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Posted on Thu, Jul 22, 2010 : 6:02 a.m.

U-M's deal to lease space at ex-Pfizer site raises tax concerns: Should it become a landlord?

By Paula Gardner

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.

pfizer.jpg files

Last week, officials announced that Washtenaw Community College - which had been exploring the lease or purchase of downtown office space - instead struck a deal to rent classrooms from U-M.

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?

Paula Gardner is Business News Director of Contact her at 734-623-2586 or by email. Sign up for the weekly Business Review newsletter, distributed every Thursday, here.



Mon, Jul 26, 2010 : 8:18 a.m.

For all those who don't agree that the UofM is a huge asset to Ann Arbor in the form of jobs, services, and the flow of a cash economy should move! Enjoy yourselves in Flint, Pontiac, or any number of depressed former auto manufacturing sites. No one requires you to live here.


Mon, Jul 26, 2010 : 5:09 a.m.

@trespass-please, do tell what sources are you claiming? Was Pfizer having duplicate resources in Europe, St. Louis, and Connecticut not the real reason why they pulled out of Ann Arbor? Or was it that there hasnt been any new research discoveries since Lipitor? Or, was it due to the fact that the expiration date for its patent on Lipitor was about to expire, thus enabling generic drug makers the right to produce the same drug, typically at a lower cost. To continue, maybe the consolidation of the drug industry was catching up with Pfizer too. Yup, sure seems that there were a host of many other reasons than my facts would indicate the real reason why Pfizer pulled out of Ann Arbor and not some suspected sources of yours would indicate. Yes, I speak authoritatively simply because my reasoning is based on facts and not conspiracy theories that might exist in your mind.

Val Losse

Sat, Jul 24, 2010 : 9:20 a.m.

This points up what I have been saying about property taxes versis income tax. Any non-profit organization can have commercial propety and collect rent without paying any property tax it isn't just the university. The State should raise the income tax and lower the property tax so that everyone is paying and not just the property owners. As a property owner I am actually leasing my property from the government and so is everyone else that owns/leases property. We property owners carry the burden of supporting the government and the school system, that is about 40% of us. While the rest of the people don't pay their fair share. By the way, the State would have to pass a law for the university to pay property taxes.


Fri, Jul 23, 2010 : 4:26 p.m.

@racerx- "Pfizer leaving had nothing to do with the UM." You speak authoritatively but I suspect my sources are better than yours. You should not state "facts" that you have no way of knowing. I don't doubt that MSC is bright but that does not guarantee that she is going to act in the best interest of the University, the City, the state or the USA. In fact her actions indicate otherwise. I hope you read of the Chinese couple that was arrested in Detroit yesterday for stealing trade secrets from GM. MSC has done so much more to give away US technology to China. What she does may be legal but it in no more in the US interest than what the Chinese couple did.


Fri, Jul 23, 2010 : 3:56 a.m.

@ trepass, Pfizer leaving had nothing to do with the UM. The UM purchasing the property was just a good business decision at a good value. And your rambling about UM accumulating more power has nothing to do with this subject. The University is one of the top tier research universities in the world, let along the states. For the UM to continue their growth in this capacity and other areas, it takes leadership, vision and risks that are deemed necessary to maintain their growth. Yes, it was a risk in purchasing the site, but look at the vision being put forth to not only grow the site (in ways that Pfizer couldnt) but the leadership that is steering the growth. Hate the UM all you want, but there are/is some very bright individuals from President Mary Sue Coleman down who are responsible for this and should be regarded as such. I guess we can wait for SPARK, the city of Ann Arbor, the Mayor and others who had plans for the site after Pfizer left to finally come up with a plan to develop the site. Wait for it. Wait for it.

Charley Sullivan

Thu, Jul 22, 2010 : 7:35 p.m.

U-M, EMU, WCC, the Ann Arbor Public Schools, the various private schools in town, and every church, synagogue and mosque in town ALL don't pay property taxes. If they run their affairs properly, they don't pay sales taxes on anything they buy for business use. When people from those organizations travel out of state on business, they have the ability not to pay sales taxes in those states. That's the way the system is set up for any educational, religious or non-profit organization in the state. That said, the University does pay two types of taxes I do know of: taxes included in the price of an airplane ticket, and local room taxes every time they pay for a hotel room for a university guest visiting overnight (though not state sales tax on the same room). Does anyone know why those particular taxes do get paid, and if there are any other similar taxes that do get paid?


Thu, Jul 22, 2010 : 3:58 p.m.

Legally, the University is entirely different from a private college, a public institution like WCC or any corporation. For all intents and purposes, the University *is* the State. It's chartered in the Constitution. It's run by an elected body. The State doesn't pay property taxes *anywhere* in the state, including places where it leases resources to private companies. The money the University spends and saves belongs to the taxpayers of Michigan. The economic development provided by UoM belongs to everyone in the state. Paying local taxes would be unfair to everyone outside of Ann Arbor. Ann Arbor is *already* seeing disproportionate benefit by being located around the University.


Thu, Jul 22, 2010 : 11:36 a.m.

Solution: Let the University annex and operate the city of Ann Arbor. Then the University will have to pay for ALL city services!


Thu, Jul 22, 2010 : 11:20 a.m.

Great example of the need for a city income tax. We desperately need to stop gouging private property owners and start collecting from the people that are really using the city of Ann Arbor and the perks that go along with it. It is just common sense.


Thu, Jul 22, 2010 : 10:56 a.m.

If indeed Pfizer planned to raze the structures and donate the land to Ann Arbor, they would have done so to escape taxes. The property would likely have gone fallow... and that's preferable? Instead, there is new vitality in the NCRC. People who will eat and shop all along Plymouth Road. Ask the merchants in that area how they feel about activity in the NCRC. I could be crass here and say "Ann Arbor - U of M = Pontiac".. but I won't. Instead, I invite you to read a summary of what is REALLY happening in this situation (instead of this grossly biased opinion piece) and judge for yourself.

Seasoned Cit

Thu, Jul 22, 2010 : 10:51 a.m.

Isn't it called Non-related income for a Non-profit when they make money on T-shirt and book sales etc. I thought if that amount exceeded a certain percent..then it was taxable. Previous comments pointing out how WCC is running a Health-Fitness center that competes with the private sector..and how about the county with it's health center? Want to have some fun.. how about the "lease arrangements" for the luxury boxes in the Big House. The UM not only isn't paying any tax on that space...but the tenants even get to use 80% of their payment as a Federal Tax deduction! Just great examples of what happens when government starts tweaking laws to help out certain segments of society.


Thu, Jul 22, 2010 : 10:37 a.m.

Seems like this will require a remedy at the state level. New laws. Yea, but something does need to be done to correct this. And a payment to the city in lieu of taxes? Ha. The U had paid the city for fire/police services years ago, but stopped and wouldn't buy into anything that equaled something akin to the services they were receiving. When they got there own police and stopped sending fire alarms to the city, they effectively said we don't need you except in a real emergency. A fire alarm is now sent to DPS and they dispatch an officer to see if there really is a fire before they ask for a response from the city. Meanwhile, precious minutes are passing by. Hum, a little of topic, but I'm bored.

Bacon Bits

Thu, Jul 22, 2010 : 10:23 a.m.

@Brad (and others): To clear up a misconception, without U-M, the buildings would not be vacant -- they would not be there today. After not being able to find a suitable commercial buyer, Pfizer had plans to raze the entire site and donate the vacant land to the City. U-M and the City were told of this plan and U-M realized it had to act and bought the buildings. I've seen the Pfizer memos detailing this plan. Pfizer had no intention of paying property taxes on empty buildings.


Thu, Jul 22, 2010 : 9:53 a.m.

@Elaine F. Owsley & Kafkaland - Well said. Thousands of communities around the country would love tobe in Ann Arbor's Shoes.


Thu, Jul 22, 2010 : 9:22 a.m.

Not 100% sure but I believe that part of public lands leased to for-profit entities can be subject to property taxes. Someone out there might be able to follow up on this. Several of the office buildings at St. Joes are taxed. Also, to those opposed to what U-M is doing, I would hope you are equally concerned that Washtenaw Community College operates a health club. Where is this in their mission? We voted them a millage and they built a state-of-art facility that would be the envy of any private health club owner. I'll bet these for-profit health centers would love to have free land, minimal tax expense, etc. And how about the AA's golf courses? They brought in a consultant to see how to better compete with for-profit courses. Do you think the for-profit courses would enjoy tax-free status? My guess is tax-free golf courses contribute to some degree in the trend of taxable golf courses going under or declining in value (and thus reducing the tax base). Local govt can't complain about the pfizer property when they themselves are guilty of much the same.

Bob Martel

Thu, Jul 22, 2010 : 9:18 a.m.

I'm not so sure that the stated tax exempt status would apply to any for profit business just because they are on University property. I am looking into this and will get back to Paula with my findings.


Thu, Jul 22, 2010 : 8:34 a.m.

This goes to the question of what the role of a top-notch public university should be. Way back when, its role was to provide an education to the best students from the state that was comparable to what the Ivy's offered, but at an affordable price. And do research to generate new knowledge - after all, teaching at this level is disseminating knowlege at the cutting edge. And, inexpensive studnet housing was needed, so dorms were built, dining halls added, etc. And not to forget entertainment for students and alumni, hence the competetive sports teams and some music and theater ventures. Other missions were also gradually added, generally by public and political demand. First came the hospitals that morphed from pure teaching and research hospitals to providing specialty care for a substantail part of the population. And that made good sense, because some of the best physicians taught at univeristy medical schools. Then, research expanded and became more applied; after all, applied research drives innovation and economic development. And the University was a natural place to do this, because some of the brightest engineers taught at university engineering departments. Then, universities were lambasted that their research wasn't getting into the market fast enough, and so they started to develop tech transfer programs, incubator spaces, etc. So top state universities like UM have eventually become what they are today - providers of knowledge-based services to the state, its communities, and citizens. They have no intrinsic incentive to compete with the private sector - still not their mission, will never be their mission, but because of their capabilities, have been asked over and over to fill voids for the public good.


Thu, Jul 22, 2010 : 8:09 a.m.

As painful as it is to see the property go off of the tax rolls, Pfizer would have started tearing down buildings to reduce their tax burden if they had not sold the property. They did this at Kalamazoo and other properties. There wouldn't be much tax to collect on a field of Black Eyed Susan's. The more troubling issue is that until the UM finds a large anchor to fill the buildings they will set empty. Boropharm is filling a small building set next to N. campus. The larger buildings are too expensive to open without larger tenets.


Thu, Jul 22, 2010 : 8:07 a.m.

@Elaine, you're exactly right. As a local, it's sometimes frustrating to see how the city loses a little tax revenue from the university, but the benefits of the school far outweigh the cost.


Thu, Jul 22, 2010 : 8:07 a.m.

If the U of M is going to be a landlord then it needs to start paying taxes, at least on the property they are leasing to the tenant. In my opinion the U should be taxed like any other company or property owner. They are sitting on something like 4 billion dollars are they not? As well, I believe they have somewhere around 4 thousand employees that make 100 grand a year or more. I am a libertarian and generally for lower taxes to spur business growth but the bottom line is the U of M is getting a free ride at the expense of the taxpayers and that is simply wrong.


Thu, Jul 22, 2010 : 8:05 a.m.

If the university isn't going to use the land for themselves they shouldn't get a tax break on it. I'm all for letting public institutions like universities get special treatment as long as the reason for it benefits the community. This is nothing more than the university becoming as the author put it a "Landlord". If they're to be using the property for profit, than they should pay taxes on it. The city lost big time when UM reacquired this land.


Thu, Jul 22, 2010 : 7:58 a.m.

It should be noted that this is a column NOT an article. I'm disagreeing with anything substantive in the column, but it's clear that some commenters don't seem to notice the difference and this should be very worrying to the editorial staff. Also, these polls which impose a single (or here only two) reasonings to sides of an issue, let alone impose only two sides to an issue are incredibly insulting to this publication's readership.

Brian Kuehn

Thu, Jul 22, 2010 : 7:55 a.m.

It seems that the appropriate approach for U of M and the City/County/Schools would be to work out a "payment in lieu of taxes" scheme for commercially leased space. U of M and the City/County/Schools could calculate the property tax for the facility as if U of M were paying property taxes. When a commercial tenant signs a lease, U of M would include the tax increment in the tenant's lease rate. Space occupied by U of M or other non-profits would not have the tax increment included. Twice a year U of M would voluntarily pay the City/County/Schools the incremental tax collected as rent from the commercial tenants. This would, of course, make the U of M rental rates less competitive than the current untaxed rate. However, every other landlord has to pay taxes so the field would be level. The U of M is a great institution. However, when it begins to encroach on the commercial and business world, the University should play by the same rules as everyone else and not take advantage of their tax free status. Personally, I am less worried about the loss of tax revenue to the City/County/Schools than the effect having 400,000 square feet of tax-free office and research space on the market. Commercial property owners are having a tough time filling space already. As a final thought, I am not connected to any real estate firm, I do not own any commercial property, and I do not work for either U of M or the City.


Thu, Jul 22, 2010 : 7:52 a.m.

Brad, It's highly doubtful that Pfizer would still be paying taxes on the facility based on its "estimated value" when the property occupied. At the time it left, Pfizer was already making noises about the "true value" of the property. An unoccupied facility just isn't worth as much as an occupied one is. Need proof? Today's (Connecticut) reports that Pfizer's Global Research Complex in New London was sold for something to the left of $100 mil, less than 2/3 of its "estimated value" when the property was used by Pfizer, plus the state had to kick in $15 mil to the buyer to get the deal to go. The current approach is a good one. Let developing businesses grow in sheltered space. They'll return tenfold what has been invested in them.


Thu, Jul 22, 2010 : 7:16 a.m.

"Without the University that property would still be sitting vacant." And the owner would still be paying property taxes, too. The LARGEST property tax payer in the city. Tax-free status for things being used *directly* by the U is one thing, but why should they be given an unlevel field to compete against the private sector?


Thu, Jul 22, 2010 : 7:14 a.m.

@Elaine F. Owsley- You should be asking why Pfizer left in the first place. Could it be that their relationship with the UM was bad, so they got no benefit from being near a major research university? Could it be that Governor Granholm would not give them tax breaks comparable to those they had in other states? Could Mary Sue Coleman have coveted their property and encourage her friend, Gov Granholm, not to give them those tax breaks? The UM got a $700 million dollar facility for $118 million. Does the UM administration really have the best interest of Ann Arbor, Washtenaw county, or Michigan in their hearts or are they just interested in accumulating more power to themselves?

Vivienne Armentrout

Thu, Jul 22, 2010 : 6:57 a.m.

Thank you for this thoughtful article. It is a question that needed to be raised. It's great to have people employed in Ann Arbor, but since we don't have an income tax, this does not benefit the city and its ability to provide services. The statement by a commenter that SEV has been moving upward surprises me. Mine has moved downward and I was pretty sure this was true across the city. Taxable values (TV) have continued to move upward for those of us who have owned property for a number of years.

Elaine F. Owsley

Thu, Jul 22, 2010 : 6:49 a.m.

The University remains the largest employer in Ann Arbor and probably the county. Without the University that property would still be sitting vacant. Without the University Ann Arbor would be just another town. Without the University and the thousands of people who come to Ann Arbor because of it, there would be no business to support the economy in any degree. Go Blue!!


Thu, Jul 22, 2010 : 6:48 a.m.

I started to read into this as lost opportunity for the city to collect taxes...we could us some moneys in the neighborhoods for upkeep. But as the economy grinds on it is far more important to get small business developed and this is a great incubator. When they hire employees...they will pay taxes and that's enough for me.


Thu, Jul 22, 2010 : 6:12 a.m.

UM doesn't care how much it screws the Ann Arbor or Michigan taxpayers. They will take all the services that the city, county and state provide but they want the rest of us to pay for it. Non-profits are not allowed to make money on commercial ventures but there is an exemption for "minimal" profits, I believe it is 3%. The taxpayers should get together and take a very good look at the UM budget and see if they are violating this exemption. The Board of Regents is an elected body and should be responsive to the citizens of the state. If you don't like the UM's policies, then vote out the incumbents in the fall election (Andrew Richner and Andrea Fischer Newman)

John Alan

Thu, Jul 22, 2010 : 5:55 a.m.

Now this article worries about U of M becoming commercial propety landlord and it indicates city does not get property tax. They have been landlord with no property tax by providing (leasing/rentng) dorm rooms to students for years and years.... what is the difference? Off campus housing owners are tagged with a HUGE property tax anywhere from $7K-$12K+ for a 5/6 bedroom house around campus and they are charging less than dorms (cost/room/month) while University charges more and does not pay property tax. Who said life is fair. This is how it goes and it is what it is.... time for commercial property get a taste of the same game as well... It is U of M and the law is clear. Same holds for the city of AA, they can do what they want to do --- not a big deal here, I am sure that City will find a way to start increasing the taxes for the rest so they can make up the short-fall from U of M. Last two years that everything has been tanking, the SEVs in AA has been moving up-ward!!! Always things will work out at the end of the day....