U-M's deal to lease space at ex-Pfizer site raises tax concerns: Should it become a landlord?
The University of Michigan dominates much of Ann Arbor: It’s the largest landowner. It’s the largest employer. It’s an economic driver unlike any other in this state, thanks to the breadth of its specialties.
Now we’re learning that U-M is becoming a landlord, too.
On Wednesday, U-M announced that it is welcoming its first commercial tenant to the North Campus Research Complex as BoroPharm Inc. leases 4,300 square feet of highly specialized lab space.
With both moves - no matter how much they seem to fit both the space and the collaborative spirit that U-M is trying to create on its campuses - it feels like the city and its commercial space is now competing with U-M for deals.
In the big picture, the university’s $108 million deal for the 174-acre, 2-million square-foot former Pfizer property is positive: It restores the property to viability, returns employees to the site and lets U-M grow key academic endeavors that will result in new business startups.
The difficulty for the city comes from the indirect payback: It will come over a long timeline despite immediately moving the property off the tax rolls. In 2007, when the property was still functioning - though not at capacity - it paid more than $14 million in local taxes.
At the same time, U-M’s announcement coincides with some immediate losses. It’s moving offices from leased space across the city and cultivating office deals that don’t benefit the local tax collection.
Now we have U-M saying that signing more leases at the NCRC is part of its plan. U-M President Mary Sue Coleman is estimating that 20 percent of the 2-million-square-foot site could house collaborations involving more companies that choose to make the NCRC their respective homes.
If that translates to 20 percent in third-party leases, then U-M is estimating that it could house businesses in 400,000 square feet of the facility.
That size is comparable to the 10-story “777 Building” at the corner of State and Eisenhower. Put another way, 400,000 square feet represents nearly one-fourth of the entire downtown Ann Arbor office market.
Adding that potential leased space to the market isn’t the only impact facing the city. The office market could be losing much of its potential business over coming years from the new NCRC move, too.
Business growth is a goal of U-M as it emphasizes its technology transfer and business accelerator programs. All over Ann Arbor, former U-M startups exist today as “real” companies that have matured well beyond the initial vision for them.
In those early days, the companies had to find incubator space. Then they signed deals for early offices. And as some of those companies grew into significant presences in Ann Arbor, they’ve formed the heart of some of the largest lease and building sale transactions in the area.
Those deals feed private enterprise. But they also contribute to the public in the form of taxes.
And in a town like Ann Arbor, where 40 percent of the property is tax-exempt, that’s important.
Now U-M is creating much of that incubation space on its own campus.
And by bringing BoroPharm Inc. into its fold at the NCRC, it’s also creating early-stage lab space for a third-party tenant.
What happens next when that company - or the ones who follow it - is ready to keep growing? Will the opportunities extend to the private entities that are part of the city’s commercial space ecosystem, in the form of the companies signing deals for off-campus space?
Or will they stay in the U-M fold, sheltered in part by the university’s tax-free status?
City officials say that since U-M doesn’t pay property taxes, its commercial tenant doesn’t have to, either. In a traditional commercial lease, a landlord would pass along the tax payment to a tenant, adding an estimated $4-5 per square foot to any deal. A tenant in a U-M building effectively gets a discount for leasing in the university-owned building, and the city’s tax base suffers.
Meanwhile, if U-M provides the office equipment, too, then the tenant won’t even be subject to personal property tax.
This scenario may not be alarming if we’re talking about that single 4,300-square-foot deal. We already see U-M striking small deals with restaurants to provide services inside university properties, like the Michigan Union.
But now that we know U-M could accommodate the equivalent of 93 more deals of the BoroPharm size, it’s worth asking: Does U-M's latest move to lease space benefit the city?
It would be hard to argue that U-M shouldn’t use its own buildings for its offices and shouldn't give up its leased space. The university needs to make sound business decisions and efficient use of space is a part of that.
Further, the activity at the NCRC is important for Michigan. The alliances among researchers and commercial entities should generate more advances that build more business. And U-M is a fine neighbor.
But should the citizens of Ann Arbor watch the commercial tax base erode further just because all of those goals are worthy and we’re grateful to have U-M among us?