There was an interesting blog post on the NYT website yesterday, entitled "Gotham Book Mart Holdings are Given to Penn." I found it interesting because it deals with a specialized business which existed in NYC for decades: a bookstore specializing in antiquarian books.
It was most recently housed in a building at 16 East 46th Street, between Fifth Avenue and the top of Grand Central Terminal. The article says that two "benefactors" had bought the building in ~2004 for $5.2 million and leased it to the owner of the bookstore for $51,000 per month. The implication is that the $51,000 monthly rent was a bargain.
I posted a comment last night as follows:
Here’s the question: is a townhouse at 16 E 46th Street likely to be a brand new building, whose construction cost could legitimately be depreciated, or is it likely to be an old, fully depreciated building (that is, its value already full depreciated by each of a series of previous owners) which is nearly 100% land value?
$51,000 per month … free and clear … that’s $612,000 per year … on a purchase of $5.2 million. Financed at, say, 6% on 100% of the purchase price, the mortgage payment works out to $31,200 per month. The difference, $19,800 per month, is LANDLORD’S GRAVY! (Triple net lease means that the tenant pays the property taxes, pays the insurance, pays the other costs.)
$19,800 per month will fund a very fine retirement, at least the way most of us live. And then the lot, which continues to appreciate (for reasons that have nothing to do with the landlords) can be sold for more than the $5.2 million purchase price. A fine nest egg for the grandchildren; and the obliging appraiser will show its value for estate tax purposes as being something pretty trivial.
Is this any way to run a healthy city or society? The money doesn’t come out of thin air. It comes out of wages of ordinary people. It comes out of the taxes the little people pay on their sales and their wages. And the entrepreneur ends up paying the property tax, and the humongous rent to get the kind of foot traffic necessary if he is ever to make a “go” of a specialized business.
$51,000 a month is a tremendous “nut” for an entrepreneur to cover. Add to that the property taxes and a living wage for an employee or two. No wonder we have so many “lost our lease” sales.
This CAN be fixed by a reform of what we tax. It is time we started. And we could start with a fine book published in 1879: “Progress & Poverty.” It lays out the problem and the remedy.
A bit of googling this morning provided some additional information. First, "townhouse" may not have been an accurate description; the lot is 25' wide and 100.42' deep, and the building is 5 stories. A February 20, 2008, note in Real Estate Weekly says that the property was sold for $11 million, and described it as a "commercial loft building". The lot is 2511 square feet, or 0.0576 acre; the transaction price works out to $190,972,222 per acre.
An undated but recent description of the property shows the property's ('08-'09) assessment for tax purposes: $670,500; and its taxes for '08-'09 are $67,446. [That assessment is only slightly above the $612,000 triple net building rent!!] The description goes on to say:
The property will be sold with DOB approved plans for a 26 story mixed-use building with a total of 32,536 SF for residential and 316 SF of commercial for a total project of 32,852 SF. In addition, the plans call for 1,626 SF of outdoor space which will be distributed over floors 21 through 26. These square footages were calculated by including a 1,430 SF mechanical deduction. The basement was conceived to have recreation room space for the residential unit above, storage, and mechanicals. This site would be a prime opportunity for a residential or commercial developer looking to take advantage of its prime midtown location where residential sellouts reach over $1,400 PSF, office rents surpass $100 PSF, and hotel rooms rent for above $500 per night
A drawing shows what a 26-story building might look like on this 25x100 lot. (I wonder how much those 316 square feet of commercial space might rent for.) It appears that the buyer who paid $11 million in February, 2008, is looking to sell it for more. (However, I also found an undated asking price of $9,950,000 here.)
So assuming a "triple net" lease, the tenant, paying $612,000 per year to the landlord, pays an additional $67,446 to the city. For a 5-story building that will be torn down shortly. The landlord was getting $612/$679, or 90%; the city gets the other 10%. The $67,446 property tax represents 0.613% of the selling price.
But the landlords' bigger payoff was in the sale of the property: $11 million in February 2008 for a property bought in 2004 for $5.2 million. (Shall we feel sorry for the $500,000 of rent that the most recent tenant failed to pay them?)
Who created that ~$6 million gain? Was it the person or firm who created the "DOB approved plans"? No. Was it the building department? No.
It is the active market in NYC, supported by infrastructure financed by taxpayers: water, sewers, transportation, emergency services, courts, etc. People want housing close to the center of things: jobs, museums, Broadway, shopping, etc.
One of the ways that land gets valued in NYC is "per buildable square foot." That is, what is the land value for each square foot of structure one is permitted to build on it? $11 million for this property is $366 per buildable square foot (plus whatever it costs to remove the existing building,). In other words, for a finished building, whose construction costs might be, say, $300 per square foot, land will still represent over half of the value. And, if the $1400 per square foot for residential sellouts, quoted above, is correct (that means that a 500 square foot studio would sell for $700,000). At $1400 psf, the 32,536 sf residential section of the building would sell for $45,600,000. The land would be fully 25% of that value when the building is complete, assuming it hasn't appreciated from the $11 million value of 2/08 (plus the cost of demolition, perhaps $10 psf for the existing 5-story building (say, 12,500 sf?, or $125,000).
A few blocks east (45th to 46th, Vanderbilt to Madison), the Roosevelt Hotel was estimated last summer to be worth $1 billion as a teardown, or something in the range of $775 per buildable foot. That property is an acre. (Read more here.)
I'm not a real estate person, so there is a great deal I don't know, and I may have jumped to some erroneous conclusions here. But as a society, we fail to collect the economic rent on land, and it is clearly a very large number. The rent on the $11 million lot would be about 5% of that value, or $550,000 per year. Currently, the city collects $67,446, and the rest goes to the landlord, who grows rich in his sleep. Meanwhile, as Leona Helmsley so famously said,
"We don't pay taxes, only the little people pay taxes."
What ought we to do? Stop taxing wages. Stop taxing sales. Stop taxing buildings. Just tax land value. Check out Common Ground NYC for more about this, in an NYC context.
Comments