Oct312014

Non-resident homeowners should be taxed heavily

Foreign and non-resident owners who view houses as an investment bid up prices in local real estate markets and price out local residents.

Marquee_Park_PlaceTaxing a commodity or a behavior makes it more expensive, which thereby lowers demand, so if legislators want to see less of some behavior or resource, they should tax it. Legislators should want to see less foreign investment in single-family residential real estate because this activity prices out owner-occupants who must compete for the resource.

Although lenders and loanowners may want to see higher home prices to bail them out of their foolish bubble-era loans, people who want to buy homes don’t relish high prices. Current homebuyers don’t like being priced out by aggressive investors, so if these investors were taxed heavily, the balance is tipped back in favor of long-term homeowners who would enjoy a lower cost of housing, and a lower cost of housing would boost the local economy as people would have more disposable income to spend on goods and services.

As someone is likely to note, this idea doesn’t serve my personal interests. I wouldn’t want to pay a large surtax on my Las Vegas properties, but even in Nevada, investors are treated differently than owner-occupants. Like Proposition 13 here, property taxes an only increase 3% per year for Nevada owner-occupants, but for investors, the cap rises to 8%. The taxes on investment properties in Las Vegas will rise 8% every year until the tax basis catches up with values. That will happen much quicker for investors than owner-occupants.realtor_nonsense

Why did Nevada structure their property tax law this way? To encourage home ownership and squeeze more money out of investors. Why doesn’t California or New York or London do the same?

Pied-à-Neighborhood

Pieds-à-Terre Owners Dominate Some New York Buildings

OCT. 24, 2014

The question of who, if anyone, lives in the multimillion-dollar condominiums being built across Manhattan grows more intriguing with every new tower crane that hoists glass slabs and concrete blocks hundreds of feet into the sky.

New Yorkers want to know: Who are these people who hide behind limited liability companies while shelling out a fortune for a condominium — who see the apartment as an investment or even just a vanity play, and who are too busy sunning in St. Bart’s or skiing in Gstaad to actually show up and shop at the local market or pay for tickets to a Broadway show?

Many well-heeled New Yorkers are frustrated that while a large share of their income goes to taxes of all kinds, their non-New Yorker neighbors down the street pay a comparatively minuscule amount in property taxes. And an evening stroll through Midtown is starting to feel like the Wild West after the gold rush, with buildings like the Plaza — officially the Plaza Pied a Terre Hotel Condominiums — sitting mostly dark. It wouldn’t surprise some of us to see tumbleweed blow by the Apple cube on Fifth Avenue.

implodeIrvine has it’s own Pieds-à-Terre along the Jamboree corridor. The most notable is the North Korea Towers, also known as the Marquee at Park Place, a building that is largely dark and night even today. The first group of owners of these can’t-miss investments were wiped out. Will the next group fare any better?

As it turns out, this is not just hyperbole.

In a three-block stretch of Midtown, from East 56th Street to East 59th Street, between Fifth Avenue and Park Avenue, 57 percent, or 285 of 496 apartments, including co-ops and condos, are vacant at least 10 months a year. From East 59th Street to East 63rd Street, 628 of 1,261 homes, or almost 50 percent, are vacant the majority of the time, according to data from the Census Bureau’s 2012 American Community Survey.

“My district has some of the most expensive land values in the world — I’m ground zero for the issue of foreign buyers,” said State Senator Liz Krueger, whose district includes Midtown. “I met with a developer who is building one of those billionaire buildings on 57th Street and he told me, ‘Don’t worry, you won’t need any more services, because the buyers won’t be sending their kids to school here, there won’t be traffic.’  ”

The developer told her that the buyers basically would never be here, Ms. Krueger said. “He said it like this was a positive thing,” she added. “You can’t make this stuff up.”

Nobody is making the case for why this is a bad thing. So what if foreigners own 50% or more of the locally-available real estate and leaves it empty? It’s as if those units don’t exist.trump_towers

The problem is those units do exist, and in areas with a shortage of residential real estate units for owner-occupants, which includes most urban centers where empty investment properties proliferate, then owner-occupants don’t benefit from the presence of these units. When we get to a point that residential real estate isn’t used — much like China — then the malinvestment becomes obvious and difficult to ignore.

Ask yourself what benefit society gains from unoccupied residential real estate. There is no utilitarian advantage to an idle asset, and if the asset has no utility, isn’t it’s value really just an illusion?

Look at this another way. If a factory owner built an expensive piece of equipment, but then never used it, and later sold it for more than he paid, was this piece of equipment a good investment? At some point, doesn’t someone actually need to use the piece of equipment for it to have any real value? Why would real estate be any different?

pissed_off

While the Census Bureau data is illuminating, it does not drill down into individual buildings. This is not easily done, although one method is to track a city property tax break given only to full-time residents. In years past, the 17.5 percent tax abatement was widely available for owners of cooperatives and condominiums, but after a rule change was enacted last year, only those who are deemed primary residents are eligible to claim it.

This is exactly the kind of tax that should be levied on investors who don’t occupy properties. At least the community gets some benefit from the property through taxes.high rise hell

Tracking this tax abatement can turn up some interesting details. Take the Trump Tower at 721 Fifth Avenue, between East 56th Street and East 57th Street. The building has 237 units, with some priced at more than $25 million. As of last year, 211 apartments claimed the tax abatement, but this year, as a result of the rule change, the city decided that only 108 apartments were eligible, according to figures from the Independent Budget Office, a nonpartisan city agency. That is a drop of nearly 50 percent and means that fewer than half of the apartments in the building are primary residences.

At the Plaza, of 163 condominiums, only 58, or about one-third of them, now receive the abatement for full-time residents.

Some of the city’s most exclusive addresses, such as 15 Central Park West and One57, receive a far more lucrative tax break — the so-called 421a tax exemption — and so they cannot be tracked this way.

George Sweeting, the deputy director of the Independent Budget Office, said the agency plans to look further into how tracking the tax abatement for primary residents could shed light on the number of pieds-à-terre across the city.

It is an important endeavor, according to Brad Hoylman, the state senator who is proposing legislation to charge an additional tax to owners of expensive pieds-à-terre. According to the proposal, owners of a pied-à-terre priced between $5 million and $6 million would pay 0.5 percent of the amount over the $5 million threshold in annual taxes. This would gradually increase, capping off at properties of more than $25 million, where the owner would pay a $370,000 annual fee plus 4 percent of the amount over $25 million.

If the tax is large enough, the investment value will be nil, and investors won’t want to hold properties that lose so much money each month. It’s one thing to own cashflow positive real estate, but it’s quite another to own property that costs as much to own as any appreciation value could add.

While the owners could be wealthy New Yorkers who happen to own a primary residence uptown, say, and a secondary apartment downtown, many who would be targeted by this new tax would be non-New York residents. These nonresidents typically do not pay New York’s hefty income taxes and instead pay just a small fraction of their apartment’s value in property taxes. Property taxes here are based on a complex equation related to rental values and can be very low. At One57, for example, a unit that sold for nearly $3.6 million is estimated by the city to have a market value of just $430,000 when calculating its property tax.

That’s a foolish tax break that actually encourages investment. Perhaps since New York is the epicenter of can-kicking, it was deemed necessary to entice a group of foreign bagholders to step in, buy overpriced property, and bail out the banks with large, delinquent loans.simple_life

“The pied-à-terre tax is seen by New York’s wealthiest 1 percent as a question of fairness,” said James Parrott, the chief economist at the Fiscal Policy Institute, who first made the proposal for the tax on which Mr. Hoylman based his legislation. “Here they are in the top tax bracket paying the top New York City and New York State income tax rates, but these non-primary residents are just paying property taxes, and the effective property tax rates are so incredibly low.” …

If this is accurate, it is certainly unfair.

Is it any more fair that we encourage Chinese investors to buy residential real estate in California while allowing them to avoid most of our taxes?

Most of the problems around the world with residential real estate and recurrent bubbles is due to the increasingly widespread perception that single-family residential real estate is an investment. For example, Norway inflated a massive housing bubble because foreigners wanted to own assets in the Norwegian currency due to it’s strength. Canada and Australia’s housing markets are inflated for the same reason.

While encouraging foreign investment is a good thing, this investment should be steered away from residential real estate otherwise the local population will pay the price.

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