With almost 6 million square feet of industrial space available or on the way in the Charleston region, a debate is emerging over whether empty buildings should be eligible for property tax breaks.
Real estate developers covet them because the incentives help lure businesses to their properties, especially at a time when prospective tenants typically consider multiple locations — many with lower tax rates — before settling on a site.
Some politicians, however, are putting the brakes on what — up to this point — has been near-automatic approvals whenever building owners seek incentives.
South Carolina mandates a 10.5 percent property tax rate for industries, among the highest in the U.S. It's expected to become a legislative issue in 2019 when the pro-business S.C. Chamber of Commerce plans to push for changes in Columbia.
"We have the 7th highest business property tax rates in the nation, placing an undue burden on both small and large employers," the group said in a written statement.
County officials have a mechanism to ease that burden. They effectively can knock the 10.5 percent rate down to 6 percent by approving a local incentive known as a "fee-in-lieu of tax" agreement on a case-by-case basis.
Knowing such an incentive is available at a "spec" building — that is, one without tenants lined up or in place — can be a big draw, developers say.
"Any company that's looking here is also looking in Savannah and most likely Virginia and possibly as far away as Florida," said Mike White, broker in charge of Daniel Island-based Charleston Industrial. "So a county that doesn't want to give tax breaks for a building is automatically hampering their economic development effort."
Steve Dykes, economic development director for Charleston County, agrees.
The county recently approved tax breaks for an empty building off U.S. Highway 78 — a site that was supposed to house a plastic pellet export business that never got beyond the planning stages. Dykes said the county has supported several spec projects, "realizing that availability of industrial space enhances our competitive position in recruitment."
In most cases, those tax breaks are tied to job creation goals that must be met by the first tenant.
In time, the building off Highway 78, Dykes said, "will host one or more tenants, and there will likely be additional buildings on site. Numerous new jobs will be the ultimate end result."
Others think the tax breaks give developers of spec properties an unfair advantage against those who don't have them. Some Berkeley County Council members said they plan to rein in such tax breaks.
"I don't think that was an unusual practice in years gone," said Councilman Josh Whitley, who also is chairman of the county finance committee. "I think it will be a nonexistent practice going forward."
Whitley said Berkeley County, home to a new Volvo Cars manufacturing campus and other big industrial employers, is "sitting in the driver's seat of economic development" and can afford to be more choosy when it comes to who gets tax breaks.
"We don't have to give away the farm every time to get an industry," he said.
A report by the commercial real estate firm Lee & Associates shows 20 speculative industrial projects are either completed, under construction or proposed for the Charleston region.
Most projects have sprung up along the U.S. Interstate 26 corridor from North Charleston toward the Volvo plant near Ridgeville. They range in size from 50,000 to 587,720 square feet and command rents of up to $7.50 per square foot.
Of the nearly 6 million square feet of space they all offer, only about 90,000 square feet — one-third of one building — had been leased by the end of the third quarter.
Even so, a recent report shows there could be plenty of room for more speculative investment.
"Despite a significant amount of new speculative construction ... the Charleston market has consistently proven its ability to quickly absorb space in the marketplace," said CBRE Inc., a big commercial real estate firm.
Bob Barrineau, senior vice president of CBRE's Charleston office, said he agrees incentives for spec buildings should be considered on a case-by-case basis, but eliminating them outright "simply reduces the number of tools in a developer's toolbox."
"Locating manufacturing facilities is typically done with a lot of advance work through a sophisticated site-selection process," he said. "Total cost of operation is a key component, taking into account real estate cost, taxes, cost of labor and transportation."
Steve Kros, an executive vice president of Atlanta-based Ridge Development, said he plans to seek property tax breaks for the 343,118-square-foot spec building his company recently completed in the Charleston Logistics Center off Interstate 26 in Berkeley County.
But he plans to wait until after a tenant has been identified.
"It’s a very competitive market and tenants, especially industrial, are bottom-line driven," he said. "If one building has (property tax breaks) and can offer a lower operating cost, all other things being equal, they’re going to choose that building."
There's enough room on the Charleston Logistics Center site for a second spec building — also 343,118 square feet — and Kros said construction will begin on that once the first structure is about 50 percent occupied.
"There’s a lot of new tenants coming to the market and looking," Kros said. "What we're all interested in is converting those to real deals."
But for Whitley and some others on Berkeley County Council, making a deal isn't always in the government's best interests, especially when it has a detrimental impact on already-stressed infrastructure and the quality of life for residents.
"We do not need every industry that knocks on our door to be here," Whitley said during a recent council meeting. "We're going to pick and choose who we give incentives to based on the quality of life in Berkeley County and that it's actually a good deal for Berkeley County. We're not going to make bad deals."