho/Noho submarkets of Manhattan.

Unfortunately, there is currently not an abundant supply of this space. Additionally, there are three primary constraints to these submarkets: 1) rental rates in this region now exceed $40-45/rsf; 2) Landlords do not offer construction allowances or prebuilt spaces; 3) Typical buildings do not provide “full-services”, thus there are hidden costs above and beyond the rent: Annually compounded percent increases, cleaning charges, water/sprinkler fees, fuel escalations, security guard charges and even air conditioning units or service, to name several.

So, how does a growth firm align its real estate budget with these market realities?

Empire Zones Opportunities

One possibility is by considering a relocation into an Empire Zone (“EZ”). There is a newly created Lower East Side/Chinatown EZ that extends westward to Broadway between Chambers and Houston Streets. We are currently representing a 10,000 rsf technology firm that has received an EZ proposal offering a package of incentives in excess of $1.3 million, including EZ benefits and cash grants for job creation. The cash grant can be viewed as a $35.00 per rsf subsidy to offset tenant improvements and equipment purchases. Think of it as a tenant improvement allowance, only being offered by the state in the form of a cash grant. The balance of this incentive package (>$90/rsf) is a corporate income tax credit phased over five years. Think of this credit as an $18 per rsf per annum rental subsidy for the first five years of a leasehold.

I recently spoke to a prospect that expressed some skepticism at the potential of municipal incentives, particularly because corporate income taxes represent only a small percentage of revenues. We feel that is the wrong way to look at this. That’s equivalent to looking at an IRA contribution only for the tax deduction. If you look at the tax credits as an $18 offset against a $40-50 cost, especially when the budget is $30, that’s where municipal incentives become the compelling storyline.