Case Studies in New York City Property

Development

Presented By: Scott Baker

SSBAKER305@YAHOO.COM

Public money for private benefit? An examination of development projects in New York

City, and evaluation of economic benefits given to encourage development, with emphasis on current and future policy

options.

Which one Is the most valuable?

Besides natural resources, there is all important location.Do you recognize this island?

How about now…?

And the most densely productive place as well

- Over $1 billion in GDP per square mile

NYC is the Most densely Populated place in the USA – 26,953 people per square mile*

* 2010 census

But the city’s growth is slowingAccording to the New York Post, the exodus from the city has been going on

for decades:“The movement from high-tax, high-housing-cost states to low-tax, low-housing-cost states has been going on for more than 40 years ... From 1970 to 2010, the population of New York state rose from 18 million to 19 million. In that same period, the population of Texas grew from 11 million to 25 million.”

…and the rent is too damn high!

Jimmy McMillan, perennial Candidate for NYC Mayor and NY Governor, from the Rent-Is-Too-Damn-High Party

6% of the buildable land - 154,000 acres - in New York City is classified as Vacant.

6% is 9,240 acres in the 5 boroughs, including 2.6% or 282 acres Vacant, and 1.9% or 206 acres, with no information, in Manhattan! - NYC Department of Planning

So... Is New York City Full?

Full?

Not Hardly!

Surfaceparking lots

...in Midtown

...besidesubway stations

But vacant land is just the beginning.

Much more land is grossly underused.

Surfaceparking lots

...in Midtown

...besidesubway stations

Boarded-upbuildings

...on the Upper East Side

...besidesubway stations

1-story “taxpayers”

...in up-and-comingneighborhoods

Full?

Not Hardly!

Park Ave. South & 29th Street

Four lots sold for a combined $31 million in 2006.

The four old buildings were torn down. So, the land value psf is $2,159.

But the city says it was $502 psf, less than ¼ of what it sold for!

Who is pocketing the difference?

When the Land Rent goes down, the Land Price goes up.

1185-1193 Broadway Lot: 79 x 86 ft.LV psf: $753BV: $2,912,000 LV: $5,000,000 Value: $7,912,000

In this zip code, for parcels with 4 stories or less, Average sale price psf: $2,322Value: $15,775,668

Average # of stories: 8

55-63 Bleecker St. 82 x 100LV: $859,000 BV: $1,725,000 LV psf: $110

In this zip, parcels 3 stories or less,Average sale price psf: $2,012 - roughly 18X the assessed LV psf!

Average # of stories: 5

HowStuffWorks.com:

Let's get to the nitty-gritty: McDonald's looks for intersections with traffic signals — typically corners of two well-trafficked streets — and ample parking.

dailywealth.com:

Most people don't realize it, but McDonald's is not a burger-flipping restaurant chain; it is one of the world's best real estate portfolios. Franchisees flip the burgers. McDonald's simply owns the best commercial property all over the world and collects 8% annual royalty fees from its tenants on top of rental income equivalent to about 10% of the sales.

From November 2002-July 2014, McDonald's dividend has risen 425% and their stock price by 5X! Much of what passes for profit is really indirectly collected land rent.

McDonald's near a subway stop: 114 DelanceyLot size: 65’ x 100’ BV: $3,427,000 LV: $2,000,000 LV psf $307

In this zip, parcels 3 stories or less, Average sale price psf: $1,571

Average # of stories: 5

McDonald’s: 2549 BroadwayLV: $2,300,000 BV: $1,014,000 LV psf: $914

Next door: 2541-2547 Broadway 7 stories, 76x100on corner LV psf: $568 (?!?) sold in 2005 for$14.5 million. Went co-op in 2007; Units sell for $1 mil+

In this zip, parcels 4 stories or less, Average sale price psf: $1,781

Average # of stories: 6

Dunkin Donuts:737-747 4th AvenueLot: 100x150LV: $225,000 BV: $1,323,000LV psf: $15 (!)

In this zip: average sale price psf of a vacant lot: $337 – over 22X more than assessed LV! Number of lots, vacant or 1 story: 513

515 & 517East 138 St.LV psf: $28

179 Vacant lots in this zip code, Average sale price psf: $191Average sale value: $1,403,322

301 East 139th St. Current property tax: $300 for the entire lot!

The 8 vacant lots that make up this parking lot pay 1/10th the property tax of the 286-unit building in back on a 34% smaller lot!

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Desperate Landowners call for desperate

measures*“Super-tall spire OK'd to rise over landmark.The Landmarks Preservation Commission approves

Extell Development's plan to cantilever its new residential tower over the neighboring American Fine Arts Society Building. It will include NYC's first Nordstrom and a hotel.

With the city's OK, Extell will now be able to extend the tower, 215 W. 57th St., 28 feet to the east so that it overhangs the American Fine Arts Society Building.” – Crain’s newspaper

* Only “desperate” to make more money!

Land Owners Pay a lot for Air Rights, but the ones who prosper are those who use Land least efficiently. In this case that’s the two 3-story buildings under the new construction.

Looking at the West side of Third Avenue between 21 & 22 streets

n

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Note the vacant lot off to the left, near the older high rise.

Low-density properties are under-taxed and there is no incentive to build higher density buildings.13 units from 266-274 Third Avenue occupy 71% of the land of 39 Gramercy Park around the corner, but pay just 19% of the property tax.

The High Line Park leads to High Real Estate Values

“Michael R. Bloomberg, proclaim(ed) that preserving the High Line as a public park revitalized a swath of the city and generated $2 billion in private investment surrounding the park… All of that commerce more than makes up for the $115 million the city has spent on the park and the deals it has made to encourage developers to build along the High Line…the price of apartments had doubled since the park opened, to about $2,000 a square foot.” – NY Times, The High Line Isn’t Just a Sight to See; It’s Also an Economic Dynamo

A new park is great! But aren’t the real questions:

• Why is the city spending money to benefit a handful of already rich land owners, when charging them a Land Value Tax (really, a rent on the Land), would have brought in enough to build the park in the first place?

• And, is it really charity when land owners give a million to build a park and then gain 10s of millions when they sell their land? Isn’t that just another investment at taxpayer expense?

Who profits when the Subway comes to a neighborhood?

“…the steady progress of the subway's 7-train extension and the northern encroachment of the High Line is turning the area around the Hudson Yards into one big real estate boomtown. The Times reports that more than 5,000 apartments have been built and more than $5 billion in private development has been invested in the area between 28th and 43rd Streets west of 8th Avenue since it was rezoned in 2005.” - Curbed

If development in this neighborhood is so lucrative, why do they need tax breaks? And who is paying for the subway extension?

“The (EDC’s) Industrial Development Agency is expected to clear a big tax discount for a portion of Related Cos.' vast Hudson Yards project…a 20-year long 40% property tax break for a 1 million-square-foot mall and 2.4 million-square-foot office spire. Related could realize $328 million in savings from the exemption…Fiscal watchdogs say that the break is especially problematic given the city plans to use tax revenue from the Hudson Yards to pay off the over $2 billion cost of extending the No. 7 subway to the site. Between 2006 and 2012, the city spent $137 million servicing the bonds for the No. 7 line, and is girding itself to spend…$155.6 million in 2013 and 2014.” – Crain’s

Profits from the Sea too…

And it has increased total property value by $500 million for all homes within a mile of its stops.

“You really see the connection in the uptick in sales prices,” said Kathleen Perkins, a broker at Douglas Elliman. “It’s a huge draw for the river communities.” She added the ferry is a boost for luring Manhattanites across the river...” – NY Post

“The East River Ferry has caused total property values in Brooklyn and Queens waterfront neighborhoods to soar by hundreds of millions of dollars, according to a new study.

The service, which launched in 2011, led to a jump in home values within an eighth of a mile of its stops by 8 percent above the normal market rate, according to an analysis by the city Economic Development Corporation.

Who Profits from the new ferry service? The Riders? The Residents? Or, the Land

Owners? Shouldn’t those who profit also pay for the

service?

And what about the future, if sea levels rise due to Global Warming? Who should pay for protection from the water

then?

“As temperatures continue to rise, so will sea levels, and the increase of both temperature and sea levels will increase the risk of large storm tide events. According to the NYC Panel on Climate Change (“NPCC”), our sea level is expected to rise between 15 and 75 inches by the 2100s. Rising seas dramatically increase the odds of damaging floods from storm tide.” – Southern Manhattan Coastal Protection Study, May 2014

If the landowner gains newly created land to build upon, shouldn’t he pay rent for its creation and upkeep?

Yet, President Obama recently signed an order to roll back national flood insurance rate hikes that were put in place after Hurricane Sandy. Who gains?

Is that fair?

In response, NYC plans to build an elevated multi-purpose levy in lower Manhattan

Who profits when leaseholds on Land are resold?

“Extell Development is selling the leasehold on 20 E. 46th St. The company's brokers said it hopes to fetch about $25 million for the 15-story property. That would be about 44% more than Extell shelled out when it acquired the leasehold in 2006 for $17.4 million. The lease for the building extends for 31 years… ‘It [the building] is in a great location,’ (said the broker).”

– Crain’s, Aug, 2012

Tax Class: 4 (commercial property)Tax Rate: 10.3%Market Value: $19,986,000 Assessed Value: $7,249,410 Land Assessed Value: $3,492,000

If land is under-assessed, the rental profits go to the

leaseholder, or sales profits if they sell.

Why would anyone pay over $90 million for an apartment?

“Extell Development Company, which is building One57, said that the buyers of the first nine full-floor apartments — plus two duplex penthouses — were all billionaires. The top-floor penthouse, which spans nearly 11,000 square feet, sold for about $95 million, a city record. The full-floor apartments…have open views of Central Park. High-end real estate has become a magnet for the world’s superrich, who are looking for better investment returns and a safe haven from thornier economic conditions in their home countries…A lot of what is happening at One57 is about wealth preservation” – NY Times

“Places like One57, 15 Central Park West and Plaza Hotel are another New York entirely, one for the ultrawealthy with a primary residence elsewhere, for whom a $55 million condo is a pied-à-terre and just another place to park their wealth. Mr. de Blasio’s proposal would have little, if any, effect on them. They pay no city income tax and comparatively low property taxes even as the city’s services prop up the value of their trophy real estate.” – NY Times

“In New York, by contrast (to foreign cities like London which now taxes foreign investors and offshore entities), buyers of new construction often qualify for a tax abatement. At One57, currently the city’s most expensive new address, the tax break amounts to around 94 percent. A Times analysis estimated that its priciest penthouse, which is reportedly in contract for more than $90 million, would initially be billed less than $1,500 a month.” – NY Magazine, Stash Pad

Wealth preservation?! For whom?! What about taxes on that property for services they use too?!

Tax Breaks for Billionaires“The millionaires buying apartments in a soaring tower rising on 57th

St. will get more than sweeping views of Central Park: They’ll also be eligible for massive city tax breaks.

So will the homeowners and builders of four other luxury Manhattan condo and rental developments.

Language quietly inserted into a bill…could cost the city tens of millions of dollars in property taxes...

The sponsor of the bill, Sen. Martin Golden (R-Brooklyn), defended the tax breaks, saying the projects would create jobs and boost the economy.

…the Assembly sponsor, Keith Wright (D-Manhattan), said he knew little about the tax breaks. “These five properties — it was important that they benefit from the piece of legislation probably, and I don’t know why, because some of the folks in the Senate wanted them to be included.” – The Daily News, writing about the newly designated “Billionaire’s Row” on mid-57 street.

“These buildings will make a lot of money for developers,” Assemblywoman (Linda) Rosenthal said. “And that’s their right. But we need something back.” – The New York Times, A Packed Forum for a Rising Concern: New Skyscrapers Near Central Park

NEW YORK STATE SENATOR LIZ KRUEGER: “(The taxes on the $90m penthouse at One57) per year would be $20,000. If they were not rolled into this legislation their taxes would be $230,000.”

What happens when the Rent is Privatized?

Who is left homeless when Billionaires buy and sell lightly taxed properties among themselves?

What happens when the Rent is Privatized?

…Oh, and another thing: there are more than enough vacant apartments, in abandoned buildings, to house all the street homeless persons, including 1/3 of whom who are children. Citywide, underutilized vacant property could house the entire city shelter population five times over at a cheaper cost than city-supported housing programs. “In 2005, New York City spent $709 million to provide shelter to…an average shelter population of 34,000* a night… Many city policies encourage landlords to keep their buildings empty. As neighborhoods gentrify, many speculating landlords choose to keep buildings empty so that they can rent them at a future date and charge far higher rents.” – Picture the Homeless

Total number of Homeless Families: 40,000Total number of vacant buildings: 3,551Total number of vacant lots: 2,489Total Housing Potential in vacant buildings & lots: 199,981

Note: this survey only surveyed 1/3 of the city and under-counted vacant lots by over 10-fold. – Picture the Homeless, from a 2012 survey conducted with Hunter College.

* As of April, 2014, 54,667 on average stay nightly in city shelters, up 75% since 2002, at a cost of >$800m – Coalition for the Homeless, DNAinfo

‘“It is not enough to simply build more market rate housing in hopes of…supplying more than the demand,” write the authors of the housing chapter of Toward a 21st Century City for All. From 2000 to 2010, New York’s housing supply grew at more than twice the rate of the city’s population. “If we could build our way out of our affordability crisis…[costs and rents] should have gone down.” Yet as the authors point out, they did not…. From the days of Henry George in the nineteenth century, New York’s progressive politicians have tried to recapture the vast—and totally unearned—income created by the rise in land values.

Why can’t we just Build our way out of this Mess?

But none have succeeded: even today, when projects like the Hudson Yards and the No. 7 subway extension prompt huge increases in values, only a tiny portion ends up in the city’s coffers.’ - What Bill de Blasio Can Learn From New York City’s Last Radical Mayor, The Nation - D.D. Guttenplan

What happened to the Law of Supply and Demand?

Even with all the exemptions, under-assessments, and tax breaks, the city is collecting more property tax revenue than ever and construction is booming (though mostly at the high end).

Why then is living in New York City so expensive, even unaffordable?

Well, what about other taxes and costs? If taxes and costs – as a percentage of income – are so much higher for the middle and working classes, is it surprising that it is so hard for them to afford to live here?

What are those other taxes…?

At current assessments and rates, land values account for just 18.1% of New York City's municipal tax revenue.

+ Buildings: 24% - This is more than ½ the property tax & discourages building!

+ Personal Income: 19.4% - Discourages Working!+ General Sales: 13.3% - Discourages buying!+ Other: 25.2% - Discourages everything else!= Total: 100%

That's not the way to ensure sensible, progressive economic development, a greener city, and full

employment!

What would be the effect of a tax policy that incentivized development &

production, and disincentivized hoarding & speculating on land?

What is the tax breakdown in New York City?

At current assessments and rates, land values account for just 18.1% of New York City's municipal tax revenue.Buildings: 24%Personal Income: 19.4%General Sales: 13.3%Other: 25.2%

The tax upon land values is the most just and equal of taxes. It falls only on those who receive from society a peculiar and valuable benefit, and upon them in proportion to the benefit they receive. It is the taking of the

community, for the use of the community, of that value which is the creation of the

community.... When all rent is taken by taxation for the needs of the community, the

equality that is ordained by nature will be attained. No citizen will have an advantage

over any other citizen except what is given by his industry, skill and intelligence — and each

will obtain what he fairly earns.

— Henry George, Progress and Poverty

Support from the National Media – You have to look for it, but it’s there

“(Landlords) don't really do anything to earn their money. They just claim ownership of buildings and charge people who actually work for a living the majority of our incomes for…staying in boxes that these owners often didn't build and rarely if ever improve. In a few years, my landlord will probably sell my building to another landlord and make off with the appreciated value of the land s/he also claims to own – which won't even get taxed, as long as s/he ploughs it right back into more real estate.

The value of the land has nothing to do with my idle, remote landlord; it reflects the nearby parks and subways and shops, which I have access to thanks to the community and the public. So why don't the community and the public derive the value and put it toward uses that benefit everyone?

The most mainstream way of flipping the script is a simple land-value tax. By targeting wealthy real estate owners and their free rides, we can fight inequality and poverty directly, make disastrous asset price bubbles impossible and curb Wall Street's hideous bloat.” – Jesse Myerson, Rolling Stone Magazine - Five Economic Reforms Millennials Should Be Fighting For

This article generated over 10,000 comments!

Support from the Local Media - from Curbed: ny.curbed.com/tags/tax-breaks

Hudson Yards Watch: As expected, a city agency approved a 20-year $328 million tax break for Related Companies' Hudson Yards megaproject. [Bloomberg]

Tax Breaks for the Rich: A housing bill extending tax breaks to low and middle income housing that just sailed through the state Legislature also contained language that made five new luxury developments, including One57, eligible for 421-a abatements. The bill's sponsors claim to not know where the language came from, but support the tax breaks nonetheless. The developers of the projects have given a combined $1.5 million to various state campaign committees over the past four years. [NY Daily News]

Fun with 421-a: Major changes are hitting the complicated 421-a tax abatement program next month. It's supposed to finance affordable housing, but it's also provided huge tax breaks for luxury housing. Now, the list of neighborhoods where they can be used is shrinking and "certificates" allowing developers to sell credits to, say, luxury developments, are being phased out. Some developers of affordable housing say chaos is coming. [NY Times - 2008]

Support from Comptroller Scott Stringer

Transforming Vacant Lots: Stalled Construction Sites

“Unfinished construction sites and vacant properties litter New York City, leaving neighborhoods in flux and reducing our quality of life. In 2007, Borough President Stringer published “No Vacancy? The Role of Underutilized Properties in Meeting Manhattan’s Affordable Housing Needs.” The report found that in Manhattan 74 percent of vacant residential buildings and 71 percent of all vacant lots are located above 96th Street. Additionally, more than $100 million a year was being lost because vacant lots above 110th Street were taxed as Class 1 residential properties.

Borough President Stringer issued a series of recommendations, including advocating for legislation to reform tax policy to spur development of vacant property and prioritize affordable housing. A year later, Governor David Paterson signed a bill authored by Assembly member Herman D. Farrell and State Senator Jose Serrano that amended the property tax equalizing the treatment of vacant land throughout Manhattan by taxing all vacant land as Class 4 property.”

Former Manhattan Borough President, Scott Stringer, wrote in his annual report:

Support from Mayor Bill de Blasio for Taxing Vacant Land

• Former Public Advocate Bill de Blasio’s publication, Foundation for an Affordable City, second of 8 recommendations was to: “Create new development opportunities by unlocking the potential of vacant buildings, lots and accessory units.”

Crain’s article: De Blasio tells lot owners to put up or pay up “(Mayor) Bill de Blasio's bid to close a tax loophole could force landlords to build new housing on their vacant plots or sell out to those who will…If carried out, the idea would affect more than 10,500 lots in the five boroughs…(to) hike yearly rates by an average of $15,300 (and) generate $162 million annually.”

How can we encourage Stringer and de Blasio to live up to their campaign

promises?

Support from the NYC Bar Association

On Page 67 of the 2013 NYC Bar Association Policy Recommendations For New York City’s Next Mayor report, they conclude:

“The City taxes land and improvements to the property using the same rates and method. This may be counterproductive, as taxing improvements to a property may discourage investment in that property. For example, landlords may permit residential buildings to deteriorate rather than maintain and improve the buildings, thus contributing to the deterioration of neighborhoods and negatively affecting the quality of life for the families and neighborhoods involved. Other municipalities have contemplated and/or experimented with the “two-rate” or “split-rate” property tax reform…Over the long-term, the lower rate on buildings/structures has the potential to encourage economic development, increase available housing, and rejuvenate blighted neighborhoods while discouraging absentee landowners from forgoing improvements. This approach should be considered as part of a property tax review.”

Support from the NYC Progressive Caucus

In 13 bold ideas put out by the new Progressive Caucus, the caucus promotes affordable housing, and calls to:

“Conduct an annual survey of vacant units and put them into productive use as affordable housing.”

13boldideas.org

Bills that Transition to Taxing LandStart by taxing vacant land. No one is going to be displaced. We’ll just

get new places to live and work. Examples of possible legislation are: Assembly Bill #S06207-2008 – Passed - to omit the huge tax break for

vacant and underutilized sites above 110th street. Assembly Bill #A05671-2009 – Tabled - provides a fifth property class

for vacant/underutilized sites. City Council Bill Int 0048-2010 – Tabled - provides for the annual

citywide Census of vacant and underutilized properties.   City Council Bill Int 0652-2011 – Tabled - provides for an annual

Registration of vacant and underutilized properties in the five boroughs. These 2 city council bills would help end the practice of holding

valuable land out of service until the market rises, i.e. "Warehousing."

Learn more from Common Ground-NYC’s e-petition: www.change.org/petitions/tax-vacant-unused-land-to-return-its-value-to-

the-community

Other Land Reform Bills Bill #A7314A – “An act to amend the real property tax law, in

relation to requiring assessment disclosure notices in New York City to include a description of the method of assessment.”

Bill #A7327A – “An act to amend the administrative code of the city of New York, in relation to requiring assessment rolls to be published on the department of finance website.

Bill #A7326A – “An act to amend the administrative code of the City of New York, in relation to requiring real property to be assessed using a fair comparative.”

These bills are all sponsored by Assembly member Dan Quart.

There are other examples of land reform!

Contact your Assembly Member, Council Member, or State Senator.

Three first steps to sensible reform1. Place a higher tax on vacant land There are 28,613 privately-owned vacant lots, 9,706 acres The effective tax rate on their listed value is 0.97% But they sell for almost 4x their listed market value

2. Shift Class 1 property taxes off buildings & onto land Exempt the median value of a class 1 building from taxation Collect the same revenue from the resulting taxable value (this will shift more tax onto land) This penalizes underuse and speculation, and provides a tax break for responsible homeowners

3. Reform assessments in Classes 2 and 4 Assess real estate values by comparable sales, not by income streams Use building-residual assessment method* Assess condos as real-estate assets, not as apartments Offset with reductions in income, commercial occupancy, and other taxes

* “The building-residual approach starts by valuing the land, leaving the difference between the land price and the property’s market value to represent buildings.” – Michael Hudson

More Long-Term Transition Proposals

Shift NY state to Land Value Taxes and off of Taxes on Production and Improvements. This would lower taxes for most New York State residents, but raise them for a few land hoarders and speculators.

See Prosper California - the inspiration for a Prosper New York tax-shift initiative. An archived website from April 5, 2011 can be found here: http://web.archive.org/web/20110405211331/http://www.prospercalifornia.com/lowers-taxes-on-most-californians/

New York State version in progress…

Helpful Websites http://commongroundnyc.org and

www.facebook.com/CommonGroundNewYorkCity - Common Ground-NYC

https://www.facebook.com/groups/landvaluetax/ (this slideshow will be in the files section of this Facebook site and on Slideshare.net)

www.schalkenbach.org/ - Robert Schalkenbach Foundation

www.urbantoolsconsult.org/ - Center for Study of Economics

www.theiu.org/ - The International Union For Land Value Taxation

http://new.livestream.com/talkingtransition/NYC/videos/35193117 - NYU Furman Center (video)

www.nyc.gov/html/dof/html/property/property.shtml - NYC Department of Finance

www.picturethehomeless.org/ - Picture the Homeless

http://www.cgocouncil.org/showcgo.php - Council of Georgist Organizations Directory

The best place in the world —

But it could be a whole lot better!