Archive: August, 2010
Joseph N. DiStefano
Philadelphia's Center City office vacancy rate has risen to 15%, highest since 2004, the Studley agency's Philadelphia branch manager, Hether Smith, says in a new report. The rate was under 10% and investors were talking about new buildings before the economy stalled two years ago. Supply's been flat.
Studley blames the most recent spike on the decline of Philadelphia's chemical industry, including Arkema's recent decision to leave town and consolidate local operations in King of Prussia, and Sunoco's plans to cut office space as it sells off businesses and refineries. Dow Chemical has also cut office use at the landmark former Rohm and Haas building on Independence Mall since it bought the company last year.
Center City office rents were flat at around $26/square foot for Class A towers, $21 for older Class B space. But landlord giveaways are on the rise, with tenants demanding around five months' free rent (less in the suburbs) plus more in free improvements.
Update: Brandywine Realty Trust confirms that Comcast has leased the 42d and 43d floors of its newly-acquired former Bell Atlantic tower, Philly's home to Comcast rival Verizon. 42,000 square feet. Just across the street from Comcast HQ. - David Binswanger, who represented Comcast, says the space was sub-let by former occupant Aramark, and expires, like all the leases in the building, in 2012.
Joseph N. DiStefano
TECHcocktail, the Frank Gruber-Eric Olson mobile start-up promo-fest, makes its first visit to Philadelphia tonight, 6:30 at the Field House Sports Bar, 1150 Filbert near Reading Terminal Market and PA Convention Center. $20 at the door, $15 here. Featured Philly firms looking to hook up with investors and 'xtend the brand:
Chris Stanchak's TicketLeap Inc., the sell-it-yourself anti-Ticketmaster
Numote Inc., Vijay Kailas's "personalized TV" service
Adapt.ly, Nikhil Sethi's DreamIt Ventures-backed online ad platform
Easel Learning, San Kim's "iPad interative learning environment"
Vozeeme, Anastasia Andreeva's freight-shipping "online marketplace"
Dan Levin's Campus Sponsorship online fundraising network
Sqoot, Mo Yehia's "aspirational Foursquare"
... plus two New York firms, Jeff Engler's MatchLend and Brian Foo and Todd Spitz's GiveLoop Inc.
Joseph N. DiStefano
The Wilmington News Journal's hardworking veteran Dover reporter Jeff Montgomery yesterday reported two scary pollution settlements - or, rather, the latest steps toward trying to control dangerous pollution from oil and steel producers on the banks of the Delaware without driving them out of business, so they can keep employing people and paying taxes.
1) "Delaware and Evraz Claymont Steel announced a new and sweeping agreement today on pollution control upgrades to the specialty plate-making factory, long under fire for raining soot and slag-metal dust on its neighbors... The [Russian-owned] plant along Philadelphia Pike near the Pennsylvania line will have three years to complete installation of new emissions control systems and relocate portions of its slag-handling operation...
"[Delaware] also ordered the company to continue mercury-monitoring programs launched in 2005, after a discovery that mercury-laden switches from automobile scrap metal had turned the plant’s smokestack into one of the nation’s larger emissions sources for the toxic metal."
2) "Delaware has fined Valero Energy $1.95 million for nearly 200 pollution violations over the past decade at the Delaware City Refinery.
"State regulators quietly agreed to the settlement -- among the largest cash-only environmental penalties levied by Delaware in recent memory -- on May 28, days before Valero sold the refinery to [Connecticut-based PBF Energy Partners on June 1 in a state-assisted deal to reopen the shuttered plant]. Officials of the Department of Natural Resources and Environmental Control only released the penalty on Monday in response to a reporter's inquiry.
"Covered were a wide range of air and water violations... Although the Department of Natural Resources and Environmental Control routinely publicizes penalties and regularly posts even littering charges on its website, agency officials said the refinery pact was quickly overshadowed by other events.
"It wasn't by design," DNREC Deputy Secretary David Small said. "It was a matter of 'Let's get this done...'"
Joseph N. DiStefano
Should Philadelphia tax firms' sales, instead of their profits?
The city charges two "business privilege" taxes. It demands $6.45 of every $100 of profits, the "Net Income Tax"; plus 14 cents on every $100 of total sales, the "Gross Receipts Tax." These city business taxes are slapped top of city property taxes and other local levies.
For a generation, Philadelphia business taxpayers, their lawyers, and the chamber of commerce have targeted the gross-receipts tax as unfair and discouraging to employers, says city finance director Rob DuBow. The current city tax ordinance calls for phasing it out over the next 12 years.
But City Council members Bill Green and Maria Quinones-Sanchez say that's backwards. "We have concluded lowering the net income tax will have a better effect on the Philadelphia economy than lowering the gross-receipts tax," Green told me last week.
Their draft bill, which they plan to introduce this fall, wouldn’t just cut the income tax; it would also boost the gross-receipts tax, to around 54 cents for every $100 in sales, while eliminating the city business-income tax, both in stages over the next five years.
Up until now, Green and Quinones have made mostly logical arguments in favor of the shift. It's relatively easy to verify sales at companies that already pay state sales tax. Out-of-town companies can be made to pay taxes on their sales to Philadelphians; "Home Depot, Lowes, Target, their stores are not going to move because their gross-receipts tax goes up a little bit," says Green.
By contrast, profits from Philadelphia sales are tough to trace, let alone tax, at big multistate companies, especially with legal local-income-tax dodges, like the Delaware invstment holding company, that turns taxable store profits into tax-free franchise or licensing fees.
That's why Texas and Ohio have switched to gross-receipts taxes recently, and a California state tax commission is recommending one, Green says.
But the two councilmembers are now going beyond ought-tos and logical arguments. They have built a new weapon: an analysis of city tax data by former city commerce director Stephen Mullin of Econsult, which shows who'll pay more, and who'd pay less, if they change the law.
The idea, says Green, isn't to boost business tax revenues, which topped $350 million in 2008-09. "We want this to be revenue neutral."
It's to change who pays, and put as much of the burden as possible on out-of-town companies that suck money out of the city, while exempting small businesses (local or not), easing pressure on the city's surviving manufacturers, and keeping new businesses that spawn in Center City, University City, and other neighborhoods from leaving.
According to a draft of Mullin's report, construction, retail and hotel operators would together pay up to $25 million more each year -- while law and accounting firms and manufacturers would collectively save up to $35 million a year.
An estimated 40,000 businesses, or nearly half the number currently paying the taxes, would drop off the business privilege tax rolls altogether, saving them a total of more than $10 million a year, because their bill would exempt the first $100,000 in yearly sales.
Banks and insurers would also pay less because state laws leave them exempt from most taxes on sales, Green told me. Since construction company revenues have lately fallen due to the recession, and the analysis didn't initially take into account the financial-sales exemption, they may have to boost the tax it's possible they'll have to charge more like 60 cents per $100 to cover the loss of income-tax revenue.
The analysis does take into account breaks the bill offers manufacturers and retailers who pay tax on their employees, plus a break for food stores that sell a high proportion of fruits and vegetables following complaints from grocery chains their margins are already weak.
Tax lawyer Stuart Weintraub of Chamberlain Hrdlicka, who's served on tax-reform commissions under Mayors Rendell, Street, Goode, and Green (the councilman's father), says he's not surprised law and accounting firms come out as big winners. "They pay the largest proprtion" of the net-income tax, he told me. Banks and utilities "will pay literally zero” if the new law passes. “They're also winners."
He’s concerned higher taxes on hotels and other tourist-focused businesses could hurt one of Philadelphia's few growth industries - though "whoever's ox is gored is going to scream."
"It is a huge competitive disadvantage to have a business tax at all," says Green. New York has a gross-receipts tax, Los Angeles has one, but most local and East Coast communities that compete with Philadelphia don't. Sales or income, says Green, "we need to lower business taxes over time."
The Nutter administration still prefers to cut the gross-receipts tax, DuBow told me, though it will review the report when it's final later this summer.
The proposal inherently picks winners and losers,” cautioned Rob Wonderling, president of the Greater Philadelphia Chamber of Commerce.
He praised Green and Quinones for reaching out, and said he is scheduled to meet with both again in the next few weeks. “They have data; we’re providing very candid perspective from our membership.” Big employers like Comcast and Aramark haven’t weighed in yet; Wonderling said discussions are “still at the technical stage, before we talk to our members.”
Lawyer Weintraub is watching the tax-change advocates’ “major push” closely. “If they can persuade people this is good economic policy, and they can convince ten of their colleagues on Council, then it's going to happen, notwithstanding the mayor's opposition."
Joseph N. DiStefano
"The U.S. is bankrupt. Neither spending more nor taxing less will help the country pay its bills," writes Boston University Prof. Laurence Kotlikoff at Bloomberg here.
Citing this International Monetary Fund (also this) and this Congressional Budget Office analyses of the federal budget and U.S. debt, Kotlikoff says the government must "radically simplify its tax, health-care, retirement and financial systems, each of which is a complete mess... They can each be redesigned to achieve their legitimate purposes at much lower cost and, in the process, revitalize the economy...
"The IMF is saying that closing the U.S. fiscal gap, from the revenue side, requires... an immediate and permanent doubling of our personal-income, corporate and federal taxes as well as [the Social Security and Medicare payroll taxes]... The IMF is really saying the U.S. needs to run a huge surplus now and for many years to come to pay for the spending that is scheduled... Based on the CBO’s data, I calculate a fiscal gap of $202 trillion...
"This is what happens when you run a massive Ponzi scheme for six decades... It will stop in a very nasty manner...
"The first possibility is massive benefit cuts visited on the baby boomers in retirement.
"The second is astronomical tax increases that leave the young with little incentive to work and save.
"And the third is the government simply printing vast quantities of money to cover its bills.
"Most likely we will see a combination of all three responses with dramatic increases in poverty, tax, interest rates and consumer prices. This is an awful, downhill road to follow, but it’s the one we are on."
What Kotlikoff doesn't believe is that the private sector is prepared to grow our way out of the slump.
Joseph N. DiStefano
It has to happen if the market is to get moving again. But the collapse in Center City real estate prices is a sign there won't be major new private construction here for years to come.
From my column in today's Inquirer: "Last week's sale of the 53-story former Bell Atlantic headquarters tower at 1717 Arch St., to Brandywine Realty Trust, for just $129 million, or $125 per square foot, could prove a good deal for Brandywine when the office market revives years from now. But it wasn't priced to inspire confidence for anyone hoping to build soon.
"The last high steel hung in that neighborhood, Liberty Property Trust's Comcast Center, cost $500 million, or $400 a square foot, in the mid-2000s. The tower was assessed this year by the city at just $181.5 million.
"'Why build for $1 what you can only sell for 50 cents'?" asks Jason Friedland, a director at real estate investor Iron Stone Strategic Capital Partners in Philadelphia. More in today's PhillyDeals column here.
Joseph N. DiStefano
TUESDAY NIGHT: Remember the end-of-the-boom Timothy J. Mahoney 2d/Brook Lenfest plan to build a $420 million Waldorf-Astoria hotel and condos on part of the site of the burned former Meridian Bancorp tower across from Philadelphia City Hall?
They scrapped it last year, as my colleague Suzette Parmley reported. And now, CB Richard Ellis has been contracted to set up an October auction to end the legal dispute between Lenfest, who put up $16 million for the project, and his construction partners, who sued him in Common Pleas Court (2009 Civil Action 002232), claiming he favored developer Mahoney's financial interest over theirs when the deal fell apart.
UPDATE: The Rubinstein Associates PR agency, which gave the auction story to the Journal last night because that's the kind of tools they are, put this out Wed. morning:
"A prime 22,400-square-foot development site, fully approved to accommodate a structure of 848,000 square feet and situated in the heart of Downtown Philadelphia’s central business district, will be sold absolute, regardless of price, at an auction conducted by CBRE Auction Services on Tuesday, October 5th, 2010.
"Located at 1441 Chestnut Street, adjacent to the City’s renowned Ritz Carlton Hotel, the site... is currently occupied by an existing surface parking lot producing an annual net operating income of $650,000...
"The open-outcry auction, the result of a partnership dissolution, will be held on Tuesday, October 5th at The Union League located at 140 South Broad Street, Philadelphia, Pennsylvania. Registration begins at 10:00 a.m., and the auction commences at 11:00 a.m. A certified or cashier’s check in the amount of $250,000 is required to bid.
"Bidder’s Seminars will be held at CB Richard Ellis’ offices at Two Liberty Place, 50 S. 16th Street, Suite 3000 on September 15th and 22nd at 1:00 pm... Call CBRE Auction Services at 800-815-1038." CBRE started an auction service two months ago as the stalled real estate market finally starts to move, at much reduced prices.
Joseph N. DiStefano
For the third time since 2001, Langhorne-based electrical-submeter maker E-Mon LLC has been sold, this time to Honeywell Inc., the Morris Township, NJ-based industrial giant that's been expanding its electrical-grid products line. E-Mon says 1,500 U.S. distributors sell its systems to monitor and control electricity use.
"Submetering is the key enabler to efficency initiatives in buildings," and Honeywell wants to sell more to boost its "smart grid" electrical conservation equipment sales, Joseph Puishys, presdient of Honeywell's Minneapolis-based Environmental and Construction Controls (ECC) unit, said in a statement (link above).
UPDATE: Honeywell won't say what it paid for E-Mon, but E-Mon chief executive (since 1991) Donald Millstein told me it got a better price than its previous sale, in 2007. Millstein and Honeywell spokesman Mark Hamel said E-Mon's nearly 50 headquarters staff, circuit finishers and other staff, mostly in Langhorne, will keep their jobs. Millstein said annual sales are up at "double-digit" rates despite the recession. John Castle, principal at E-Mon's previous main, private equity firm Branford Castle, New York, was unavailable for comment. PNC Harris Williams advised E-Mon on the sale.
In 2001, chief executive Donald Millstein sold the company to Hunt Power LP of Dallas. In 2007, Millstein bought it back with backing from private-equity firm Branford Castle Inc., which sold to E-Mon. Millstein wasn't immediately available for comment on his plans now that E-Mon is taking over. More in Wednesday's Phillydeals column here.
Joseph N. DiStefano
The video-rental and online-movie businesses are converging, from both ends, as the middlemen who stand between Hollywood and movie-watchers cut deals:
1) Netflix's deal with Epix, the joint-venture movie-distribution channel run by studios Paramount, Lionsgate and MGM, to distribute some movies online "is a long-term positive" for home-movie-mailer Netflix - but it will need to lure millions of new subscribers (or boost prices or cut costs) to make it worth the "close to" $200 million a year the Los Angeles Times reported Netflix is paying Epix, writes Janney Capital Markets analyst Tony Wible in a report to clients today.
Won't that make Netflix an even more effective competitor (at $10 a month) vs. cable TV? No: The studios that own Epix don't want "to cut off their disc dollars," so they'll make sure Netflix customers "have to wait 90 days after movies debut on Epix [and cable] before they can get them over the Web," notes MediaMemo's Peter Kafka here.
2) Comcast's deal, to give its customers dollar-a-DVD discounts at ailing video-rental chain Blockbuster, will also open 1,500 Blockbuster stores in Comcast territories to Comcast retail sales promos, so Comcast can "market our triple play" video-phone-Internet services to Blockbuster customers, writes Comcast vice president Eric Budin in this blog post. - More from Wall St Journal here
Joseph N. DiStefano
Is Hewlett Packard a growth stock or a value stock? Both, professional money managers said; but it's neither, at the moment, since the boss was forced out. The printer giant's stock fell 8% Monday after boss Mark Hurd left in the wake of a company investigation of a sexual harrassment complaint that found he'd violated "business conduct" rules.
So who lost money? As one of the nation's most valuable companies, HP is cemented into index mutual funds. It was also the third-largest holding in Vanguard US Growth fund - and the fifth-largest holding in Vanguard's Windsor II fund, which Morningstar Inc. calls a "value" fund, notes Daniel Wiener, publisher of the Independent Adviser for Vanguard Funds newsletter.
Growth! Value! What do they mean anymore? Wiener's a steady critic of Vanguard US Growth, which he says needs new direction. Meanwhile, he notes, "Vanguard director Rajiv Gupta [ex-head of the former Rohm and Haas] is also on the board of H-P. I’m sure he’ll have tales to tell at the next Vanguard Board meeting."
UPDATE: "It's not unusual" these days for a big stock like HP to show up "in both the growth and value benchmark," as well as "growth" and "value" funds, says Vanguard spokeswoman Amy S. Chain. "Valuation spreads have compressed, thus creating overlap between 'growth' and 'value'." Earlier this year, for example, HP was part of both the Russell 1000 Growth and Russell 1000 Value indices, she added.
Separately, Chain called it "insulting and disrespectful" to suggest Rajiv Gupta PhD might ever discuss sensitive HP business (like the big-news Hurd firing) with the Vanguard board (Gupta serves on both): "Our board members take their role as stewards of our clients' assets very seriously, as they do their roles on the boards of other companies and institutions. They honor the confidentiality of those engagements and certainly do not waste time engaging in gossip."
