Link: ROOSEVELT'S UP FOR SALE AT COOL $1B - New York Post. This article is actually 8 months old, but popped up on a standing google alert in my mailbox, and it contained some factoids I'd not previously seen. I'm not going to get into the background story (which some might find quite interesting, based on my bit of research). Rather, I'm going to focus on the land values involved, because they might surprise the ordinary mortal, and provide some food for thought.
The property is just under 1 acre, and currently has a 1,013 room 20-story luxury hotel, built in 1924, on it. The $1 billion valuation is as a teardown, as a site for a higher and better use, given current markets.
The hotel occupies nearly a full-acre block just north of Grand Central Terminal bounded by 45th and 46th Streets, Vanderbilt and Madison avenues.
Its 43,000 foot site can be built to 800,000 feet as-of-right, but attorneys say that special district air rights can be piled on to create a skyscraper that could leap to 1.5 million feet.
Potential bidders are being advised to compare the hotel to the site next to the Museum of Modern Art which sold for $775 a buildable foot, but is mid-block near Sixth Avenue.
Over a number of years making strategic land and air rights purchases, Macklowe Properties paid around $950 a foot for the Swisshotel Drake New York at Park Avenue and 56th Street, which they have changed from a residential hotel to offices.
Office rents have since climbed markedly in the city with 18 deals completed at over $125 a foot this year alone versus 16 in all of last year.
If we take the "value per buildable foot" of $950 and the "as of right" square feet of 800,000, that works out to $760 million for that acre. If we use the 1.5 million square feet, that works out to $1.425 billion for that acre.
If we take the "value per buildable foot" of $775 and the "as of right" square feet of 800,000, that works out to $620 million for that acre. If we use the 1.5 million square feet, that works out to $1.162 billion for that acre.
Tearing down and removing the remains of the existing 20 story building is an additional cost, and gets added to whatever transaction price to determine the current value of the land. I've heard $10 psf as an estimate of that cost (at least for single family homes).
What intrigues me is that in at least some places in midtown Manhattan, it has been someone's business decision to pay $775 per buildable foot.
Back to the "buildable square feet" concept. If I am interpreting this accurately, we're talking about $775 for the land value under each square foot of building. How much does it cost to build, psf, considering both hard costs and soft costs? A single family home can be built for $50 to $200 psf. Building costs in large cities are perhaps higher, and the structural costs associated with a high rise building are certainly higher. Let's say that a skyscraper's construction costs are $500 per square foot. At that point, with a land cost per buildable sf of $775, land represents $775/$1275, or 61%. That building will start depreciating immediately, as building techniques and technologies advance. (Single family homes depreciate at 1.5% per year, according to a 2006 FRB study.)
The final paragraph quoted above cited some office rents at $125 psf. Presumably those are in prime locations with first class construction and services. What percentage of the value comes from the location? The calculation above suggests that, putting aside the services the building offers -- the elevators, security, some kinds of maintenance, trash removal, etc. -- the locational value is at least 61% of the property-related value. And going out into the future, the land will appreciate and the building will depreciate.
Let's return to the value of the land itself, using the lowest of the four estimates, $620 million for the nearly-one-acre site (the highest was more than twice that, at $1,425 million for the land alone). Suppose that, instead of our current convention of buying the existing building and its site from the current owner, the practice was for the holder of the site to pay to the commons an annual fee for the use of that acre, based on its value. One could call this land rent, or an annual user fee. It would be on the order of 5% of that selling value. For this particular acre, which might sell at $620 million, 5% would be $31 million per year. (That's less than the 30 year mortgage payment at 5% or 6%, and less than the sum of the current taxes -- which I'd eliminate -- and the mortgage payment.)
Who is getting this value now?
The current owners bought the property (with another party) for $36.5 million in 1999, and bought out the other owner in a complicated transaction in 2005. Let's estimate their cost at, say $75 million. (I'm pulling this number out of thin air, but it probably isn't a bad number. A December, 2007 article says they put in $3 million in "soft" renovations, after turning down (rumored) offers of $244 million. That same article says
According to multiple reports in Pakistani newspapers, the hotel is expected to generate profits in excess of $7.5 million this year, and future estimates predict that sum increasing to about $22 million annually over the next decade.
But the land appreciation, even at the low-ball $620 million figure, far exceeds the operating profits for the 20 story hotel. The difference between the, say, $75 million I guestimated as their purchase cost and the current land value of $620 million is quite a few years of operating profits as a hotel.
Who is entitled to that value? I'm not asking what our tradition is -- I know that the landholder is traditionally the beneficiary of that increase in value.
Who created that value? It isn't the current owner, or any in a series of previous owners of the land, and anyone who buys the property is going to tear down the existing building. The people of New York City -- its residents, those who work there, those whose sales taxes and wage taxes and (rather small) real estate taxes pay for the transportation systems, water system, sewer, public safety, public health, education, etc., -- created that value. The landholders didn't create it.
And that value didn't come out of thin air. It came from the wages of those who live and work in NYC and its metropolitan area. They are taxed on their wages. They are taxed on their purchases. They are taxed on the buildings they place on their sites, and (fairly lightly) on their sites.
Taxes on wages depress the economy. Taxes on sales depress the economy. Taxes on buildings discourage redevelopment and maintenance. All those taxes represent theft of that which the individual and corporation work hard to create, and we should make every effort to reduce and even eliminate them.
Taxes on land value only depress speculators. They collect back for the commons that which we-the-people-together created. The unearned increment. The social surplus. The fat of the land. (Doesn't that phrase conjure up Lennie and George?)
I don't particularly care who the landlord is. It could be an individual, a family, the trust established by a long-dead real estate mogul (either for the benefit of his heirs or his favorite charity), a corporation, a real estate investment trust, a college or university with a huge endowment (whether or not it gives out substantial aid to its students), a philanthropic entity, a religious entity, an insurance company (whether a mutual or a shareholder-owned entity), a pension fund (public, private, religious, whatever), a foreign owner, a foreign natural resources owner, a foreign government. Which of those gets the rent doesn't make a big difference: the community is not getting it, and we-the-people -- the community members -- are the losers.
How do we turn this around? Tax land value. Treat the economic value of land as our COMMON treasure, not anyone's private money-fountain.
Will that destroy the incentives to put that fabulously-located acre of land to good use? To the contrary! Choice sites will be put to their highest and best use, producing the sort of density that makes cities walkable, livable. Motivated landholders will compete with each other to construct housing, construct commercial venues of all the kinds for which there is demand. Who benefits? the community. Who loses? Only those whose "business" is land speculation. And I can't figure out what it is they contribute, or why it should be rewarded with the lion's share of what we are all produce together: land value.
footnote: Interestingly, the owner is a foreign airline company, owned by its government, which would, according to the articles, use the proceeds of a sale to purchase additional aircraft.