Boston CRE Raises Alarm As Mayor Wu Proposes Sharp Increase in Commercial Property Taxes

Mayor Michelle Wu's proposal to increase commercial property taxes is already generating intense criticism from Boston's real estate sector.

In March, Wu unveiled plans to file a home rule petition that would hike commercial property taxes as a way to protect residential properties from rising — and the city from budget cuts.

But critics told Bisnow this week that they believe the proposal is based on assumptions rather than facts and will hinder new development.

Rob Skinner, the market leader at Cushman & Wakefield's Boston office, said that the commercial property tax has always been roughly twice as high as the residential tax in the city, making it one of the highest rates in the country.

"I think it's a mistake," Skinner said about the proposal. "How much higher can you go, right?"

The tax hike is only the latest in a series of controversial policy changes that Wu has proposed in recent years — policy shifts that have flustered Boston's real estate sector.

Since she was elected in 2022, Wu has proposed several policies aimed at the development community, including a hike in the city's Linkage and Inclusionary Development policies — as well as a rent control proposal that have all made it more difficult to make projects pencil in the city.

The proposal would temporarily shift the tax burden for commercial and industrial properties from a maximum of 175% to 200% of residential property tax to make up for the decline in property values.

Wu wants to levy taxes for up to five years to soften the blow the decline could have on residential property taxes and the city budget, which is aimed to increase 8% to $4.6B in fiscal year 2025.

Skinner said that the spread between assessed value and market value for these properties is still fairly wide in the state, as appraisals occur every couple of years rather than during a sale, marking discrepancies in reporting. He said that the policy is based on an assumption that the city will lose tax revenue from a massive decline in property values, but that hasn't been the case yet.

"It's a perceived problem because values are down, but no one's really studied the assessed value and market value," Skinner said.

Unlike other major metropolitan areas, Boston heavily relies on property taxes to fund its budget, with an even heavier reliance on commercial and industrial property taxes. These properties are taxed almost twice as much as residential properties.

The reason for this is the city's split tax rate, which reduces the tax burden for residential property owners but limits how much these commercial properties can be taxed. This is the part that Wu wants to expand temporarily. The petition first needs to be approved by both the Boston City Council and the state legislature.

On Monday, Wu defended the tax hike on WBUR's Radio Boston when asked about the pushback the policy had received and arguments made that it would push business out of the city.

"To ask us to shift the burden onto residents hurts businesses as well," Wu said. "We see signs and evidence that things are moving in the right direction. But in order to ensure in the very, very short term we have every tool possible to protect our workforce, employees, residents, this is the legislative mechanism that is necessary."

Last week, city councilors discussed the proposed hike at the Government Operations Committee Hearing, with many of them on the fence and questioning the viability of the proposal and its impacts on economic development in the city.

"How do we make sure we’re being fiscally responsible?" Councilor Erin Murphy said at the meeting.

"Not putting an added burden on our downtown commercial real estate and businesses that are already struggling, and at the same time ... people are already having a hard time being able to afford to stay living here in the city, so it’s a balance that we have to tackle together."

The concern surrounding the city budget was exacerbated by a February report from Tufts University's Center for State Policy Analysis that estimated office property values would fall roughly 30% by 2029, leading the city to lose $1.5B in revenues in the next five years.

Business leaders have been criticizing the proposal since it was unveiled, arguing that it would greatly impact business owners in the city and landlords who are already struggling with declining property values.

Greater Boston Real Estate Board CEO Greg Vasil said that the city should concentrate on incentivizing and creating competition in the city rather than removing it.

"Boston’s leaders should be focused on making the economy more competitive, attracting businesses, and boosting foot traffic throughout the city, not increasing taxes on commercial properties," Vasil wrote in a statement.

The Greater Boston Chamber of Commerce President Jim Rooney told WBZ's Jon Keller last week about the importance these commercial properties hold to the city and what impact the hike would have on their business moving forward.

"It's the golden goose," Rooney said.

The hike proposal is not new for the city. In 2004, then-Mayor Thomas Menino put forth a similar initiative to raise commercial property taxes after the dot-com bust to buffer residents from sudden impact. However, Menino also made budget cuts to offset the impact on commercial properties.

"That's a troubling combination," Rooney said about the 8% increase the city's budget could see on top of the property tax hike. "We've seen proposals for transfer fees, proposals for increased linkage fees … you add that to all of the things that I've said before, building anything new in Boston is almost impossible."

The property tax hike is just the latest in a string of policies that have left a bad taste in the commercial real estate community's mouth.

Since Wu took office in 2022, she enacted and proposed several controversial policies and petitions that commercial real estate professionals alike have been concerned will impact development and investment in the city. This newest hike has reignited the conversation.

"As many have noted, it feels a bit like kicking a man once he’s already down," Nixon Peabody partner Jennifer Schultz said in a statement. "Commercial real estate in Boston is in a precarious situation already — it does not appear that the office market will ever reset entirely to where it was pre-Covid, and CRE more generally is still suffering from an unstable market with significantly higher rates than what previously drove deals."

Wu's mayoral campaign ran partly on the notion that she planned to abolish the Boston Planning & Development Agency, which she argued was an outdated and broken agency. Since then, she has created a new planning department and moved part of the agency to other offices within the city.

In late 2022, Wu proposed increases in the city's Linkage and Inclusionary Development policies. In February 2023, Wu submitted a rent stabilization proposal to the city council, which would set an annual maximum for rent increases of between 6% and 10% with a cap based on the consumer price. The proposal was passed by the city council and is now awaiting a hearing on Beacon Hill.

Earlier this month, a proposed tax break incentive aimed to spur housing development Wu floated last year was shelved, the Boston Globe reported. She said at her annual speech at the Boston Municipal Research Bureau that interest rates remained too high for these incentives and weren't in the best interest of the city's residents at the time.

Skinner said that this newest policy might not be the straw that breaks the camel's back because the city is still attractive to many in the industry, but that there are limits that the city seems to be testing.

"I think there's a calculus involved that we could probably still get away with it because people still want to be in Boston," Skinner said. "But you run the risk that at some point, everyone has a point where it is too far and I think they are trying to figure out where that is."