Tenants Get Break From Soaring South Florida Costs With Rent Tax Repeal

Companies leasing office, retail and industrial space in South Florida have endured some of the fastest-rising commercial rents in the nation, but starting in October, their real estate costs will actually go down.

The state passed a law this summer that repeals its 2% annual tax on commercial rents, which takes effect Oct. 1. In Miami, where office rents have climbed more than 50% since 2020, the legislation is a welcome, albeit mild, breath of relief for businesses, brokers told Bisnow.

“It’s not a huge savings, but it’s something when you add it up over the course of a year on your balance sheet, saves you a little bit of money,” Colliers senior associate Anthony Cicio said. “Whether you can buy a new piece of machinery or invest in your business or hire somebody new with those savings, then that’s always a good thing for business.”

Gov. Ron DeSantis in June signed into law the $1.3B bill entirely eliminating state and local taxes on business rents. House Bill 7031 also added tax holidays for hunting, fishing and camping equipment between September and December and expanded item exemptions for things like batteries and fire safety equipment.

Florida is the only state to have a dedicated commercial lease tax, and CRE professionals have been pushing for years for its repeal.

The state introduced the tax in 1969 at 6% and began gradually reducing it in 2017 until dropping it to 2% by last June. The tax applied not only to base rent but also to additional rent charges passed through to tenants. This made fees like common area maintenance, utilities, insurance and property management fees subject to the tax, according to Holland & Knight.

On top of that, most counties also tacked on a local levy of 1% to 1.5% on commercial leases, which is also being removed by the state law, brokers said.

The savings from the tax aren’t seen as big enough to change the math for companies on space decisions, but the bigger the square footage in a deal, the bigger the savings.

​​“On small leases — 2K SF, 3K SF — it's not a huge deal. It's like a few hundred bucks,” Cicio said. “But when you get into like those bigger 50K SF, 60K SF, 70K SF deals, it's a pretty big chunk of change and a good amount of money they'll save annually and can reinvest in their business.”

The tax cut alone isn’t enough to persuade companies to relocate, expand their footprint or spark new leasing momentum, but it does have an immediate impact on tenants already renting or preparing to renew, said Peyton Dowd, managing director of Savills’ Miami office. 

But when paired with Florida’s lack of state or corporate income tax, the repeal is viewed as the cherry on top for the state's business-friendly reputation, adding to its competitive edge against other Sun Belt markets.

“When you compare us to Texas and Georgia, it was kind of one of those things that they did have over us,” Dowd said. “And now they don't.”

Miami’s office market activity has slowed from its wave of migration during the pandemic. But its average rent still increased by nearly 10% year-over-year to $63.34 per SF, according to a second-quarter report by CBRE. It is now one of the five priciest office markets in the U.S., which would have been unthinkable before the pandemic.

Many leases already include an automatic 3% annual rent increase, but this year both landlords and tenants can use the tax repeal to help offset the bump, Lee & Associates South Florida principal Bert Checa said.

“I'm coming to the tenants from the landlord side with the great news that we're still going to have the same cost per month as we had last year, because the annual increase on rent is offset by the reduction renewal of the sales tax,” Checa said. “Then I'm going back to the landlord and I'm saying, ‘We've got to increase the 3%, and the tenant doesn't even feel it because they got the reduction from the sales tax.’”

Landlords, who are ultimately responsible for paying the tax, typically pass it on to their tenants. But they were still liable for calculating the costs and forking over the funds to the state.

The repeal also removes that extra layer for brokers and landlords, especially when dealing with tenants that weren’t aware of the tax.

Laura Kozelouzek, CEO of coworking firm Quest Workspaces, said while it was never a deal-breaker, it was “less than comfortable” to educate clients that ultimately have to pay the cost.

“I love the fact that that sort of barrier, or I should say the annoyance, is going to be removed,” she said.

The tax was sometimes a factor in the negotiation for clients who were expecting to pay a base rent, instead of base rent plus tax, Checa said. Now, it’s one less thing brokers have to worry about.

“Conversations sometimes get started on the wrong foot, because you started off with the question about, ‘Why is there sales tax on rent?’” Checa said.

Beyond that, the extra time in calculations and work needed on the accounting side will be significantly reduced, especially for landlords like Kozelouzek, who manages 14 Quest locations and leases space to roughly 2,000 companies.

The repeal may be a small feat as far as savings on money and time go, but it's also a signal to business owners, in and out of the state, that Florida is working with them, especially as costs rise, said John Boyd, CEO of Boca Raton-based site selection firm The Boyd Co.

“We're in the middle of some real — I hate to use the term crisis — but the skyrocketing insurance costs that impact not just Florida but many coastal states around the country,” Boyd said. “Florida has sort of become the poster child of the insurance crisis. This is another mitigator.”