A political battle is brewing at the apex of New York’s property market.
The real-estate industry is mobilizing to kill a proposed levy on non-resident owners of apartments valued at more than $5 million, seeking to ensure the world’s biggest city doesn’t follow London, Hong Kong and Singapore in extracting extra cash from trophy properties.
The industry’s lobbying arm, the Real Estate Board of New York, says the measure will scare off investors who fuel a business supporting more than 500,000 jobs and generating 40 percent of the five boroughs’ revenue. Brokers warn of economic calamity if officials slap a luxury tax on apartments owned by someone who lives in the city less than half the year.
“The first e-mail I woke up to yesterday was from a gentleman about to sign a $25 million contract who said, ‘I’m not signing this until I understand better what the implications are of this new pied-a-terre tax,’” Pamela Liebman, chief executive officer of the Corcoran Group brokerage firm, said in an Oct. 8 interview.
The idea runs counter to the “reputation of New York as a city that welcomes citizens from around the world,” she said.
The measure would raise about $665 million annually by requiring part-time New Yorkers to pay a 0.5 percent surcharge on dwellings valued at more than $5 million. The tax would rise incrementally to 4 percent for units valued at more than $25 million.
New York Mayor Bill de Blasio, 53, who has called income inequality a defining issue and has already lost one fight over raising taxes on the wealthy, said he’s considering the proposal and remains undecided. The first Democrat to run City Hall in 20 years, de Blasio lost a bid to tap those with incomes above $500,000 to pay for universal all-day pre-kindergarten. The plan was rejected by the state legislature, which must approve changes to the city’s tax policies. It was instead funded within the state budget.
The most-populous U.S. city wouldn’t be first to zero in on the trophy real estate market to derive revenue from absentee homeowners and slow spiraling prices. People living outside the U.K. will have to start paying capital-gains tax on home sales starting in April 2015. Hong Kong and Singapore charge higher purchase taxes on non-residents.
Targeting the Rich
In New York, the proceeds would support de Blasio’s agenda, which includes 200,000 affordable-housing units, college scholarships, job training and reduced class sizes in schools, according to state Senator Brad Hoylman, a Manhattan Democrat and de Blasio ally who introduced the bill.
“It targets very wealthy non-New Yorkers who enjoy our services, don’t pay city income tax and pay very little property tax, particularly in buildings that got subsidies,” Hoylman said.
The city Finance Department reports about 89,000 co-operatives and condominiums owned by persons for whom the unit isn’t their primary residence. Of those, about 1,556, or 1.75 percent, would be affected by the luxury non-resident tax on units valued at more than $5 million, according to the Fiscal Policy Institute, the union-backed research group that developed the proposal.
One of those 89,000, Diane Francis of Toronto, who with her husband owns a part-time home on Manhattan’s Upper West Side, took to the pages of the New York Daily News to describe themselves as “walking wallets.” She wrote that they already pay plenty in property and sales taxes without using schools or other services she helps pay for.
“The money we spend, meantime, employs concierges, maintenance and cleaning personnel, masseuses, clothiers, hairdressers, tailors, cabbies, entertainers, vendors, museum curators, chefs, waiters, bartenders, comedians, singers, musicians, actors, artists, athletes and goodness knows who else,” she wrote. “And a new tax is the thanks we get?”
Steven Spinola, president of the real-estate board, whose 15,000 members include owners, builders, architects, brokers, bankers and lawyers, said in an e-mail the organization “will continue to communicate our serious concerns to the appropriate officials about the extraordinary chill in the sales and development market and the very negative impact this proposal would have on New York City’s economy.”
New York’s real-estate industry accounted for $15.4 billion of the city’s $41 billion in 2012 local revenue, more than enough to pay for its 70,000 teachers, 35,000 police officers, firefighters, sanitation workers, parks and libraries, according to a real estate board report.
The industry’s reaction may be disproportionate to the tax’s chance of passage. For the idea to become city law, a lot of improbable political events would have to happen. The measure would require approval of the state legislature, whose composition will be determined in a Nov. 4 election and where the Senate, now run by a coalition of Republicans and Democrats, has been hostile to new taxes.
It also would need the signature of Governor Andrew Cuomo, a Democrat who built a campaign treasury of more than $30 million by accepting donations from corporate executives and real-estate developers. On his campaign website, he vows to “reverse the mentality of New York as the tax capital of the nation.”
More than 80 percent of the $665 million generated would come from 445 units valued at more than $25 million, whose owners would pay an average $1.2 million a year in taxes, said James Parrott, policy institute’s chief economist.
“Such non-primary owners are unlikely to be paying New York City personal income tax, and because of the arcane nature of the city’s property tax, or because such units benefit from tax breaks mainly intended to benefit more affordable housing for low- and middle-income residents, chances are they pay a very low effective property tax relative to the real market value of the property,” Parrott said.
Bob Knakal, chairman of Massey Knakal Realty Services, which represents owners in the sale, retail lease and financing of their properties, called the proposal “nothing but a dumb idea” that would reduce the ability to finance construction.
He predicted the surcharge would cut the market value of a $50 million apartment by 50 percent. At $15 million, the value would fall by 15 percent and at $6 million, it would be decreased by about 2 percent, he wrote in the New York Observer.
“When buildings don’t get built, construction jobs are not created and other local workers are not hired,” Knakal wrote. “Architects, designers, engineers, lawyers suppliers and a host of others who perform services for these projects would have less work.”
At New York’s Citizens Budget Commission, a business-funded fiscal-monitoring group, President Carol Kellermann questioned the need for the pied-a-terre levy, particularly after de Blasio and the city council in June enacted a $75 billion spending plan that the mayor said would ensure five years of fiscal stability.
“It’s a slippery slope to say that property owners we don’t approve of should have a different property tax,” Kellermann said. “Today it’s Russian oligarchs. I don’t know who might be next.”