Should Offices Be Allowed in Retail Zones?

Here’s a riddle for you: How much sales tax is collected by a town from a storefront that is vacant? Not the toughest of riddles. In fact, the answer is rather obvious. A fifth-grader can figure it out. The answer is NONE.

Several years ago when the commercial real estate market was really humming, some towns got the notion that they needed to make it illegal to allow offices (i.e. real estate, accounting, doctors, lawyers, chiropractors, physical therapy, etc.) in their “prime” retail zoned areas. The theory being advanced at the time was villages shouldn’t “clog up” their limited retail spaces with non-sales tax generating businesses. Sales tax is a valuable source of revenue in any town’s budget. So, it sort of made good sense not to do anything that would jeopardize potential for collecting such sales tax.

Non-home-rule committees get rebated from the state of Illinois 1 percent out of 7 percent or so collected on each retail sale. Some home-rule communities like Crystal Lake have higher sales taxes that the voters have agreed to incur and collect more than 1 percent. Service businesses like dry cleaners, tanning salons, etc., do not generate sales tax (yet) but these types of businesses don’t seem to get the same “stiff arm” as the office type businesses in the typical zoning regulations.

Here’s the problem: The commercial real estate market hasn’t been humming for several years and you may have noticed a lot of vacant storefronts in the various communities where you do your shopping. Do you think it would be better to put an office type use in that vacant space or just leave it vacant? If you were the landlord, I don’t think you would think twice about this one.

Different times call for different thinking on the part of municipalities. I agree, if a retailer wants to come to your town, you would like to be able to accommodate him or her. But if an office user wants to relocate by the local Jewel and there is a vacant space available, why not let him go there without making him jump through bureaucratic hoops like special-use permits (which cost money and take extra time)?

It turns out office workers have this weird habit – they eat lunch every day. At lunch time, they go out and patronize local eating establishments a few doors down from their office. They’ll stop and have a cup of coffee and doughnut at the Dunkin’ Donuts, they’ll stop at Jewel on their way home and buy groceries. Do you know what I’m saying?

The office employees spend dollars in the nearby retail establishments because those establishments are convenient to where they work. And those purchases generate sales tax that might never occur if this retail establishment were not convenient. What a concept!

In addition, these office uses create new job opportunities in town and they pay rent to landlords who have been suffering greatly from overall lack of demand for their space. Get too much vacancy and they can’t pay their mortgage and may have to lose their valuable hard-earned asset to the bank.

I’d like to ask any town that restricts office uses in retail zones to re-think its posture on this subject and immediately take steps to dial back on this economically hurtful practice. The laws of supply and demand, if allowed to work without government interference, will cause more retail space to be built if by chance your “prime” retail space gets filled up with office type uses. Is that such a bad thing? How many new retail centers have you seen being built lately?

It will be a lot easier to return to a stabilized prosperous commercial real estate market if local governments can see the error of their ways on this subject and permit office uses in all their retail zoned areas.

Written by Bruce Kaplan, Senior Broker associate with Premier Commercial Realty in Lake in the Hills.