Americans have a tendency to respect those who are "self-made men." This seems to include people whose fortunes have been made in real estate. The latest example in the news is the outgoing governor of New York, whose father, Bernard Spitzer, reportedly has a $500 million portfolio of properties, most or all in NYC.
I have nothing against real estate developers in their role as developers. They bring large amounts of money and multiple talents to bear to create new modern buildings on sites previously occupied by more modest buildings suitable to another decade or century. And when they build they generally create the venues in which dozens, even hundreds, of entrepreneurial visions can be made into reality, and where thousands, sometimes tens of thousands, of people can be employed in a single building. Appropriate development of choice sites, served by existing infrastructure such as NYC's elaborate transportation system and things as prosaic as city water, sanitary sewers, stormwater runoff, and all the other systems that are paid for by we-the-people: schools, public safety, public health, libraries, courts, hospitals, etc., means that specialized work can take in the center of the central business district, conducted by people who come from a 360 degree radius. It minimizes sprawl on the fringe, and makes the economy work more smoothly.
But there are other facets of the real estate business that I think are "opportunities for plunder" that should be restructured to serve the common good instead of the private good. This involves a revision of our notions of what is right, what is just, what is rightly private property and what legitimately belongs to the commons.
The news stories surrounding Eliot Spitzer's resignation have provided some interesting snippets, which lead to some further websearching. This is the full text of a NYT article dated April 22, 2000, entitled "Returns Show Spitzer Sold Apartments to Pay Off Debt"
Attorney General Eliot L. Spitzer last year continued to liquidate his personal assets to pay off campaign debts, selling more than $6 million worth of Manhattan real estate for that purpose, according to tax returns he made public today.
He sold eight co-op apartments in 200 Central Park South, a luxury building at Seventh Avenue. That, plus the sale the year before of $3.9 million in stock portfolios, wiped out most of Mr. Spitzer's personal wealth, according to his aides, though his assets remain in the millions.
But the attorney general, who gained most of that wealth through gifts from his father, Bernard Spitzer, a real estate developer, remains an heir to his father's much larger fortune.
Eliot Spitzer, then a little-known 35-year-old former prosecutor, made an unsuccessful run for attorney general in 1994, paid for almost entirely with nearly $4 million borrowed from his father. That arrangement became an issue during his winning 1998 campaign, when it became clear that he had done little in the way of paying off the debt. His opponents in the Democratic primary contended that the money was nothing more than a gift, disguised as a loan to skirt campaign finance laws.
Mr. Spitzer again ran primarily on borrowed money in 1998, though he avoided compounding the controversy by taking out a line of credit from J. P. Morgan and pledging to repay it with his own assets. He borrowed $8 million for that campaign.
Of the total of $12 million in debt from the two campaigns, Mr. Spitzer has paid off close to $10 million.
In all, Mr. Spitzer and his wife, Silda A. Wall, reported income of $6,243,644 for 1999. He paid $1,288,355 in federal income tax, $426,896 in state income tax and $238,318 in New York City income tax. Their total tax bill, $1,953,569, amounted to 31.3 percent of their income. They reported $16,056 in charitable contributions.
Mr. Spitzer sold the eight apartments for $6.1 million, declaring capital gains of $5,968,911 after various expenses .
The building at 200 Central Park South was built in 1963 by Bernard Spitzer, who transferred partial ownership to his children. When the building went co-op in 1984, Eliot Spitzer's share of the building was translated as ownership of eight apartments, which he retained and rented out. Most of his remaining assets are in other Manhattan real estate he was given in similar fashion by his father.
Aside from the sale of the property, the Spitzers claimed $274,733 in income, derived roughly equally from his salary as attorney general and from income on other properties and investments.
There are many interesting aspects to this, but the one I want to focus on is the "capital" gains. He sold the 8 apartments for $6.1 million, and declared capital gains of $5.969 million. Think about that. It means that his combined "basis" in those 8 apartments was roughly $100,000, and the rest of the value was capital gains. Now he might have been depreciating that appreciating asset for income tax purposes, since 1984. I'm sure that the Spitzers have the very best advice from the most sophisticated of real estate and income tax attorneys, and utilized every possible angle to minimize their tax liability.
Buildings do not appreciate. As every homeowner knows, they depreciate. (A 2006 Federal Reserve Board study pegs that depreciation at 1.5% per year.) Systems get old and worn, technology gets outmoded, preferences change, appliances wear out.
What appreciates is the land on which those buildings sit, and this is no less true for a 5, 10, 20, 50 or 80 story highrise than it is for a single-family residential lot on the fringe. Those 8 apartments appreciated by an average of $750,000 each over the years. And the Messrs Spitzer, pers et fils, can take no credit for that land appreciation. They didn't create it.
Federal capital gains taxes in 2000 were a third higher than they are now. He would have paid 20% on that $5.969 million "capital" gain. (And again, we can be quite certain that skilled accountants and tax attorneys have charged everything possible against those properties to bring the gain down that low.) So he gets to keep 4/5 of it, and the federal government gets 1/5 of it. 4 for him, 1 for us. A few years later, the tax rate changed to 15%, so it would be 17 for him, 3 for we-the-people-who-created-it. What a deal!! (You've heard about the lion's share?)
And during his years of ownership, he collected significant rent from them, I'm sure, and paid in relatively little to the city in the form of property taxes. $137,000 in taxable annual net income from his remaining real estate holdings -- remember, he has the best tax attorneys money can buy, to figure out every possible deduction! -- is a pretty substantial figure. (And, as we have recently learned, he lives rent-free in an 5th Avenue apartment owned by his father, an annual gift whose valued has been estimated at $200,000 or more; pains are taken to specify that the father pays gift taxes on this sum each year.)
(I'm led to wonder how often people and entities at this level of income and complexity are audited by the IRS, or whether the IRS simply trusts their lawyers to keep them honest, and only asks token questions, if any. It seems to me that both the enforcement and the message it sends would be dollars well spent -- but I digress.)
This brings me back to a statement we heard reprised last spring
upon the death of Leona Helmsley, another person whose fortune came
from New York real estate, to the effect that people like her didn't
pay taxes; it was the little people who pay the taxes. Most people, I
suspect, interpreted that as a statement about evading
taxes. But there is a larger sense in which she spoke a larger truth:
the working people of New York City pay sales taxes, and income taxes,
and many other taxes, which fund the services which help drive up the
value of Manhattan's most choice land. That appreciation goes into
private pockets, like those of the Spitzers, pers et fils, the
Helmsleys, the late Brooke Astor and her heirs and trusts, the Goldman
trust (to collect rent for 150 years!), and thousands of others.
This does not come out of thin air. It comes out of the pockets of
working people. [See also: Working hard, making other people rich.]
And then it is worth considering Spitzer's charge to a new Property Tax Reform committee which he encouraged to look at property tax caps.
Should we be surprised?? Consider the source. Consider where his
wealth comes from. What he is calling for is good for a specific class
of people, and that class is much narrower than the proponents of
property tax caps might want us to believe. It is the Spitzers, the
Helmsley heirs, the Astor heirs, the Goldman heirs, and all the other
real estate interests -- whose key asset is land value that we all
created together, and which we should be treating as our common
treasure, the legitimate revenue source for public spending -- who will
benefit BIG TIME from a property tax cap, while it parades as "relief
for the little guy." Guess who will pick up the slack. (See "Working
hard, making other people rich.")