NYT 2/1/09: Recession Has Landlords of Retail Tenants Extending Discounts of Their Own
As you read this, think about what contributions each landlord mentioned -- or any other you know -- has made to society, in his role as landlord, during his ownership of his building and land, be it 3 years, or 30, or even 300 years. Think about how we have our incentives set up.
a few lifts to provide the flavor:
Just a year ago, the owners of New York’s most coveted retail and restaurant spaces held almost unassailable power to dictate the terms of their leases. But the recession is changing that equation, as rapidly rising vacancy rates and bankruptcies are making it hard to find new tenants.
And so some small businesses are finding a silver lining in the recessionary clouds: they suddenly have leverage with their landlords.
Six months ago, for instance, the landlord of the Holland Bar in Hell’s Kitchen terminated the lease because he was confident of finding a higher-paying tenant or developing luxury condos. But when he found no takers, he offered the space back to the bar, at a 20 percent increase in rent. The Holland reopened last week. ...
That does not mean that all of the city’s landlords, whether in upscale Manhattan districts or shopping strips in Brooklyn and Queens, are cutting their tenants a break; many shops are still facing sharply rising rents as leases come due.
Indeed, many landlords find themselves in a bind because they paid stiff prices for property in recent years and need to cover hefty mortgage payments. On average, Manhattan landlords paid $3,348 per square foot for retail properties in 2008, compared with $538 per square foot in 2004, according to the brokerage Cushman & Wakefield.
The slowdown is hitting small businesses especially hard in places like the Lower East Side, where real estate values quadrupled in recent years to more than $400 per square foot, said Michael F. DeCheser, a Massey Knakal Realty Services broker.
Ms. Gillis feared she might be forced out after watching a neighboring business move when the retailer could not pay his rising rent.
Since 2001, the retailer, Arjan Khiani, had owned a clothing shop at 174 Ludlow called Bodyworship, where the customers included celebrities like Britney Spears. In December 2007, Arwen Properties, the building’s management company, sent Mr. Khiani an eviction notice saying that he owed about $45,000 in real estate taxes and that his rent would double to $6,900 a month. ...
Last year, the new owner of a building down the block from Ms. Gillis told his tenant, Ludlow Guitars, that the monthly rent could more than triple, to $24,000 from $7,100.
Think carefully about what contributions the landlord has made to society during his ownership of his building. Think about how we have our incentives set up.
The landlord has little risk. It all falls on the entrepreneur -- the tenant.
How is it that "on average, Manhattan landlords paid $3,348 per square foot for retail properties in 2008, compared with $538 per square foot in 2004?" What did those who had retail properties in 2004 do to make them worth $3,348psf in 2008? What did they sow?
I can't find evidence that the landlords are anything other than legalized leaches. He who bought a 10,000 sf retail property in Manhattan in 2004 for $5,380,000 in 2004 could sell it for $33,480,000 in 2008, if I understand this article correctly. Did he do something to earn that $28 million? And in the meantime, he was collecting rent from his tenant -- perhaps as much as $400 psf. (And a February 4, 2009, NYT article -- see, below, the post "Sharecropping on Madison Avenue" -- described retail rents as high as $1250 to $2000 per square foot in certain parts of Manhattan.)
And, due to triple net leases, the landlord doesn't even pay the real estate taxes; the tenant pays the city the amount of the property tax, in addition to his payment to his landlord!
(Does the fact that a landlord whose purchase came at the top of a cycle mean that yes, there is risk and therefore all landlords are entitled to whatever they can make? Not in my eyes. Nice try, though.)
These are not brand new buildings; most have been depreciated -- over and over, by a series of owners. And it is the tenant who pays for the maintenance, the utilities, etc., not the landlord!
Remember Leona Helmsley's statement: We don't pay taxes. Only the little people pay taxes. The "little people" include the consumers, but also the tenant class, the entrepreneurs whose ability to conduct their business is reliant on a choice location. In some circles this class might be called "Main Street." They take the risks; the landlords reap the benefits. (See "Sharecropping on Madison Avenue")
Does it seem to you that the windfalls to the landlords are gifts from heaven, with no consequences for the rest of us, or is it obvious that windfalls for them come out of others pockets?
What rises in value is the land under the buildings; the buildings themselves are worth no more than it would cost to reproduce them today. What we do is to permit the landlords to keep the increased land value as their own private windfall, and we honor them as self-made men, and applaud their occasional philanthropy -- pennies on the dollar -- as heroic.
The alternative is a reform of the property tax to collect virtually all of the value of the land and treat it as our primary revenue source. NYC collects only a tiny fraction of that value. If they were smart, they'd collect more of it. But they could collect all the revenue they need from it, and there would still be a windfall left for the landlords. And it seems to me that New York State and the Federal government both rightly have a claim on that land value, if the City chooses not to collect it. I'd much rather see us taxing land value than taxing wages, or sales, or buildings.
Some things ought to be socialized, and other things ought to be privatized. We only need the wisdom to know the difference, and the good sense and courage to act on it.
Nothing new about this. David Ricardo and Henry George pointed it out several centuries ago. Oh, when will we ever learn? You want to know where all the flowers have gone? Gone to landlords, every one. (Mrs. Astor was kind enough to plant a few for the rest of us, the little people who pay the taxes.)
Oh, and by the way, the commercial mortgage lenders are doing okay here, too! Did someone yell "FIRE"? Every dollar that an entrepreneur must put into paying a seller for land value, and must pay a lender interest on to pay for land value, is a dollar that can't be used to pay employees a decent wage or to build the business. When some reap what they didn't sow, others who are sowing are only reaping a small percentage of their sowing.
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