How to save downtown

By Yule Heibel, June 2011

Living over the store may seem quaintly old-fashioned, but it’s a direction that might keep downtown Victoria healthy.

Victoria City Council recently offered the business community an olive branch when it addressed the tax ratio of commercial to residential rates by voting to reduce marginally (very marginally) that ratio by 0.004 percent in favour of commercial rates. While the Chamber of Commerce responded with tepidly mumbled words of encouragement for council’s decision, the daily newspaper merely reported the other side of the coin: that residential property taxes will rise by 7 percent compared to 1.1 percent for businesses. 

Anyone who bothers to walk around downtown Victoria can see that many businesses are struggling. Take Fort Street’s Antique Row. Start at Cook, continue to Douglas, and note the number of “for lease” or “going out of business” signs. Too often, though, we ignore the plight of businesses and focus instead on the rise in residential taxes.

I recently posted photos of the many empty Fort Street storefronts to my blog. The comments that came in were instructive. Readers (including business owners) blamed downtown’s desuetude on many things: big box stores, tourism downturns, street people, lack of community support for independent merchants, and problems related to overzealous parking commissionaires.  

Everyone cited high rents, which are no doubt worsened by excessive property taxes: 

“I have been perplexed that while we saw a recession start in 2009, retail rents continued to rise right through it as though there was nothing happening.” 

“There is certainly no shortage of eager, creative and motivated entrepreneurs in Victoria. If they can deal with the impossible rents, along with the fact that the City is inherently anti-small business (zoning, permits, etc), they may have a chance.”  

Comments repeatedly cited the City of Victoria’s lack of business support, noting that it burdens businesses with adversarial inspectors and bylaws.

Others noted that there is too much emphasis on tourist retail and not enough on incubating innovation for the home-grown market.   

And people asked: If so many storefronts are empty, why are rents still so high? Bound to triple-net leases, tenants are typically on the hook for property taxes, and even building improvements. (Actually, taxes are generally passed on to tenants in any form of rent.) For paying property taxes, the City doesn’t deliver anything special to businesses beyond what it does to residents.

In 2005 Greater Victoria had a retail vacancy rate of 3.5 percent. By 2010, that rate had climbed to 5.9 percent, and it doesn’t look better for 2011. According to Colliers’ Market Report, “2011 is likely to be a year of ‘status quo’ for Greater Victoria retail.” While the forecast admits that “2010 was a year of uncertainty,” it also posits that “the overall market has remained relatively healthy.” Downtown’s empty storefronts suggest otherwise.

Perhaps macro-analyses of Greater Victoria, which include data points around “secure federal and provincial employer presence” (read: consumers) and Uptown or Westshore shopping mall expansions (read: competitive vendors), don’t speak fully to what’s going on specifically in our downtown. 

I asked Graham Smith, who looks after Greater Victoria retail for Colliers, about lease rates and their responsiveness to the market. Smith pointed out that every property is different, each has its unique qualities. Whether it’s on this or that side of the street or in this or that block affects its lease rates. And just as properties are unique, so are owners. Smith likened it to selling a house: Most people are convinced that their property is uniquely valuable, and some owners will insist on getting their price, while others just want it rented.

Why would a property owner let his property stand empty instead of offering struggling tenants a rate reduction? Smith’s market-based answer seemed cruel, albeit realistic: If a business is struggling, there’s something wrong with the business model besides leasing expenses. A 10 percent rent reduction isn’t going to help that business thrive if there either isn’t really a market for what it’s retailing, or it’s not open when customers want to shop.

Whether this is true or not, the tax burden imposed on business, is something to consider. Take 789 Fort Street, a property assessed at about $2 million; its 2010 property tax was $49,130.18. A comparable $2 million residential Victoria property (1989 Crescent Road, for example) is taxed at $13,685. That’s a difference of nearly $35,000. 

Who pays the property tax on commercial buildings? Ultimately, the lessee and the consumer.

According to sources at City Hall, Victoria relies equally (50-50) on residential and commercial property taxes, but commercial property is clearly carrying the brunt. Nor is Victoria alone. 2010 Tax Rates reveal that Victoria taxes businesses the most, but Saanich and Langford are close behind

Every municipality has a pro-residential bias. After all, residential taxpayers elect the politicians. However, the difference is very much skewed against City of Victoria businesses in absolute terms: a lessee will pay much less property tax for a similar property in Langford since the property has a lower assessed value. This difference can be the make-or-break factor for a business, and partly explains the exodus from downtown. Let’s also not forget that fewer than ten years ago, Victoria’s ratio of commercial to residential taxation was 2.63, while it has now climbed to 3.59.

An effective way to reduce the currently painful ratio would be to increase the number of residential properties on the City’s tax roll. 

Recall my conversation with Graham Smith of Colliers. From his 11th floor CIBC Building boardroom we could see 789 Fort Street, a one-story building with two storefronts. Presently, half the building is rented, while the other languishes.

I pointed out that this building should have rental apartments on top, which would provide both customers and even employees. The newer building next door (at Fort and Blanshard, southwest corner) was built within the last 15 years. Although newer, it’s also just a single story, with zero residential above the store. It seems we haven’t been adding mixed-use buildings with a view to bringing a diversified demographic into the downtown. 

So why don’t we encourage more development that brings residents into the downtown? After all, it would help “spread the pain” of property taxes on mixed-use commercial/residential buildings and would benefit retailers who need steady repeat customers? Consider that downtown Victoria’s population has actually declined since the 1970s when new seismic regulations left buildings vulnerable to unaffordable code upgrades. If you’ve ever wondered why some buildings downtown don’t have people living on the second or third floors, it’s because they didn’t remain “continuously occupied” since new codes came into effect. If a building remained continuously occupied, it’s exempt. If it’s vacated, however, it becomes subject to the new rules, and requires fearsomely cost-prohibitive seismic upgrading. 

As for new buildings, condo towers (which target just one small slice of the larger demographic pie) have added some population, but we’re still below 1970s population levels. Newer one-story buildings, as well as older one-story buildings, represent a missed opportunity to diversify the downtown and to bring its residential levels back up to what they used to be. 

There is a new proposal that’s heading in the right direction. The Cosmopolitan is a five-storey development for the 600-block of Fort. Currently making its way through City Hall, it includes ground-floor retail, with four stories of rental housing above. If the project is approved (it needs a minor height variance), it’s an opportunity to build exactly what Victoria needs: residential over the store. I asked the developer, Jurgen Weyand, how the numbers work when building rental. The short answer: they don’t really. Compared to building condos, building rental is an investment on his part that may pay off for his grandchildren. Meanwhile, retailers will benefit from having residents who live where they work and shop. 

Clearly, we need more development downtown, whether it’s condo towers or five-storey walk-ups above ground floor retail. New condo towers may attract retiring empty-nesters who want to shop and recreate in a walkable downtown. Rental apartments above ground-floor retail diversify the demographic, attracting a younger, more mobile tenant who works in those businesses for her day job (and shops there, too), while incubating the next great thing in the creative economy after hours. Win-win.

Bottom line: if we want to save downtown, we need people living there, right over the store. That would provide customers for businesses, as well as defray the property tax burden currently off-loaded via triple-net leases solely on businesses.

 

Yule Heibel earned her doctorate in art and architectural history at Harvard and taught at MIT, Brown, and Harvard. She is the author of a book and numerous articles. Read her blog at http://blogs.law.harvard.edu/yulelog/