Real Estate - Commercial

When The Government Becomes A Landlord

By Johanna F. Still, posted Feb 3, 2023
The former PPD building in downtown Wilmington could be purchased by the city in a potential $68 million deal. (File photo)
Should a complicated deal come to fruition, the city of Wilmington could become a landlord over office space in the city’s tallest building.

This wasn’t the city’s intention.

Officials realized the Thermo Fisher Scientific building could be a cost-saver, given estimates that rebuilding and consolidating city offices at 305 Chestnut St. could cost up to $96 million. At a potential price of $68 million, with nearly four times as much square footage, the 12-story Thermo Fisher building presents an attractive alternative, officials say. 

The city only needs up to six floors, deputy city manager Chad McEwen told Wilmington City Council members on Jan. 24 before they approved sending Thermo Fisher an offer-to-purchase contract. 

That would leave up to half the building available to be rented at a market rate. ThermoFisher has indicated it is interested in leasing back up to three floors, leaving the remaining floors open to other potential commercial tenants. Prospective tenants have already expressed interest, McEwen told the city council. 

But this, and potentially other aspects of the arrangement, could stall or snag the city’s hopes of having the deal approved by the N.C. Local Government Commission (LGC). 

“The LGC will have a strong say in how much of the building we occupy,” city manager Tony Caudle told council members during the meeting. “The reason being is because we cannot be seen as buying that property with taxpayer money and being able to make money off of the leases.”

According to LGC spokesman Dan Way, an Internal Revenue Service rule caps the amount of private use allowed on nontaxable financing at 10%. While the LGC has yet to receive an official application, it will be tasked with overseeing the purchase of the property, Way said. 

Wilmington might need to issue bonds and/or raise taxes to finance the deal, city officials said. Revenues from private leases and the sale of its other office assets could be used to offset the city’s debts. 

The city’s primary goal, according to city spokesman Dylan Lee, is to meet public parking and city office space needs in the most efficient and cost-effective means available. “If the city believes this property acquisition accomplishes that goal, the lease of excess office space would be a byproduct but not a primary goal of the acquisition,” Lee said. 

City officials have already discussed getting feedback about potential tenants.

“During that 120-day examination period, does the city anticipate engaging with the public with regards to the market rate space that will be available to determine the market demand of that space,” asked Councilman Luke Waddell at the agenda briefing Jan. 23. 

Waddell also asked if the city could advertise a public notice to garner feedback from potential tenants. 

“Absolutely,” McEwen replied. “We’ve actually already received some interest. Obviously interest doesn’t pay bills, but we have had phone calls and interest in those residual floors that will be available and we certainly will engage public as well as private entities that may be interested in securing space.”

Global commercial real estate firm Cushman & Wakefield and Paul Loukas, broker in charge of Cape Fear Commercial (CFC), are representing Thermo Fisher/PPD in the potential sale of its Wilmington property.

Loukas said they’ve had interest from Class A office users interested in leasing space in the building. 

“Some of those prospects have been interested in space for quite some time, but they’re larger users, and there just hasn’t been availability of their square-footage needs,” Loukas said. “So this was a good opportunity for them.”

Wilmington currently leases publicly owned property to nonprofit groups at a low rate, Lee said, including DREAMS of Wilmington, Voyage, First Tee-Greater Wilmington, Communities In Schools and the Wilmington Railroad Museum. 

The city also has a limited number of leases with private companies, which mostly originated from its April acquisition of 115 N. Third St. In that $11 million purchase, the city honored existing leases in the building. As of 2021, those tenants included United Bank, the StarNews and RE/MAX Executive. 

Meanwhile, New Hanover County is preparing to absorb – should the deal cement as intended – several tenants at the nearby 319 N. Third St. building. The county is set to lease the five-story building to Cape Fear Community College to expand its nursing and allied health programs, and both intend to honor the existing private leases. Tenants include Black & Veatch, Litify Inc., Eshelman Ventures, Dye Creek Capital, Suzy and subtenant Port City Logistics. 

That deal is slated to close Feb. 3, barring a legal holdup between the seller and a former owner over parking spaces. Other than this proposed continued leasing arrangement, the county only has four leases for parking and five leases for space on its cell towers, according to county chief financial officer Eric Credle. 

Asked if there are specific rules the county must abide by in private lease arrangements, Credle said, “The statutes generally consider any lease with a term for more than 10 years to be a sale of the property, which results in needing to comply with various statutes related to property sales.” 

Credle added there are no restrictions on how the county spends revenue generated by its leases with private entities. 

However, according to Lee, there are state statutes that govern what cities can use the revenue for. “There are many state statutes that govern how cities can execute leases,” he said. “Some of those statutes address issues or impose conditions that are not required in a lease agreement between two private entities.”

Revenue generated by leasing part of the Thermo Fisher building back to the former owner, estimated at $2 million, could offset the city’s acquisition and/or operating costs, city officials said. 

Lee said, “The primary goal for the city in situations such as these is always to accomplish a public purpose in a responsible way, never to create a revenue stream for the city.”
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