Tag Archives: luxury housing

Tax Expenditure Wars: Wealthy Households v. Poor

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Henry Rose has posted How Federal Tax Expenditures That Support Housing Contribute to Economic Inequality to SSRN. This short article examines “how federal income tax laws benefit more affluent owner households but provide no benefits to economically-strapped renter households.” (1) Housing policy analysts (myself included) constantly bemoan the regressive nature of federal tax policy as it relates to housing, but it is always worth looking at the topic with updated numbers. And this article contains some tables with some interesting numbers.

One table provides an overview of the estimated tax savings (in billions) in FY 2014 for five federal tax expenditures for owners of housing that they occupy:

Mortgage Interest Deduction  (MID)                                                 $66.91

Property Tax Deduction (PTD)                                                        $31.59

Capital Gains Exclusion on Sales                                                   $35.54

Net Imputed Rental Income Exclusion                                            $75.24

Discharge of Mortgage Indebtedness Exclusion                            $3.1

Total                                                                                                 $212.38

The next table provides an estimated distribution of two of these tax expenditures (FY 2014, savings in millions):

Tax-Filer AGI                PTD Tax Savings         MID Tax Savings                

Below $50,000              $693                              $1,443

$50,000-75,000             $2,190                           $4,330

$75,000-100,000           $3,478                           $6,581

$100,000-200,000         $13,648                         $27,421

$200,000+                     $11,798                         $29,340

Total                              $31,806                         $69,115                               

The article concludes by noting that despite

the great disparity in economic positions between owners and renters, federal tax expenditures lavish tax savings on primarily affluent owners and provide none for renters. The federal tax expenditures for owners are so generous that interest can be deducted on mortgage balances up to $1,000,000 and can also be taken on second homes, even yachts, as well as primary residences. It is difficult to conceive of a federal public policy that more directly promotes economic inequality than the federal tax expenditures that support owners of housing but are not available to renters. (9-10, footnote omitted)

I don’t expect this disparity to be addressed any time in the near future, given the current political environment, but it is certainly one that should stay at the top of any list of reforms for those concerned with promoting equitable federal housing policies.

Reiss on Foreign Buyers in NYC

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MainStreet.com quoted me in Foreign Buyers Driving Up Rental Prices Impacts New York Residents. The story opens,

Emir Bahadir, a native of Turkey, purchased two apartments in Manhattan for the purpose of renting them out. The 24-year-old paid a total of $9 million for the apartments in the West Village and Chelsea and earns some $40,000 a month in rental income.

”Entry into the real estate market in Manhattan by the foreign buyer has become easier because of technology,” Bahadir told MainStreet.

As a result, foreign buyers are increasingly coming into the Manhattan market and buying properties worth $2 to $5 million for the benefit of rental income. That can push rental prices higher for those on Main Street.

“[Foreign buyers] are not keeping them empty but filling them with tenants,” said Tamir Shemesh, a Realtor at the Corcoran Group. “A $2 million apartment can be rented out for as much as $8,500 a month, while a $3 million apartment can go for $11,000 to $12,000 a month.”

The tenants who can afford to pay thousands a month in rent are largely foreign as well.

“The reason we invest in real estate in New York is because of the exorbitant amount of rent that people are willing to pay,” Bahadir said. “That doesn’t happen anywhere else except in the U.K., but because of complications in the Middle East, London is not so popular these days.”

The downside for Americans is that escalating prices impact the overall rental market.

“It lets landlords know what the ceiling is and may encourage them to reach for it,” said David Reiss, professor with Brooklyn Law School.

Reiss on the $1M Parking Spot

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Law360 quoted me in NYC’s $1M Parking Spot Shows Appetite For Luxury (behind a paywall).It opens,

Atlas Capital Group LLC caused a buzz Wednesday with its listing of a parking space in a condominium building in SoHo for $1 million, more per square foot than the homes above it, but experts say in the context of a burgeoning luxury market such a price may just be the beginning.

That price for a 99-year license that allows the condominium resident to use the parking space — even one in its own condominium unit and tax lot — may sound wild, but experts say much of the attention this property has gotten may be a bit overblown, especially considering the level to which many are willing to go for comfort and convenience in New York City.

“It’s not really about $1 million for a parking space,” said Bruce Bronster of Windels Marx Lane & Mittendorf LLP. “If you were just going to condo a parking space, you couldn’t get $1 million for it. It has to do with having an amenity on a very expensive apartment.”

There aren’t many places to park in SoHo, making a convenient parking spot a hot commodity, but experts say the bigger message is that New York City’s luxury residential market is hotter than ever, creating new opportunities for developers to differentiate themselves with the right amenities.

The development is at 42 Crosby Street, near Broome Street, where Atlas Capital Group is turning what used to be a parking lot itself into a condominium building with three-bedroom units ranging from $8.7 million to $10.45 million, according to information gathered by The New York Times.

The eye-popping element comes when one looks at the price per square foot. Some of the parking spots — there are actually 10 being built under the condominiums — are expected to be up to 200 square feet, but they will reportedly all cost between $5,000 and $6,666 per square foot. The condominiums, on the other hand, are only going for about $3,150 per square foot.

But experts say this isn’t too surprising, considering the demand for luxury housing and amenities that has skyrocketed in recent years.

Prices for luxury residential properties have risen to pre-recession levels and surpassed them in some cases, with a few record-breaking penthouse deals passing the $90 million mark thanks to flush foreign investors.

More than anything, experts say, the $1 million parking spots are a way for Atlas Capital Group to distinguish 42 Crosby from other apartment buildings and draw in those investors willing to pay top dollar.

“The million-dollar spots do highlight how developers have seriously monetized amenity spaces,” said David Reiss, a real estate professor at Brooklyn Law School. “In all likelihood, the prices for amenities like parking spaces will follow the same trend line as those for the apartments to which they are attached.”

And it’s not just parking spaces; Reiss said he has seen similar setups with amenities such as storage facilities and rooftop cabanas commanding top dollar.

Reiss on the Poor Door

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Law360 quoted me in ‘Poor Door’ A Symptom Of Tough Balancing Act In Housing (behind a paywall). It opens,

Extell Development Co.’s so-called “poor door” — a separate entrance for affordable housing tenants at a development on Riverside Drive — made headlines last week after receiving official approval, but experts say the controversy clouds the reality of balancing private and public housing interests in a city like New York.

The building and its “poor door” first caught the world’s attention last year, when the developer released renderings for the project that showed separate doors for condominium buyers and affordable rental tenants.

It wasn’t the first setup of its kind, particularly not in New York City, but with news of growing inequality around the country and especially in large urban areas, many criticized the separate door as classist and suggested that affordable housing tenants were being treated as “second-class citizens.”

The controversy erupted again last week when the Department of Housing Preservation and Development confirmed that it had approved Extell’s application for the department’s inclusionary housing program, which gives the developer access to certain incentives in exchange for adding to the city’s affordable housing inventory.

Many have argued that the trade-off may not be worth it: If developers that qualify for such programs end up relegating lower-income tenants to a separate entrance, are those tenants benefiting fully from the city’s efforts to house them?

“One reason that the ‘poor door’ issue touches a nerve is that real estate and class are so closely linked in New York City,” said David Reiss, a professor at Brooklyn Law School who focuses on real estate finance and community development. “Affordable housing units are seen as a great equalizer. The notion that someone living in an affordable housing unit must be constantly reminded of their status is repugnant to many.”

This has led to headlines around the world proclaiming Extell’s design and the city’s approval a “disgrace.” But experts say the question of what to do about such practices is not that simple.

Inclusionary housing has been a major tenet of Mayor Bill de Blasio’s plan to add or maintain 200,000 affordable housing units over the next decade. In a city with such high land prices and rents, it has become clear that developers need some kind of incentive to include affordable housing in their projects, and the mayor and city council have made a series of adjustments and concessions to get such housing into projects like the new Domino Sugar Factory development and under-construction buildings at Hudson Yards.

But just how affordable and market-rate housing should be built together in these developments has not been as closely considered, and experts say the “poor door” controversy may just be the first of many unanticipated issues in need of creative solutions.

To get around the issue of affordable units having different entrances or looking different and having different amenities from market-rate units, some have suggested making the units indistinguishable, but Reiss warns that this might cause additional problems.

“For instance, given a particular amount of funding for affordable housing, is it better to build fewer units of affordable housing that are indistinguishable from market-rate units in a Manhattan building, or is it better to build more units of affordable housing in an outer-borough — and therefore cheaper — building?” he said. “There is no right answer to that question. Each reflects a policy preference. But it is most important to realize that a trade-off between cost and number of units exists.”

Reiss on “Sexy Tax Breaks” for Luxury Housing

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MainStreet.com quoted me in Luxury Real Estate with Sexy Tax Breaks. The story reads in part,

Buying a high end property doesn’t always cost a fortune for the wealthy especially if there are tax breaks attached.

Property tax deductions and even exemptions exist for buyers of luxury properties under special incentives, such as New York City’s J-51 and 421a program.

“A J-51 unit in a luxury building will likely sell for more than a comparable condo without a tax break, because monthly expenses are lower due to reduced property taxes. It’s a deal but not dollar for dollar, and that’s true everywhere you look for tax breaks in luxury properties,” said David Reiss, professor of real estate law at Brooklyn Law School.Benefits include no tax by reducing the assessed value of the property to the pre-renovated price and secondly by capping property taxes.

“These benefits phase out typically over a 14 year period for market rate properties,” Reiss told MainStreet.

Most J-51 buildings in the borough of Manhattan are above 110 Street due to state restrictions.

For example, for interested buyers there’s a two-bedroom J-51 condominum on West 140th Street available for $620,000 advertised on condo-living-west.com.

“The tax reduction will be priced into the cost of the home,” said Reiss.

A back end strategy would be to buy and sell early rather than buy early and sell late to make a profit after purchase.

“Because the closer you are to the 14 year phase out when you sell, the less of a benefit the tax break is to the owners’ sale price,” Reiss said.

The 421a program is another tax break available for new construction not rehabilitation or conversion of existing buildings in Manhattan.

For example, an owner in a $90 million duplex penthouse in Midtown Manhattan would normally pay $230,000 in taxes without an abatement and $20,000 in taxes under an abatement program.

About 150,000 units in New York City receive partial tax exemptions under 421a.

The downside is that taxes gradually go up as the abatement is phased out.