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Downtown development could give GraceKennedy $1 billion tax windfall

Published:Tuesday | September 29, 2015 | 11:48 AMCamilo Thame
Don Wehby, group chief executive officer of GraceKennedy Limited.

GraceKennedy's commercial complex planned for the Kingston waterfront could provide the conglomerate with a $1 billion windfall in tax breaks under a law aimed at redeveloping downtown.

The group of companies bought the land on which construction will take place for $75 million. Additionally, it currently estimates that the new building will cost US$25 million ($2.95 billion).

The Urban Renewal Act provides developers with an investment tax-credit equivalent to one-third of the capital expenditure.

"GraceKennedy does plan to apply for the tax incentives that are available to us under the Urban Renewal Act," GK group CEO Don Wehby told Wednesday Business. "Without it, the benefits of the project would be marginal at best."

Rental income is also tax free under the act, and the project currently includes building some 6,000 square feet of retail space at the new complex.

Savings on rent to be realised when the group moves its money services operations, GKMS, from the pricey New Kingston area to the new building should also sweeten the pot. Those rented offices cost the conglomerate upwards of US$500,000 ($59 million) a year by Wednesday Business calculations.

Most of the 68,000 square feet of office space planned for the downtown complex will be occupied by GKMS operations now situated in the uptown business district where commercial rents run from US$10-US$30 a square foot.

Early discussions with banks suggest a favourable view on funding the project, according to Wehby. That's likely because available incentives give financiers of such projects tax exemption on interest income.

The Urban Renewal Act even benefits renters of approved properties in the special development area, where the project site is located. Lessees of these properties get to claim double their rental expense as a deduction from gross income when arriving at taxable earnings.

Real estate prospect

For GraceKennedy, the project might also be the launching pad for a real estate investment trust (REIT), which the group of companies hopes to establish and list on the local stock exchange.

"GraceKennedy is still considering floating an REIT into the market close to the completion of construction of the new building in June 2018," said Wehby. "Naturally, market conditions at the time will determine the feasibility of the REIT."

He said that the trust would include properties outside of downtown Kingston. The group's distribution centre in St Catherine is currently seen as one such property that could be included.

The conglomerate previously benefited from tax relief under the Urban Renewal Act when it developed its headquarters on Harbour Street in the mid-1990s. Since then, other developers have made similar undertakings, most notably Digicel, which opened the doors to its US$65 million headquarters on Ocean Boulevard at the beginning of 2013.

Pan Jamaican Investments, along with its Canadian partners, bought the Oceana Hotel located a few hundred metres from the telecoms' new offices for $385 million in January. They plan to spend $1 billion developing the property, starting with the renovation of the ground floor of the former Kingston hotel to accommodate 70,000 square feet of new office space.

Wehby wants his new building to stand out, and he has instructed the architects - Bob Fowler and Associates - to deliver on that. "I want the building to be a prototype for energy self-sufficiency," he said.

Given that parking is often cited as a problem for downtown, the new complex will also include high-rise parking going up three to four floors and spanning more than 100,000 square feet.

"GraceKennedy plans on building a building that is right for us and fits our culture," added Wehby. "We are proud to say that GraceKennedy was one of the first companies to put in place an open-office environment in Jamaica when we inaugurated our offices at 73 Harbour Street. We certainly plan on continuing that tradition of employing innovative office designs in our new corporate headquarters."