State tax board pays a pretty penny for Fresno office space

It’s hard to miss the State Board of Equalization’s Fresno field office, ensconced in a gleaming glass building at Palm and Nees avenues in one of the trendiest office-commercial areas of the city.

And the agency in charge of collecting sales taxes, property taxes and some other taxes for the state pays a premium for its second-floor digs. The Board of Equalization occupies 13,418 square feet within the three-story River Bluff II building, for which the monthly rent amounts to $41,529 – or about $3.10 per square foot.

That’s about 50 percent more than the advertised rate of $2.05 per square foot for smaller spaces within the same building listed by Russell G. Smith Inc. The state reports that its lease rate includes the cost of tenant improvements made by the landlord to accommodate the offices, as well as rent increases over the nine years since the Board of Equalization moved into the building in late 2008.

But the raw figures don’t tell the entire story. When the state sought bids from office developers for space in 2007, it required an extensive array of upgrades and improvements – including significant measures to ensure the safety and security of employees working in the office. Those improvements significantly drove up the costs that needed to be recovered over the term of the lease – to the tune of 60 to 65 cents per square foot, said Russell G. Smith, chairman and CEO of the brokerage that bears his name.

The Board of Equalization is the target of a major overhaul by legislators in Sacramento, who voted last week to largely dismantle it and replace it with a new taxing agency. Additionally, investigators from the California Attorney General’s Office are interviewing civil servants in a probe that may lead to civil or criminal penalties against board officials. A March audit from the Department of Finance reported that elected board members had inappropriately intervened in the agency’s daily operations, misused public resources by reassigning civil servants to different jobs and created a climate of fear among some state workers who worried about crossing them.

About 65 state employees work in the Fresno field office – one of 22 field offices that the Board of Equalization has across California. The agency’s 10-year lease in Fresno expires in September 2018.

Smith said comparing the raw number for the lease rate paid by the state to the market rate is like comparing apples and oranges, and not only because of the specialized tenant improvements required by the state.

In many office buildings, tenants pay a base rent, but then are responsible for their proportional share of other operating costs associated with the building. It’s an arrangement known in the real estate industry as “triple net,” and covers such costs as property taxes, insurance and maintenance. Think of it as the base rent paying for a basket of apples, and then paying extra to add oranges, peaches and strawberries to the basket.

For the Board of Equalization offices, however, those triple-net costs – which Smith said amount to another 68 cents per square foot – are built into the base lease rate rather than treated as add-ons. So the rent covers the metaphorical fruit basket – apples, oranges, peaches and strawberries – on one bill.

The competitive process by the state attracted plenty of bidders, Smith said. “We were the low bidder and won the contract,” he said. Rather than seeking out overly expensive office space, “in fact, they procured the space from the cheapest possible source.”

Craig Capriotti, vice president of the office division of commercial real estate brokerage Fortune Associates in Fresno, said the north part of town is one of the hottest office markets in the city. “We’re in a growth spurt right now for office space,” Capriotti said. “But keep in mind that northwest area has been in play for a long time.”

The going rates for office space in northwest Fresno tend to range between $1.65 and $1.95 per square foot, Capriotti said; the rates are similar in the Woodward Park area on the east side of Highway 41. But that is the base rate, before adding on the “triple net” costs that are passed along to tenants by building owners.

Capriotti said he has worked frequently with state and federal agencies on office leases; his experience is that they are often able to negotiate better terms than private firms. “They have a budget, and when the state deals, they don’t pay for common areas like hallways and restrooms,” he said. “They do negotiate pretty hard on what they pay for.”

While the Board of Equalization pays for a net rented area of 13,418 square feet in his building, Smith said, the agency actually occupies a “gross rentable area” of nearly 16,000 square feet. The lease rate of $3.10 per square foot reflects an adjustment to help make up for that difference, Smith said.

In some instances, though, agencies find themselves limited in terms of what office space is available in the market to meet their needs. “It’s not necessarily fair to say that (the state) wanted to be in the most expensive area,” Capriotti said. “When it comes to a market like Fresno, when (the state) came here and they needed a large space, there might only have been a few choices for them to see at that time.”

To illustrate his point, Capriotti did a database search of available office space in the 12,000- to 15,000-square-foot range. “There are only 17 places that fall in that range,” he said. “There’s really not all that many in all of Fresno.”

The total volume of office space in northwest Fresno, north of Herndon Avenue, is about 3.4 million square feet, according to a real estate update presented by Collier International senior vice president Brett Todd for the Fresno Economic Department Corporation earlier this year. Of that, less than 290,000 square feet are vacant and available for lease – a vacancy rate of about 8.5 percent. That is the lowest vacancy rate among the various areas of Fresno.

▪ This story was updated from the original posting.

This story was originally published June 20, 2017 at 5:24 PM with the headline "State tax board pays a pretty penny for Fresno office space."