🔒Major Hartford landlord Shelbourne warns higher property valuations could threaten its downtown holdings

Shelbourne Global Solutions, Hartford’s largest downtown landlord, is warning of ruinous impacts from the city’s recent revaluation. The city-wide property revaluation increased the market value of three of Shelbourne’s four Class A office towers downtown by more than $12 million combined, which could translate into a sizable tax increase. The higher city appraisals came even as other commercial property values dropped, on average, by about 10%, led by declines in office space. City officials attributed Shelbourne’s increases to the expiration of a 2018 tax-fixing agreement.

“This is threatening literally to the existence of the company and to the city,” said Ben Schlossberg, a managing member of Shelbourne. “The city has totally misunderstood the devastation of COVID and what’s coming next, or has chosen to ignore it.” Hartford is nearing completion of a property revaluation, required of every Connecticut municipality every five years. Most property owners have been alerted to changes in their assessments. For the most part, the revaluation saw office values drop, a reflection of the pandemic’s grim impact on occupancy rates and use of large metropolitan office spaces. The assessed market value of Hartford’s largest office tower City Place I, sank from $103.4 million to $82.3 million, down 20.4%. The assessed market value of the neighboring 301,000-square-foot City Place II office tower dropped from $20 million to $18.5 million, a 7.5% decrease. At the same time, some of Shelbourne’s assessments shot up. The company’s 281,189-square-foot office tower at 100 Pearl St., jumped in value by 14%, to $24.4 million. The fair market value of its 12-story tower at 350 Church St. — known as the Metro Center — gained $6.3 million, a 25.8% increase. Another Shelbourne office tower at 20 Church St. — the Stilts Building — is up 16.9% in value to $33.1 million. Shelbourne’s fourth downtown office tower — the Gold Building at 755 Main St., which it owns in partnership with LAZ Parking CEO Alan Lazowski — saw its assessed fair market value drop to $62.3 million, down 2.6%. Shelbourne bought heavily in Hartford over the past eight years, acquiring — wholly or through a partial ownership stake — a portfolio of 20 city properties with more than 2.5 million square feet and values totaling more than $250 million, Schlossberg said. The real estate investment group has spent more than $30 million renovating and marketing its Hartford properties, he said. Hartford Assessor John Philip said several Shelbourne properties had assessments set years ago in a legal settlement that has since expired. That’s why some of its properties have now shown market value increases, despite the overall office market taking a hit. “The assessments that were sitting on the books [prior to the recent reval] were half of what they otherwise would be,” Philip said. “Now the [tax-fixing agreement Shelbourne had with the city] expired with the 2020 grand list. I don’t get … why you would think an assessment based on fair market value would be lower than the tax deal you got that set the assessment at half fair market value.”

Tax disputes

Shelbourne has been bullish on Hartford ever since its first $44 million purchase of the Stilts Building in 2014. But this isn’t its first tax dispute with the city. Shelbourne ran into similar issues years ago, following the city’s 2016 revaluation, which more than doubled the taxes on three of its Class A office towers: 20 and 350 Church St. and 100 Pearl St. The combined tax bill on all three properties at the time grew from $2.6 million to $5.4 million. Shelbourne sued the city over those new valuations, but eventually came to a settlement agreement in 2018. The deal provided Shelbourne property tax relief by fixing assessments for a set period on several of its downtown Hartford properties (100 Pearl St., 20 Church St., 1006 Main St., 30 Talcott St. and 36 Talcott St.).

In return, Shelbourne dropped ongoing appeals of its 2016 assessments. It also agreed to acquire 36 Talcott St., pay off about $3 million in back taxes, demolish all structures on the Talcott properties and build a garage there with at least 400 spaces. Shelbourne pledged to spend $10 million on property improvements. The 2018 agreement set the market value of Shelbourne’s 20 Church St. office building at $28.8 million. Without it, the tower would have been valued at $43 million, according to Philip. As a result of the recent revaluation, the city now appraises that property at $33 million, Philip said. Under the 2018 tax-fixing agreement the city placed a $21.4 million market value on the 17-story tower at 100 Pearl St. Absent that deal, the building would have been taxed at $34 million, Philip said. The latest reval values the property at $24.4 million. Schlossberg argues the 2018 agreement didn’t provide tax breaks, but was rather an agreement settling upon reasonable values. He also noted that 350 Church St. – which rose 25.8% in value under the current revaluation – wasn’t subject to the agreement. “They didn’t give us a tax break,” Schlossberg said. “They agreed the assessment at the time was to be reduced to meet what was an agreed upon number, not to go back and increase it afterward… .”

Full reval impact

Mayor Luke Bronin acknowledged the difficulties faced by downtown office properties on Jan. 10, when he used an online town hall to discuss the revaluation’s impact. Bronin, and Philip, warned the tax burden will likely shift toward residential property owners. Values for commercial properties, led by a decline in office buildings, dropped about 10% while a hot housing market saw residential property values jump around 30% to 46%. Multifamily properties gained values at greater rates. Office buildings represent about 20% of the tax base, Bronin warned. “So, when you have office buildings and commercial buildings going down and you have residential properties going up, it means you have a shift and that is a big change that presents real challenges,” Bronin said.

Bronin said he hopes to lower the city’s 74.29 mill rate, tempering the tax impact of higher assessments. Bronin’s exact tax rate proposal will be released with his city budget proposal in April. Hartford taxes differently than every other Connecticut municipality. Others apply their mill rates against 70% of a property’s estimated fair market value. Hartford does that for commercial properties. But when it comes to residential properties, Hartford’s tax rate is applied against only about 36% of the fair market value. It means the tax rate is effectively halved for residential properties. In his Jan. 10 address, Bronin told residents he probably has the ability to push back the revaluation by a year due to COVID-19 impacts. But he said he fears commercial values will only continue to drop, shifting even more of the tax load onto residential property holders. “You can see it just by walking by our office buildings and seeing how empty they are right now,” Bronin said. “There is a lot of reason to expect that a lot of the companies that have office space are going to renew their leases with less office space the next time. Some of them may even decide they are going to shift virtual altogether. That has a real impact on commercial values.”

Silver lining

There may be some good news for office properties in the months ahead. Three of the city’s largest employers — Travelers Cos., The Hartford and CVS Health/Aetna — recently announced plans to send thousands of downtown employees back to the office in March and April. And while those companies mostly own rather than lease space, their presence could bring back some much-needed vibrancy and help spur other leasing activity downtown. In a subsequent interview, Bronin argued there is another silver lining. Long term, the same forces that carried workers out of offices could untether companies from more expensive cities, he said. “To me the story is by no means all negative,” Bronin said. “I think the change in work patterns presents significant opportunities for cities like Hartford. As companies take a look at their footprint and employee base, they might not feel so tied to large metro centers like New York or Boston. But seizing on those opportunities will take some time.”

Market outlook

In the short term, Hartford’s office market faces challenges. There are several “very large” downtown office tenants that are contemplating downsizing their footprint when current leases expire, or even moving entirely out of Hartford, Schlossberg said. About 20% of downtown office space is currently not under lease, Schlossberg said. And only about 10% to 15% of currently leased space is actively being used, he said. That squares with office market data provided by realty consulting firm CBRE, which showed downtown Hartford had an overall office vacancy rate of 18.8% at the end of the fourth quarter, while Class A properties had a 21.7% vacancy rate.

“Those are serious and not good numbers for the city,” Schlossberg said. “That also drives the rate you can charge a tenant because there is a lot of space available. Plus, the cost of putting a tenant into a space has risen 20% to 25% during COVID because of supply chain issues, because practical goods are not available.” The average gross asking rent in downtown Hartford was $22.42 per square foot at the end of the fourth quarter, according to CBRE. Schlossberg said Shelbourne, while anxious, is hopeful officials will respond to its concerns. If not, Shelbourne is ready for a legal battle, he said.

Joel Grieco, executive director of brokerage firm Cushman & Wakefield, said the downtown office market has little demand right now beyond existing tenants. And many of those are likely to seek smaller spaces when current leases expire, he said. The pandemic had a huge impact, but downsizing forces were in play before COVID-19, Grieco said. UnitedHealthcare leases almost half of City Place I, the city’s largest office tower, but there is great uncertainty how much it will occupy in the near future, Grieco said. “UnitedHealthcare was adopting a work-from-home approach prior to COVID,” Grieco said. “They were getting very efficient doing so.” Grieco said he thinks rental rates have sunk as low as possible. He anticipates vacancies growing, but no further reduction in rental rates. “Landlords right now are writing leases that are break-even,” Grieco said. “They want to be better than vacant and hope things improve by the time the tenant renews.”