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City levy on commercial leases creates a storm

The Southern Nevada commercial real estate industry is crying foul over attempts by the city of Las Vegas to force commercial property owners to pay a fee based on revenue they generate from rents.

The issue surfaced in recent weeks when the city’s Business Licensing Enforcement unit mailed hundreds of letters to commercial property owners informing them of the need to obtain a license if they’re leasing their property to businesses.

It’s part of an ongoing effort to enforce compliance of business licenses in various categories, said Karen E. Duddlesten, deputy director of the city’s department of planning.

The enforcement efforts, however, caught many in the commercial real estate industry by surprise. Industry officials said they thought they defeated attempts in the past for Las Vegas to enact such a fee, only to see it in place today. They blame city staff for what’s happened and the way ordinances are interpreted.

“It’s not like they’re enforcing a rule that’s already in place,” said Mike Shohet, president of Southern Nevada chapter of NAIOP, the Commercial Development Association. “They’re interpreting it differently, and they started doing that this year. We don’t agree with it, and it’s basically a tax on rent is what it is. We’re working with some other organizations to fight it.”

Duddlesten said the city sifted through its business license categorization in 2013 and separated it to make it understandable, and it’s clear that those who own commercial property and leased the space were subject to a license. When the city received a list last fall from the Secretary of State, it revealed that a “huge number” of commercial property owners did not have a corresponding business license, she said.

“We routinely go through the business license category to send letters to businesses to make sure they have the right license,” Duddlesten said. “This is not anything new. We just this year chose to remind people if they’re doing this they need a license.”

The move has generated a lot of interest in the commercial real estate industry and lobbying efforts from groups to stop the fee of .00056 percent of the gross revenue from commercial rents every six months. If a building generated $30,000 in rental income, that would equate to $55, city officials said. The total would be larger for an entity that owns many buildings and charges even higher rents.

“With any potential legislation, we welcome the opportunity to sit down with the government leaders and have an open dialogue so that we can come up with a mutual solution,” said Soozi Jones Walker, president of the Commercial Alliance Las Vegas, the commercial real estate arm of the Greater Las Vegas Association of Realtors.

“There was a discussion several years ago about implementing something like this, and many of us went down to talk and it went away. Somehow in 2013 it came to the surface again, and we just literally started hearing about it from the owners in the past couple of weeks from letters they received.”

Jones Walker, president and broker of Commercial Executives Real Estate Services in Las Vegas, said this is an issue of staff taking existing ordinances and twisting the interpretation. She’s concerned it will lower commercial values because it will discourage people from wanting to buy commercial real estate within the city limits.

“This is really scary,” Jones Walker said. “Maybe they find temporary money, but they kill the golden goose. I hope it doesn’t come down to that. Since when did we start licensing owners because they own a piece of property in the city of Las Vegas? It’s an interesting premise because with a commercial property, you may be losing money owning that property because rents are still low. There’s a huge difference between what you’re marketing the property for and after you do rent it and pay expenses. What do you have left in your pocket in the very end? That business license is like some sort of potential income tax, and it looks on the surface as income tax.”

Shohet said such a licensing requirement — in which commercial property owners pay a fee based on rental income — is done in a few cities across the country. Where it has been implemented, many investors refuse to buy properties, and he fears that could happen in Las Vegas.

Duddlesten said Las Vegas isn’t doing anything that isn’t already being done in unincorporated Clark County. Casinos and other major property owners are required to pay a fee on rental income there, she said.

Clark County on its website has a category of commercial leasing that says anyone who leases commercial property pays a semiannual license fee determined by the gross revenue. In 2015, the county reported $476,000 in revenue from that category.

Jones Walker and Shohet said they’re not aware of any such rental fee in unincorporated Clark County and haven’t been informed by members that there’s a problem. Jones Walker said city officials are misinterpreting the county ordinance, and that it’s not a tax on rent. She said she’s concerned Las Vegas might be turning into one of those states that’s looking to tax people and doesn’t care about unintended consequences.

“That is a very bad thing for business,” Jones Walker said. “It’s going to affect the value of our real estate or affect the velocity of investors coming in because of additional licensing and restrictions. One of the reasons people invest here is we make it business friendly and easy for them. That’s as we are coming out of this recession and one of the things we keep telling people. Are we being that way as we add additional layers of regulation, taxation and licensing?”

Since a violation of a Las Vegas code also is a misdemeanor, Jones Walker said that’s going to have a chilling impact on the city and send shockwaves through the commercial real estate industry. Many commercial property owners don’t live in Las Vegas, she said.

“Will we have to lock these guys up at the airport when they fly into town and learn they have warrants out for their arrest because they didn’t have a city business license they didn’t know anything about,” Jones Walker asked. “They’re singling out commercial property owners versus all investment properties. They’re not requiring that of someone who owns 100 homes and rents them out.”

Opponents also cited unfairness in treatment of commercial property owners who operate their business out of a building they own and face paying the fee. That includes many professional practices such as doctors and lawyers who set up a holding company that leases to the practices. It’s a standard practice for liability protection, officials said.

Duddlesten said that issue is under review and may be brought to the City Council for clarification if needed. There is no intent to charge such a fee to the property owner who in essence is leasing the building to themselves. Such practices pay a business license fee already.

Las Vegas Councilman Bob Beers said he’s concerned about the fee and is waiting to hear from staff on where the matter goes from here. Beers said the city already licenses commercial real estate brokers and doesn’t need to do anything that would burden the industry.

“I believe that it is double taxation,” Beers said. “The decision was fueled by a consultant’s report that was apparently procured several years ago. We hired a consultant asking how we can get more money from our citizens now that taxes are flat. That is where this is coming from and in my opinion it is ill advised because we are already taxing the industry.”

Beers said he hasn’t decided his next step and whether he will take the issue to the council but warned this won’t be the last of such fees. The state Legislature has created a situation where local government revenue is flat but the expenses must increase to pay wages, he said.

“As long as the Legislature structures local government in that manner, you’re going to see local government attempting to raise revenue however it can because it cannot stop giving out raises under state law,” Beers said.

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