To Make Affordable Housing a Reality in NYC: An 11-step framework outlining how the cost of living in NYC will be reduced as a result of market-friendly incentives and property tax

To Make Affordable Housing a Reality in New York City An 11-step framework outlining how the cost of living in NYC will be reduced as a result of market-friendly incentives and property tax reform

Dylan Michael Ciraldo | Cornell University 12-12-2015

Page 1 - © 2015 by Dylan M. Ciraldo. All Rights Reserved. TABLE OF CONTENTS

Introduction .................................................................................................................................... 4

Executive Summary Of The Reforms I Advocate ......................................................................... 6

CHANGE 1: Value All Residential Real Estate Using a Comparative Sales Based Methodology .......................................................................................................................................... 6

CHANGE 2: Reform and Simplify the Property Tax ................................................................ 6

CHANGE 3: Increase Density Through Incremental Increases in “Air Rights” ....................... 6

CHANGE 4: Institute Predetermined, Non-Negotiable Tax Abatement Multipliers for Affordable Housing ................................................................................................................................ 7

CHANGE 5: Charge The Police For Their Misconduct ............................................................ 7

CHANGE 6: Provide Incentives for Developers to Build Both Affordable Housing Units and Micro-Apartments .................................................................................................................................. 8

CHANGE 7: Use EB-5 Funds to Build Affordable Housing Units ........................................... 8

CHANGE 8: Strengthen Disclosure Laws to Prevent Shadow Ownership of Real Estate ........ 9

CHANGE 9: Raise Property Taxes on Absentee-Owners and Foreigners ................................ 9

CHANGE 10: Raise the Capital Gains Rate on Foreigners Who Own Residential Real Estate .............................................................................................................................................................. 10

CHANGE 11: Raise the Minimum Down Payment Required of Foreigners to 45% .............. 11

Understanding the Current Property Tax System of NYC........................................................... 12

Why Should We Care About the Property Tax? ...................................................................... 12

NYC Property is Broken into 4 Distinct Classes For The Purpose of Taxation ...................... 12

What Type of Property is in Each Class? ................................................................................. 13

Initial Summary - The Current Property Tax System .............................................................. 14

What Effect Does Classification Have? ................................................................................... 15

Demographic Analysis - Class 1 renters are more affluent than their Class 2 counterparts .... 16

Tax policy and its implications on affordability: Is it good public policy to treat homeowners more favorably than renters? ................................................................................................................ 17

The Federal Government Subsidizes Homeowners at the Expense of Other Residential Forms .............................................................................................................................................................. 18

Why Are The Tax Rates So Different Between Different Classes of Real Estate? ................. 20

Valuation of Real Property and Why It Matters ...................................................................... 20

Brief History of the Property Tax ............................................................................................ 21

S7000A’s Broken Promise ....................................................................................................... 22

Assessment Caps and How They Effect Property Taxes Raised By The City ........................ 22

The Cooperative and Condominium Property Tax Abatement of 1996 .................................. 23

The Method Used for Condo and Co-op Valuation is Flawed, Making Apple to Orange Comparisons ......................................................................................................................................... 24

CASE STUDY 1 - Luxury Condos in The Time Warner Center ............................................ 27

Page 2 - © 2015 by Dylan M. Ciraldo. All Rights Reserved. Further Information Regarding Undervaluation ...................................................................... 27

CASE STUDY 2 - The Witkoff Group - Luxury Condos at 36 Central Park South ............... 28

Brief Digression into Gerrymandering of Districts .................................................................. 28

The Burden Shifting Consequences of Undervaluation Exacerbate Unaffordability For Those Who Can Least Afford It ...................................................................................................................... 29

Final Words on the Current Property Tax System ................................................................... 29

CHANGE 1: Repeal Section 581 and Instead, Value All Residential Real Estate Using a Comparative Sales Based Methodology .................................................................................................. 30

What Do Experts Say about Undervaluation and How to Stop It? .......................................... 30

The New York City teachers union would steadfastly support this initiative .......................... 30

Responding to Ignorance .......................................................................................................... 31

CHANGE 2: Reform and Simplify the Property Tax .................................................................. 33

In the chart above, what does X represent? .............................................................................. 33

Responding to Opposition from Non-Residential Real Estate Owners ................................... 34

CHANGE 3: Increase Density Through Incremental Increases in “Air Rights” ......................... 36

Has anything like this been done before? ................................................................................ 36

My proposal increases allowable density much more so than the city’s proposal ................... 36

Example of how my proposal would be applied ...................................................................... 37

CHANGE 4: Institute Predetermined, Non-Negotiable Tax Abatement Multipliers for Affordable Housing .................................................................................................................................. 38

How is this different than the 421-a tax abatement? ................................................................ 38

CASE STUDY 3 – An example as to how the 421-a tax abatement was abused - One57 ...... 39

Following Up to Curb Corruption in Government ................................................................... 40

CHANGE 5: Charge The Police For Their Misconduct .............................................................. 41

Officers Will Pay The Cost for Their Misconduct, Not Taxpayers ......................................... 43

Responding to Potential Counter Arguments and Concerns .................................................... 44

Clarifying Misperceptions ........................................................................................................ 45

What is the best way to implement this reform? ...................................................................... 45

Concluding Thoughts ............................................................................................................... 45

CHANGE 6: Provide Incentives for Developers to Build Both Affordable Housing Units and Micro-Apartments .................................................................................................................................... 46

Why do these 2 forms of residential real estate deserve preferential tax treatment? ............... 46

CHANGE 7: Use EB-5 Funds to Build Affordable Housing Units ............................................. 48

What is EB-5? .......................................................................................................................... 48

How will my change be structured? ......................................................................................... 48

Why does the government need to encourage the private market to develop affordable housing units? ....................................................................................................................................... 48

CASE STUDY 4 – Unaffordability in San Francisco .............................................................. 50

Page 3 - © 2015 by Dylan M. Ciraldo. All Rights Reserved. Who is Using EB-5 and How Much is Being Raised? ............................................................. 51

Overcoming Potential Problems .............................................................................................. 51

CHANGE 8: Strengthen Disclosure Laws to Prevent Shadow Ownership of Real Estate .......... 53

What exactly is the problem? ................................................................................................... 53

Further Information Regarding the Problems of Shell Ownership .......................................... 54

CHANGE 9: Raise Property Taxes on Absentee-Owners and Foreigners .................................. 55

CASE STUDY 5 - Unaffordability in Israel ............................................................................ 55

How Did Israel Respond to Affordability Pressures Caused by Foreign Demand? ................ 56

Lower the Absentee Threshold Timeframe For an Increased Tax to 3 Months ...................... 56

If this tax change went through, what would happen? ............................................................. 56

What would the city do with the additional money raised? ..................................................... 57

Residential Real Estate Comprises But a Small Fraction of the Investable Universe ............. 57

CHANGE 10: Raise the Capital Gains Rate on Foreigners Who Own Residential Real Estate . 59

Why is demand for real estate soaring and to what extent? ..................................................... 59

What is my rationale? ............................................................................................................... 61

New York Residents will NOT Face this Punitive Rate .......................................................... 61

What would the city do with the extra money raised from the tax? ........................................ 61

CHANGE 11: Raise the Minimum Down Payment Required of Foreigners to 45% .................. 63

CASE STUDY 6 - Unaffordability in Hong Kong .................................................................. 63

How Would This Minimum Down Payment Affect Foreigners? ............................................ 64

Concluding Thoughts ................................................................................................................... 65

Works Consulted .......................................................................................................................... 66

Page 4 - © 2015 by Dylan M. Ciraldo. All Rights Reserved.

Introduction

“Cynics are better enactors of social change than optimists, for a cynic can account for human venality.”

“If you can’t explain it simply, you don’t understand it well enough.” –Albert Einstein

To make affordable housing a reality in New York City, government policies must be created to incentivize the private market to build and maintain a larger number of affordable units. To achieve this goal, government policy must first address some of the egregious iniquities inherent in the residential market of NYC as a result of an antiquated and unjust distribution of the property tax.

In this paper, I will outline a list of policy prescriptions that will make housing in New York City more affordable in the long run. This dream is achievable if much needed and rational reforms are introduced and this is exactly what my paper intends to do. Thank you for reading.

To start this paper, I would like to point out a few facts that elucidate the harsh economic realities facing NYC right now: The homeless population of NYC stands at 58,761 as of June 2015 -an astronomically high number that has recently been on the rise.1 Simultaneously, 89,000 of the city’s condos and co-ops -valued at $20 billion based on city tax assessment data but with an actual estimated fair market value of $80 billion- are owned by people who claim to be nonresidents of the city.2

Based off of this assessment, each of these condos and co-ops owned by nonresidents has an average fair market value of $898,876 dollars.3 If you take this number and divide it by New York State Median Income for 2015, a much more modest sum of only $84,381, you receive a ratio of 10.65. This number denotes that it would take the median New Yorker 10.65 years’ worth of income to purchase the typical home that an absentee owner maintains in New York City. Intuitively, however, this makes sense because in order to have a home in a place where you are not a resident, it has to at least be a second home. The only people who can afford a second home, especially in a high cost city such as New York, are the very wealthy –which is why we have such a

1 Dawsey, Josh. "NYC Homeless Problem Vexes City Hall, Spurs Action." WSJ. The Wall Street Journal, 4 Aug. 2015. Web. 22 Aug. 2015. 2 Saul, Stephanie. "New Disclosure Rules for Shell Companies in New York Luxury Real Estate Sales." The New York Times. The New York Times, 20 July 2015. Web. 25 Aug. 2015. 3 = 80,000,000,000 fair market value / 89,000 absentee owned units from foreigners = $898,876.40 average fair market value


high average value per absentee residential unit. Equally jarring is the following reality: If you were to take every single homeless child in NYC,

all 23,692 of them, and place them into a unit owned by a nonresident of the city, a unit that is ironically unoccupied for the majority of the year, then you would house all of New York City’s homeless children 3.76 times over again.4 ‘Tis the reality facing one of the greatest cities in the world, and it is an alarming reality indeed.

To clarify my intentions, I recognize that it would not be viable to house tens of thousands of homeless in the private homes of others, and this has no bearing on the policy prescriptions I will suggest in the following paper. Rather, I choose to emphasize how profound the iniquities inherent in the residential market of NYC are by use of these facts. We need government action now.

4 (89,000 absentee-owned units / 23,692 homeless children) = 3.76


Executive Summary Of The Reforms I Advocate

The following section will provide an executive summary of the reforms I recommend implementing in order to make affordable housing a reality in New York City.

CHANGE 1: Value All Residential Real Estate Using a Comparative Sales Based Methodology

When the property tax is levied, the tax itself is almost always calculated based off of a percentage of the property’s value. Therefore, when the valuation of the property is incorrect, so is the property tax being paid. Under the current tax system, certain forms of residential real estate are grossly undervalued, while others are not; this results in the burden of the property tax being shifted unfairly onto other forms of real estate. To ensure each unit pays its fair share of the property tax, all residential real estate should be valued based off of its most recent sales price. My reform is as follows:

• Repeal Section 581 [of the current property tax code] and instead value ALL residential real estate based on comparative sales.

o By law, a comparative sale will be defined as a property that sells WITHIN 5% of the unit in question’s purchase price per square foot.

CHANGE 2: Reform and Simplify the Property Tax The current property tax system is deceptive and unfair and it must be reformed in order to make

affordable housing a reality; this is because the current system results in an unjust distribution of the property tax where some real estate owners overpay their fair share of the property tax while others circumvent the fair share of the tax they should be paying.

The current property tax system has 4 classifications of real estate, and the different classifications result in wildly different taxes being paid by real estate of similar value but different classification. My change will reduce the classification of real estate to 2 distinct classes: residential real estate and non-residential real estate. Non-residential real estate will face a property tax rate that is exactly 10% greater than residential real estate’s rate. In effect, non-residential real estate will subsidize a small portion of the property tax for residential real estate. Since residential real estate will be taxed less, a greater supply of housing will be made available at lower prices due to a lower tax burden.

Additionally, under the new system residential real estate owned by foreigners will be treated differently than residential real estate owned by NYC residents. The property tax rate levied against foreigners who own residential real estate will be double the rate faced by residents of NYC who own residential real estate. In essence, this change will encourage foreigners to sell off their holdings of residential real estate, thus making the current supply of housing more available to New Yorkers. This change will result in foreigners effectively subsidizing the true cost of housing for full time residents of the city. Also, this preferential treatment for residents will have the added benefit of discouraging detrimental real estate speculation from foreigners –which drives up long-run equilibrium housing costs.

CHANGE 3: Increase Density Through Incremental Increases in “Air Rights” Starting on January 1st, 2016, New York City will increase density throughout the entire city at

the rate of population growth. For each incremental “air right” increase after this date, the NYC government will allow the private market to build into the space that has been made newly available. The private developers who build into that newly available density will then own the space, outright, through a leasehold interest for 35 years. After 35 years, whatever is built inside of the incremental air right area by the private market will revert in ownership back to the NYC government. Once the ownership of the incremental real estate reverts back to the government in year 35 as a fee simple interest, the government will immediately sell it back out to the private market. With the funds earned


from the sale, the NYC government will use the money for 3 purposes only: I. 33% will build and maintain affordable housing units

II. 33% will fund repairs and maintenance for the city’s aging infrastructure III. 33% will be used to fund NYC schools

CHANGE 4: Institute Predetermined, Non-Negotiable Tax Abatement Multipliers for Affordable Housing

One reason why rents are rising so rapidly is because the private market is not building an adequate supply of affordable housing units on its own. This dearth of supply results in a targeted market failure that only applies to affordable units. “Of 370,000 multifamily rental units completed from 2012 to 2014 in 54 U.S. metropolitan areas, 82% were in the luxury category.”5 So how can we encourage the private market to develop affordable housing on its own, so that government does not have to step in to solve the problem in the future?

What we need is a generous incentive to inspire the private market to build affordable units. The generous incentive I propose will be sufficient to goad developers into building affordable housing. The incentives will be fair, predetermined, and non-negotiable so that the program is ensured to have its benefit exceed its cost. My reform is as follows:

• For every $1.00 invested to build, convert to, or preserve affordable housing, a tax abatement of $1.50 will be earned. Previous government programs, such as the controversial 421-a tax abatement, were flawed

because they gave overly generous tax abatements to developers in exchange for too little affordable housing. For example, it was reported in The Wall Street Journal that Extell Development received $66 million in 421-a tax abatements on its One57 building in exchange for building $5.9 million in affordable housing.6 Examined as a ratio, for every $1.00 Extell Development put into affordable housing, it received a property tax discount of $11.19. To put this in perspective, I provide you with the following quote: “One57, which soars above the southern fringe of Central Park, is home to the city’s most expensive apartment, a $100.5 million glass-walled penthouse.”7 A property tax abatement of $11.19 is way too generous for a super luxury condo development; an abatement of $1.50 is not.

CHANGE 5: Charge The Police For Their Misconduct From 2010-2014, payouts to victims of police misconduct cost New York City taxpayers $601.3

million dollars.8 These massive payouts were for a litany of charges against the NYPD ranging from charges such as alleged beatings to wrongful imprisonment. However, it is important to note that the settlements received by the victims, all $601.3 million of them, were NOT paid for by the police force. Instead, New York City taxpayers subsidized the cost of police misconduct. This is unacceptable; taxpayers should not have to bear this cost. Under my reform, the NYPD will be required to bear the cost of their misconduct by purchasing liability insurance to protect the city from footing these expenses.

As part of my policy prescription to make affordable housing a reality in NYC, I want to shift the cost of police misconduct away from taxpayers and onto police officers.

5 Kusisto, Laura. "New Luxury Rental Projects Add to Rent Squeeze." WSJ. The Wall Street Journal, 20 May 2015. Web. 22 Aug. 2015. 6 ibid 7 Barbanel, Josh. "Study Details Cost of Tax Break for Luxury Manhattan Condo: One57 Developer Got $66 Million in 421-a Tax Abatements in Return for $5.9 Million in Affordable Housing." WSJ. The Wall Street Journal, 14 July 2015. Web. 25 Aug. 2015. 8 Elinson, Zusha, and Dan Frosch. "Cost of Police-Misconduct Cases Soars in Big U.S. Cities." WSJ. The Wall Street Journal, 15 July 2015. Web. 25 Aug. 2015.


• A law needs to be passed in New York that requires the police force to purchase liability insurance. According to this new law, liability insurance would need to be purchased by each NYPD precinct so that in the event of a police misconduct ruling against a city officer, the city and its taxpayers would be protected from the cost.

o If the police refuse to purchase this insurance, then to pay for any and all police misconduct cases that arise, NYPD officers will have their wages garnished, up to 10% of their pay, to pay for the cost of misbehavior.

With the subsequent savings harnessed as a result of this reform, the NYC government will fund property tax reductions for full time residents of New York City. These reductions will apply to residential real estate only.

CHANGE 6: Provide Incentives for Developers to Build Both Affordable Housing Units and Micro-Apartments

According to a 2014 study by the nonprofit research group the Urban Land Institute, micro units are typically defined as apartments of less than 350 square feet, with a fully functioning kitchen and a bathroom compliant with the Americans With Disabilities Act.”9 Did you know that total rent for a micro unit is 20% to 30% cheaper than a conventionally sized apartment?10 A 20% to 30% cheaper rent is significant, and the government would do well to subsidize any form of residential real estate that has the ability to reduce rents by such an impressive amount.

These 2 forms of residential real estate deserve preferential tax treatment because they provide numerous benefits to society. Therefore, to encourage the private market to build more of these units, tax rates levied against these forms of residential housing will be lowered by 10% through the creation of the: “NYC Property Tax Deduction for Micro-Apartments and Affordable Housing”

CHANGE 7: Use EB-5 Funds to Build Affordable Housing Units EB-5 is immigration reform for the 1%. The EB-5 Visa program is a Federal program that was

created by congress to provide a method for foreign nationals to obtain a green card by investing money in the United States. In essence, foreigners must invest a minimum of $500,000 in either a high unemployment or rural area and the investment must create or preserve at least 10 US jobs. If these requirements are met, the immigrant investor will then receive permanent residency and may apply for U.S. citizenship.11

Currently, the largest real estate developers in New York City are using EB-5 funds, and they are raising billions of dollars with this program. For example, “the developer behind Manhattan’s massive Hudson Yards project, is using $600 million of EB-5 funds to finance this one project.” For 2014, EB-5 money funded nearly $4 billion dollars of investment.12 But rather than have EB-5 funds go to established real estate developers who could easily secure capital through other means, the funds should instead go towards building affordable housing units –an investment that historically has lacked sufficient capital sources.

9 Ramey, Corinne. "Micro Units Are Coming to Queens." WSJ. The Wall Street Journal, 7 Oct. 2015. Web. 04 Nov. 2015. 10 Ramey, Corinne. "Micro Units Are Coming to Queens." WSJ. The Wall Street Journal, 7 Oct. 2015. Web. 04 Nov. 2015. 11 Mahmoodi, Arian, and Jan De Roos. Financing Hotels via EB-5. The Center for Hospitality Research. Cornell University, 2015. Web. 12 Brown, Eliot. "Hot Source of Property Financing: Visa Seekers." WSJ. The Wall Street Journal, 9 Dec. 2014. Web. 25 Oct. 2015.


To realize my reform of the use of EB-5 funds, the following law must be passed: EB-5 Housing Affordability Act:

I. Pursuant to this law, 90% of all EB-5 funds spent within the state of New York must go towards affordable housing units.

• Of the 90% of EB-5 funds required to go to affordable housing: i. 70% will go towards building affordable housing units, and

ii. 30% will go towards improving the existing stock of affordable housing units II. The remaining 10% not earmarked for affordable housing can then be used as the private

market deems appropriate. CHANGE 8: Strengthen Disclosure Laws to Prevent Shadow Ownership of Real Estate

Currently, international buyers are using shell companies to buy real estate and to avoid taxes. By using shell companies, foreigner owners are trying to avoid paying New York City’s income tax, because there is a law stating that those who have apartments and stay in New York City more than 183 days are considered legal residents and are required to pay city income taxes.13 In fact, “more than half of New York condominium sales above $5 million last year [2014] were to limited liability companies.”14 This shell game has made the market less transparent and therefore increasingly alluring for foreign buyers wishing to maintain anonymity with their purchase. This anonymity is bad. It leads to tax evasion and it cheats the city of revenue it needs. My solution to the problem is simple. Pass 2 laws that state the following:

1. By law, those who have apartments and stay in New York City more than 91 days are considered legal residents and are required to pay city income taxes.

I. (Therefore, the threshold for paying NYC income taxes would reduce from 183 days to 91 days under my reform.)

2. Any residential real estate purchased through a shell company will be assumed to have been purchased by a resident of the city, and will be treated as such for the purpose of taxation.

I. If a purchaser of residential real estate wants to contest the city’s blanket assumption of residency, the burden is on the foreigner to prove they are indeed non-residents of the city and therefore not subject to the city’s income tax.

First, by lowering the threshold number of days at which residents are required to pay city income taxes, the city can earn more money for social services. Second, by placing the burden on foreigners to disprove they are residents of the city, less foreigners will be able to avoid paying the city’s income tax. This change is good because the increased tax revenue will come from foreigners and not from New Yorkers. If more of the tax burden is carried by foreigners, it will result in a commensurately decreased burden on New Yorkers. This is good government policy.

CHANGE 9: Raise Property Taxes on Absentee-Owners and Foreigners Remember when I explained that 89,000 of the city’s condos and co-ops are owned by people

13 Saul, Stephanie. "New Disclosure Rules for Shell Companies in New York Luxury Real Estate Sales." The New York Times. The New York Times, 20 July 2015. Web. 25 Aug. 2015. 14 ibid


who claim to be nonresidents of the city?15 My question to you is this: what type of government policy do we have if the state sits by idly as the wealthy of the world drive up residential real estate prices through speculation and inflated demand, thus displacing New Yorkers, and nothing is done to serve as a countervailing force? I would argue that we would have a very ineffective system of government whose inaction results in unnecessary burdens being placed on residents of the city.

To prevent this unnecessary burden, my reform will double the property tax on foreign and absentee owners of residential real estate. In essence, absentee owners would pay their property tax twice. Therefore, the first property tax they pay should go to the city’s budget as normal. The second property tax levied would be set aside in a specific fund separate from the city’s budget. Each year, the total proceeds inside the fund would be used for two thing:

I. 50% would be used to build and maintain affordable housing units. II. The other 50% of the funds would be voted on by taxpayers of NYC to determine what

their preference would be for spending the money. The results of the vote would last three years. The taxpayers would be asked to decide what to do with the remaining 50% of the funds by voting for one of these 5 pre-determined options:

A. The funds would be used to fund and/or expand a tax credit to employers who hired homeless people.

B. The funds would be used to purchase books and school supplies at New York City schools. (As a requirement, the money would ONLY be used for school supplies for students and nothing else.)

C. The funds would be used to pay for the upkeep and continued maintenance of New York City’s homeless shelters.

D. The funds would be used to clean and improve the dilapidated subways of New York City. As a requirement, 50% of the money MUST go to janitorial workers and other cleaners. The other 50% of the money MUST go towards paying for capital expenditures to improve the aging infrastructure.

E. The money would be divided equally among the four initiatives. CHANGE 10: Raise the Capital Gains Rate on Foreigners Who Own Residential Real Estate

Demand for real estate is soaring right now: “Investors are pushing commercial real-estate prices to record levels in cities around the world, fueling concerns that the global property market is overheating. The valuations of office buildings sold in London, Hong Kong, Osaka and Chicago hit record highs in the second quarter of this year [2015], on a price per square foot basis, and reached post-2009 highs in New York, Los Angeles, Berlin and Sydney, according to industry tracker Real Capital Analytics.”16 The main reason why demand for real estate is soaring is low interest rates. Low interest rates are causing investors to dabble more in real estate in search of higher yields. For example, right now a US 10-year treasury note is yielding roughly 2.2%; this is anemic at best. Meanwhile, New York real estate has a much more robust average yield of 5.7% on a 10-year hold.17 Therefore, real estate is more attractive to investors due to its higher return on investment.

We must recognize that when investors/speculators bet on residential real estate appreciating, it drives up the long run equilibrium price for housing. When this occurs, affordability goes down and

15 Saul, Stephanie. "New Disclosure Rules for Shell Companies in New York Luxury Real Estate Sales." The New York Times. The New York Times, 20 July 2015. Web. 25 Aug. 2015. 16 Patnaude, Art, and Peter Grant. "Surge in Commercial Real-Estate Prices Stirs Bubble Worries." WSJ. The Wall Street Journal, 12 Aug. 2015. Web. 27 Oct. 2015. 17 ibid


more people become rent burdened. The following change I recommend will prevent this: Raise the capital gains tax rate on residential real estate to 95%; ONLY apply this onerous rate to foreigners and absentee-owners.

o NOTE: This extremely punitive tax rate will ONLY be applied to foreigners and absentee-owners of real estate. Absentee owners will face this high tax only for capital gains harvested from RESIDENTIAL real estate. For example, should these individuals earn a capital gain on ANY OTHER FORM of real estate, that tax rate will remain unchanged.

CHANGE 11: Raise the Minimum Down Payment Required of Foreigners to 45% When foreign investors inflate demand for real estate, it has severe consequences on

affordability. This inflated demand is a real problem and it needs to be curbed. The change I propose will effectively achieve this goal.

One of the easiest ways to discourage foreign investors from buying residential real estate is to raise the minimum down payment required of them so that there is a higher barrier to entry for home ownership. Therefore, I recommend that for residential real estate owned by foreigners and absentee-owners ONLY, the NYC government raise the minimum down payment required to 45%. Please note that only foreigners would face this additional barrier. New Yorkers would not. Additionally, since this would only apply to residential real estate, foreigners would still be encouraged to make investments in others forms of productive assets across the city –such as in the stock market or nonresidential real estate.

Since many foreigners -even the wealthy ones- will not be able to afford an onerous down payment of 45%, less foreigners will buy residential real estate. This will reduce the inflated demand and prices will drop according.


Understanding the Current Property Tax System of NYC

The current property tax system of NYC is extremely distorted and in order for affordable housing to be made a reality, it must be reformed. In fact, property tax reform is the single most important concept from my entire paper. Therefore, before an in depth discussion of my proposed reforms are to take place, the current system, its significance, and the problems it contains must first be explained.

Why Should We Care About the Property Tax?

The property tax is New York City’s number one, largest source of revenue. In 2011, the property tax collected roughly $17 billion of the city’s revenues.18 On average, real property taxes in New York represent 35% of the total state tax collected. The property tax is then followed by sales and gross receipts tax (34%), individual income tax (20%), corporate income tax (3%), other taxes (6%), and motor vehicle tax (2%).19 Therefore, the property tax is the single most important tax in the entire state of New York.

Comprehensive property tax data taken from fiscal year 2006 is displayed in the graphic to the right.20 It shows the proportion of tax revenues generated from the property tax by some of the nation’s largest municipalities. You may find it interesting to note that the reason why Texas’ reliance on the property tax is second to none is because the state has no income tax –so they must raise revenues from other taxes such as this one. As you can see from the chart, the proportions are high for all of these cities -further highlighting this tax’s vital importance.

NYC Property is Broken into 4 Distinct Classes For The Purpose of Taxation Over 96% of all property in New York City is subject to taxation; however, the property tax

burden is not distributed equally across all property types.21 This is the result of the tax classification system.

18 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 19 Lavarone, Alison. "New York State Property Tax Assessments and the Homestead Option." Proquest. Cornell University, Apr. 2014. Web. 12 Sept. 2015. 20 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 21 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015.


NYC’s property tax system has drastically different tax rates for properties of equal value but different classification. The reason for these stark differences in property taxation began in 1981, when the property classification system was first introduced. The classification system is fairly simple and straightforward: it has 4 categories, and the following figure shows easy to understand examples of what types of real estate fall under each category.22

The most insightful descriptor of a

property tax system is the effective tax rate, because it most closely resembles the taxes paid in real life. For those who are unfamiliar with real estate tax jargon, effective tax rate is simply the tax paid on the property divided by the market value of the property.23 Since the current classification system results in similar properties of different classification having significantly different effective tax rates (ETRs), I will argue that it is unfair and should be reformed.

What Type of Property is in Each Class? Below are descriptions of the 4 classes of

NYC real estate: 1. Class 1 – most residential property

of up to three units, most condominiums under four stories

a. Properties in Class 1, are by a very large margin, taxed at the lowest effective tax rate.24

2. Class 2 – larger condominium buildings, most cooperative buildings, and larger rental buildings.

a. (However, some Class 2 properties, namely condos and co-ops, are taxed at an effective rate more or less equal to the low rates of Class 1 properties. This is a result of the 1996 Condo and Co-op Property Tax Abatement.)25

22 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015. 23 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 24 ibid 25 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015.


3. Class 3 – utilities 4. Class 4 -- commercial and industrial properties

Initial Summary - The Current Property Tax System

If you were to go onto the New York City Department of Finance’s website to look up the published tax rates for different property classifications, you would see a chart similar to the first one shown.26 This chart shows nominal tax rates, which are calculated based off of the TOTAL TAXABLE VALUE of a given class of real estate, NOT the real estate’s actual fair market value. In reality, the nominal tax rate is neither helpful nor insightful. What is much more important is the effective tax rate. The ETF reflects the tax rate actually paid by a property owner after adjustments, such as tax abatements and credits, are accounted for.

The NYC property tax system is this regard is purposely deceptive. For example, upon first glance we look at the nominal tax rates and see Class 1 has the highest nominal tax rate. However, exactly the opposite is proven true in the following figure.27 The effective tax rate is what the Department of Finance truly cares about and it shows a very different picture: “While the nominal rates above appear to suggest that the city taxes Class 1 properties at the highest rate and Class 4 at the lowest, precisely the opposite is true.”28 I created the following graph to highlight the extreme discrepancies in the nominal tax rates published by the DOF compared with the effective tax rates that reflect what the different classifications actually pay. The current system is purposely deceptive and is created in this manner to obfuscate the truth. I suspect many people would be upset with the system if they truly understood its inner workings.

There are three main reasons why the nominal tax rates are so far from the truth. The three main reasons for this phenomenon are: pervasive undervaluation of real estate, assessments caps on property, and tax abatements/credits. An assessment cap occurs when real estate appreciates rapidly. It is put in place to protect the property owner from a rapidly rising property tax burden commensurate with a

26 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 27 ibid 28 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015.


rapidly rising property value. Example: Your property tax cannot rise more than 6% per year. An assessment cap occurs when real estate appreciates rapidly. It is put in place to protect the property owner. I will speak in greater depth about these reasons later in the paper, but will now move on to explain the effects of the classification system on NYC real estate.

What Effect Does Classification Have? As we now see, the effective tax rates among these 4 different classifications are very different.

For example, Class 2 real estate, which is comprised of residential forms of real estate, has an effective tax rate of 3.31%.29 Meanwhile, the ETR on Class 2 property is 4.94 times greater than the ETR levied upon Class 1 real estate.30 The funny thing is, both Class 1 and Class 2 real estate are forms of residential housing. Logically, one might ask: Why is the DOF arbitrarily granting a “most-favored nation status” upon Class 1 residential real estate, but not Class 2? Why is Class 2 being taxed at roughly 5 times Class 1’s rate?

An unintended consequence of this classification system is that some “most favored” forms of residential real estate pay low tax rates while less fortunate residential forms pay a tax that is 4.94 times larger. The current system is unfair because Class 1 real estate owners are not paying their fair share of the city tax. The effect is that the burden of the tax then shifts onto all of the other 3 classes of real estate in order to make up for that shortfall from Class 1. This exacerbates housing unaffordability because it forces some forms of residential real estate to overpay their fair share of the property tax.

29 ibid 30 3.31% effective tax rate on Class 2 / 0.67% effective tax rate on Class 1 = 4.94X larger burden


If you look at the bar chart

graphic to the right, you can see that Class 2, Class 3, and Class 4 are all paying a proportionately larger share of the city levy than their market value would deem appropriate.31 The only anomaly is Class 1; Class 1 real estate is the ONLY form of real estate in New York City that does not pay its proportionally fair share of the city levy.32 The effect of this system is that all Class 4 (hotels, etc.), all Class 2 (large apartments, etc.), and all Class 3 real estate (utilities) are overpaying their property taxes to make up for the under taxation of Class 1 property (one-to-three bedroom residential home, etc.).

Demographic Analysis - Class 1 renters are more affluent than their Class 2 counterparts

Class 1 renters are more affluent than their Class 2 counterparts, but they pay a smaller tax. This is because Class 2 real estate includes apartment renters who tend to be less well-to-do. On average, Class 1 renters make $45,000 per year and Class 2 renters make $37,000.33 However, Class 2 real estate faces an effective tax rate that is 4.94 times greater than Class 1’s rate. Please see the following demographics chart for further information.34 If Class 2 realized how much greater its tax burden is than Class 1, then many people would seek to make the system more equitable.

Additionally, if the owners of the Empire State Building (Class 4), ConEd (Class 3), and apartment renters (Class 2)

31 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015. 32 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 33 ibid 34 ibid


were explained that they are unfairly overpaying on their taxes in order to subsidize the under taxation of a 3-bedroom residential home on the Upper East Side (Class 1), then they would be indignant and property tax reform would be much more attainable.

For reform to take place, politicians first need to spend significant resources educating the public on the iniquities of the current system so that rational people will demand change. Politicians will only be galvanized to act when the people demand reform of the unfair and regressive property tax system currently in place. Now that we have shown the extent to which Class 1 real estate shirks its fair share of the property tax, the next question to be answered remains:

Tax policy and its implications on affordability: Is it good public policy to treat homeowners more favorably than renters?

The main rationale for the government to tax Class 1 real estate at a lower rate is simple: it encourages homeownership. The logic: homeownership is good and it is encouraged because when people buy homes in an area, they are making a concrete investment and are thus more prone to staying and improving that area in the long term. However, this strong preference to homeowners comes at the expense of renters.

New York City imposes the second HIGHEST tax burden on apartment buildings in the country -a staggering 4.00%.35 This is particularly troublesome because NYC has the highest percentage of renters in the country; renters occupy 67.9% of all occupied housing units in New York City.36 Equally interesting is that NYC homeowners, who are the minority of the population, pay the 7th LOWEST property tax in the nation -a paltry 0.67%.37 Yet, NYC council members still ponder why so many city residents are rent burdened. If the NYC government was serious about reducing the number of rent burdened residents, it should begin by lowering the punitively high tax rate Class 2 real estate. If renters make up 67.9% of all occupied housing units in New York City, then why are they being taxed at the 2nd highest rate in country while the homeowners are taxed at the 7th lowest rate?

This question is especially important to answer as demographics change. In July 2015 the US Commerce Department published a report explaining that the homeownership rate in the US has hit a 48-year low.38 The reason for this puzzling trend is simple: As rents rise and housing becomes more unaffordable, less people can afford homes and so they rent. “From 2003 to 2013, the share of renters

35 ibid 36 Ibid 37 ibid 38 Sparshott, Jeffrey. "Rising Rents Outpace Wages in Wide Swaths of the U.S." WSJ. The Wall Street Journal, 28 July 2015. Web. 22 Aug. 2015.


aged 25 to 34 who are considered cost-burdened increased from 40% to 46%.”39 “Rents have skyrocketed so much and incomes haven’t kept pace, so we have an affordability crisis in some of our major metropolitan areas for the middle housing market,’ said Kenneth Rosen, chairman of the Fisher Center for Real Estate and Urban Economics at the University of California, Berkeley.”40

It is not wise public policy to treat homeowners favorably because it shifts a greater portion of the tax burden onto renters, and renters comprise the majority –especially in New York City.

The Federal Government Subsidizes Homeowners at the Expense of Other Residential Forms

It is important to mention briefly that this preference towards homeowners isn’t just lavished at the state level but also at the federal level of government. This can be briefly explained by the following direct quotes from a June 2015 Wall Street Journal article:41

1. “The U.S. commits about $200 billion annually to housing, largely through tax breaks. Nearly three-quarters of that goes toward homeownership, and the biggest piece—almost $100 billion annually—is the mortgage-interest deduction.”

2. “According to the Congressional Budget Office, the wealthiest 20% of households, those earning more than $160,000 annually, receive 75% of the total tax benefit.”

3. “Curbing the interest deduction also could free up funds for the rental side, where the government could boost the use of low-

39 Ibid 40 Ibid 41 Timiraos, Nick. "New Housing Headwind Looms as Fewer Renters Can Afford to Own." WSJ. The Wall Street Journal, 7 June 2015. Web. 22 Aug. 2015.


income housing tax credits that entice developers to build or renovate more affordable housing units.”

4. “The U.S. must rethink providing the most generous federal housing assistance to the well-housed and the well-to-do. Instead, the government should refocus the existing subsidies on helping young families save to purchase a home.”

In a 2012 research paper from NYU’s Furman Center for Real Estate and Urban Policy, similar concerns and suggestions were voiced: “As policymakers begin to rethink the government’s role in encouraging homeownership, they must not forget that policies affecting homeowners will tend to have a corresponding impact on renters as well. The political history and current disparities of New York City’s property tax are a testament to this reality.”42 This renter v. homeowner discussion is important especially because during the Great Recession, falling home prices destroyed billions of dollars of equity stored in homes, and this had disastrous consequences for families whose homes were “their primary vehicle for saving”. The foreclosure

42 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015.


epidemic of 2008 and 2009, along with the ever increasing budget deficits, ought to provoke additional scrutiny and skepticism regarding the specious benefits of providing enormous subsidies for homeowners at all levels of government.

The bipartisan Simpson-Bowles Commission had recommended exactly this: it suggested a significant curtailment of the mortgage-interest deduction.43 The economic effect of this would be profound because as homeowners stop being subsidized, they being to pay more in property tax, thus alleviating the outsized burden on renters –those who typically can least afford onerous tax rates. Why Are The Tax Rates So Different Between Different Classes of Real Estate?

Properties in Class 1 have, by far, the lowest tax rates. For example, Class 1 properties account for 49% of the market value for all taxable property but only 15% of the city’s revenues.44 Class 3 utilities and Class 4 commercial/industrial properties are taxed at a far higher effective tax rate and consequently bear a disproportionate share of the overall tax burden.

One explanation for this is the failure of renters to understand how much of the property tax they actually bear, since the portion of the rent they pay that goes to taxes is largely unknown to them. (They pay the landlord and then the landlord pays the tax.) The viewpoint that landlords pay the burden of the property tax, in the form of reduced profits, is certainly incorrect and shows a lack of understanding. Instead, the landlords pass the second highest tax burden in the country onto tenants in the form of higher rents. Since the NYC apartment tax is the second highest in the nation, reducing this tax would lead to lower rents.

Valuation of Real Property and Why It Matters

43 ibid 44 ibid


Obtaining accurate assessments of value for real estate is of vital importance because the property tax is always a portion of that value. When the value is inaccurate, so is the tax paid.

Section 306 of New York’s Real Property Tax Law mandates that municipal authorities assess all real property at full fair market value. This is a great, common sense law. However, this rule means nothing and is easily flouted because contrary to the law, discretion is given to local tax assessors. This discretion consistently results in assessments of residential property that routinely amount to less than one-third of market value.45 Municipalities make up for the under taxation resulting from fractional assessment by increasing the tax rate to satisfy revenue needs.

Brief History of the Property Tax In 1975, the Hellerstein family brought a lawsuit against New York City arguing that consistent

undervaluation of certain properties was unfair, led to distortions in the market, and that it should be changed. The court agreed: it stated that patterns of under taxation might fail to be uniform and instead reflect the “incompetence, favoritism, or corruption of local officials.” The court wanted to change fractional assessment, but was unfortunately prevented from doing so.

For more than 200 years, New York State’s property tax system has been corrupt. I state this because for over 200 years, it has allowed local assessors to assess property values “as they deem proper,” despite Section 306 of New York’s Real Property Tax Law being in place.46

The distortions due to fractional assessment were so large and had been pervasive for so long that a 1979 State Assembly Task Force report found that the Hellerstein Mandate, which would have correctly ended the corrupt practice of fractional assessments, would have led to the doubling of property tax bills for homeowners in Brooklyn, Queens, and Staten Island.47 In essence, the property tax distortions of New York were so large and had been large for so long that reformation of the system would have been political suicide. The politicians decided this was not a good outcome for themselves and so they abandoned true and desperately needed reform despite the understanding that the system in place was flawed and prone to abuse.

When this realization took place, there was a panic in Albany as legislators realized that fixing the distorted system overnight would make them many enemies. Consequently, the legislature rushed through S7000A in 1981; this tax reform bill treated NYC and Nassau County different from the rest of the state:

45 ibid 46 ibid 47ibid


1. S7000A allowed all municipalities, excluding NYC and Nassau County, to continue to indulge in the “ancient custom” of fractional assessment.48 As I explained before, this practice has shown a propensity for corruption and an unfair distribution of the property tax.

2. In NYC and Nassau County however, the tax reform looked upon first glance to be good and equitable because it technically ended fractional assessment; but again, this reform was a farce. With S7000A, the legislators were able to achieve the same effects of perpetuating fractional assessment, but through different means. How so? In NYC and Nassau County, S7000A separated residential real estate into two Classes: Class 1 and Class 2. This decision proved extremely advantageous to Class 1 property owners. By doing this partition, S7000A preserved the favorable tax treatment of small residential properties in New York City. This is achieved because one-to-three bedroom family homes tended to receive a much larger “assessment discount” than those afforded to Class 2.49

S7000A’s Broken Promise When S7000A was enacted in 1981, it was supposed to be adjusted every two years to account

for changes in the total market value of properties in each class. Yet, 8 years later no market value adjustments had taken place despite the rapid appreciation of Class 1 property values between 1981 and 1989.50 Consequently, Class 1’s contribution to the citywide levy was still based on 1981 market values, meaning its contribution was proportionately decreasing each year. Since legislators had not adjusted the market values for 8 years, had the state actually adjusted the shares in 1989, Class 1 property owners would have seen their property tax rise dramatically. This was the result of the adjustments not taking place every two years as initially planned.

In response, once again, the legislature lost its backbone and abandoned the reform. Instead, the legislature chose to set the base class shares at their “1990 levels”, but the 1990 levels were effectively the levels from 1981, so these changes ensured that the effective tax rate on Class 1 property would remain significantly below that of other classes for a long time.51

This is why I previously stated that with S7000A, the legislators were able to achieve the same effects of perpetuating the ancient custom of fractional tax assessment, but through different means. Fractional assessment results in a property not having to pay its fair share of the property tax, and Class 1 real estate is able to enjoy exactly this.

Assessment Caps and How They Effect Property Taxes Raised By The City

48 ibid 49 ibid 50 ibid 51 ibid


In New York law, statutory caps were put in place for Class 1 real estate that specified that the assessed value of a Class 1 property cannot increase by more than 6% per year.52 This is a good law, in theory, because it protects owners from a property tax rising precipitously when the value of the property also appreciates. But it has tax consequences and it also shows how, once again, Class 1 real estate is favored over Class 2 real estate: “Only smaller Class 2 properties are subject to a statutory assessment cap. For all other Class 2 buildings, changes in the assessed value of these properties are phased in over five years.”53

In the figure to the right you can see how, “As the share of assessment-capped properties goes up, the effective tax rate goes down. Neighborhoods with greater appreciation in home values from 2000 to 2010 tend to have a greater share of Class 1 properties with capped assessments, and thus lower Class 1 ETRs.”54 This capping is another way that the effective tax rate of Class 1 property is whittled down from an 18.49% nominal tax rate to a meager 0.67% effective tax rate. Consequently, it is important to understand the tax implications of these assessment caps.

The Cooperative and Condominium Property Tax Abatement of 1996 As I stated prior,

some Class 2 properties, namely condos and co-ops, are taxed at an effective rate more or less equal to the much too low rates of Class 1 properties. This is a result of the 1996 Condo and Co-op Property Tax Abatement. “The condo/co-op abatement is the third largest individual tax expenditure, valued at over $400 million.”55 This law effectively reduced taxes for this form of residential real estate by 17.5 to 25%.56 “Tax abatements provide a dollar for dollar reduction of

52 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 53 ibid 54 ibid 55 ibid 56 ibid


a property owner’s final tax liability. The abatement was created largely in response to complaints from co-op and condo owners that their homes were taxed at several times the rate of one-the-three-unit family homes (Class 1).”57

The Method Used for Condo and Co-op Valuation is Flawed, Making Apple to Orange Comparisons

The New York City Department of Finance (DOF) values all co-op buildings and condos with four or more units as if they were rental properties.58 Since four or more is such a small threshold, nearly every condo and co-op is valued under this method –as if it were a rental property.

Rental properties are valued based off of the income they generate. But, here is problem number one: condos and co-ops do not generate income for their owners, like a hotel would, unless the owners choose to rent them out. Neither a condo nor a co-op is an income producing property like a hotel is; it only has the POTENTIAL to be an income producing property if it is rented out. Yet, the DOF chooses to treat it as such and it results in a gross undervaluation of the properties. Instead, these properties ought to be valued based off of their sale prices per square foot.

To value these condos and co-ops (at 4+ units), the DOF currently uses income from “comparable” buildings to estimate their value. Upon first glance, this seems to be a legitimate way to value properties, as the DOF uses “statistical modeling” to select the rental properties under these comparisons.59 However, I will explain why this is also a farce.

Factors that would make two income producing properties “similar” include location, amenities, size, and age. However, the system of “comparables” is systemically flawed because the DOF compares apples and oranges. Regarding age as a factor: few rental buildings attract affluent tenants as rich as some of the luxury pre-war co-ops in Manhattan. Nonetheless, the city often selects RENT REGULATED apartments as “comparables” for expensive pre-war co-ops because of their similar age. Greater than 29.5% of the units in the rental buildings selected as “comparables” are subject to rent stabilization.60

By default, any building subject to rent stabilization has rents below market and the income it can generate is thus artificially limited; therefore, it is inappropriate to have roughly 30% of your basket of comparables for pre-war co-ops compared to rent stabilized buildings. Rent stabilized buildings are for the poor, but the co-ops I am referring to are for the very top of the income distribution.

57 ibid 58 ibid 59 ibid 60 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015.


Two rental building may be “comparable” in size, number of units, location, and age yet differ starkly in true value. For example, the comparables selected by the DOF to represent one Upper East Side building had average values of $188 per square foot. Meanwhile, a single unit in that same Upper East Side building sold for $4,500 per square foot61 –an amount per square foot that was 23.94 times greater than its comparables.62 That unit sold for $54 million. Any rational person should ask the following: why is the DOF using a basket of comparables that contains 29.5% rent stabilized apartments to value a $54 million dollar apartment? Why is the DOF comparing units selling for $188 per square foot to units selling for $4,500 per square foot? This is an indefensible and corrupt practice and it leads to gross undervaluations of real estate.

This undervaluation is bad because when the condos and co-ops avoid their fair share of tax, that burden is then shifted to others. In the current system, the burden is shifted to those who can least afford it. This is the sad truth of the current system. But, allow the following chart to the right to illustrate just how PERVASIVE the under taxation truly is: This graphic is taken from NYU’s Furman Center for Real Estate and Urban Policy’s July 2013 research paper titled: Shifting the Burden: Examining the Under Taxation of Some of the Most Valuable Properties in New York City.63

61 ibid 62 $4,500 per square foot condo / $188 per square foot basket of comparables = 23.94X. Why is the DOF comparing units selling for $188 per square foot to units selling for $4,500 per square foot? 63 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015.


Allow me to tell you a story: Imagine a large building with 66 residential condo units in total. If you were to be told that a single unit had sold for more than the entire building (66 units) was purported to be worth by the NYC Department of Finance, then would this raise a red flag? Would you even believe the undervaluations I am referring to could be so extreme?

In 2012, NYU’s Furman Center for Real Estate and Urban Policy identified exactly 50 co-op sales where a SINGLE RESIDENTIAL UNIT sold for a price that exceeded the DOF’s estimate of the market value for the entire building!

The people estimating market value at the DOF must either be incompetent or corrupt. Facts like these lend ammunition to belief in the latter. “These severely undervalued properties are concentrated in Brooklyn and Manhattan, with more than 70% located in just a few neighborhoods: the Upper West Side and Upper East Side, Park Slope/Carroll Gardens, and Fort Greene/


Brooklyn heights.”64 Take a moment to look at the very first item on the list above: A single condo unit sold for $54

million. However, the NYC DOF had estimated the entire building, all 66 residential units in total, to be worth only $41.099 million. Thus, even if all 65 other condo units inside of this building were utterly worthless, the DOF would STILL be undervaluing the property by $12.901 million.65 How is this valuation so counterfactual to reality and how does it affect the distribution of the property tax burden?

CASE STUDY 1 - Luxury Condos in The Time Warner Center Remember I stated prior that the DOF

makes apple to orange comparisons when using a basket of comparables to estimate the value of condos? Well, consider the following facts regarding the luxury condos inside of The Time Warner Center at Columbus Circle. “The city Department of Finance averaged the cash flow of an unremarkable Chelsea high-rise with that of a Columbia University dormitory to estimate Time Warner Center apartments’ value and tax them accordingly.”66

In 2006 Tom Brady, the New England Patriots quarterback, purchased a condo at The Time Warner Center on the 74th floor. “But he apparently never warmed to the condo and instead rented it out for a reported $50,000 a month before selling it in 2011.”67 Any rational person should ask the following: why in the world is the DOF using dorms for broke college students at Columbia to value luxury condos in a building like the Time Warner Center? Intuitively, this practice does not make sense; it is indefensible and the public has a right to feel outraged at these egregious examples of favoritism and corruption. Practices like these explain how the DOF can arrive at such extreme undervaluations. Tax evasion for the wealthiest property owners in New York City is carried out through undervaluation. When you compare apples to oranges, you get distortions.

Further Information Regarding Undervaluation “Indeed, the most valuable rental properties in Manhattan are valued by the DOF at well under

$500 per square foot.”68 Consequently, the most valuable residential properties have systematically been

64 ibid 65 $54,000,000 selling price for a single unit - $41,099,000 DOF’s estimate for the entire building’s worth = $12,901,000 difference. 66 "Editorial: Stop a Big Tax Break for Wealthy Property Owners." NY Daily News. NY Daily News, 20 July 2015. Web. 23 Oct. 2015. 67 "A Summary: The Hidden Money Buying Condos at the Time Warner Center." The New York Times. The New York Times, 07 Feb. 2015. Web. 23 Oct. 2015. 68 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015.


undervalued for years. The city worsens the undervaluations by comparing apples and oranges. According to the DOF’s crooked logic, a rent regulated building is the same as a $54 million

dollar apartment, and a dorm is the same as a condo renting for $50,000 per month. What brilliance. CASE STUDY 2 - The Witkoff Group - Luxury Condos at 36 Central Park South

Let us now look at a powerful example taken from current events: A $1.7 billion dollar luxury condo project was announced on October 13th, 2015 by The Witkoff Group -a real estate company headquartered in NYC. The Witkoff Group plans to build a 900-foot condo tower at 36 Central Park South in Midtown. In the presentation made to investors by The Witkoff Group, prices are expected to be as high as $13,000 per square foot –just shy of the city’s record price per square foot.69

If it is recognized by The Witkoff Group and its investors that the going market sales price per square foot is $13,000 in Midtown Manhattan on 59th street, why is the DOF valuing these properties at less than $500 per square foot? In this instance, the undervaluation that would ensue would be by a factor of 26.70 Looked at another way, the DOF would only value The Witkoff Group’s new condo building at 3.85% of the buildings TRUE market value.71 Again, this is why I stated that legislators were able to achieve the same effects of perpetuating the ancient custom of fractional tax assessment, but through different means.

The Witkoff Group’s shiny new condo building will be charged a supposedly high nominal tax rate that will get whittled down to something around 0.67% because only a fraction of the building’s real value will be taxed. This example is merely one of many.

Brief Digression into Gerrymandering of Districts

To add insult to injury, please see the figure to the right. It shows how politicians in NYC are gerrymandering districts so that their real estate developer friends, who donate to their campaigns, can qualify their projects for EB-5 funds. If you are unfamiliar with this program don’t worry because I will further elaborate on it later on in my paper.

Here is a quick overview of EB-5: EB-5 is a federal program that allows foreigners to invest money in the US in exchange for US citizenship. The program was intended to create jobs in rural places, where funding is scarce. As you can see, that aim is not being achieved. EB-5 is being used

69 Brown, Eliot. "Swanky New York Condo Project Exploits Aid Program." WSJ. The Wall Street Journal, 13 Oct. 2015. Web. 14 Oct. 2015. 70 ($13,000 price per square foot estimated by The Witkoff Group and its investors / $500 price per square foot estimated by the NYC Department of Finance) = 26 71 ( 1 / 26 = 3.846% of fair market value)


heavily in Manhattan. To receive approval to use EB-5 funds to build a project, a project must be in a “high unemployment area.” That is why politicians have gerrymandered districts of NYC so that East Harlem is linked to Central Park South –to make one of the most expensive places to live in all of Manhattan considered a high unemployment area. In the figure above, you can see a specially made EB-5 district that links gritty East Harlem to ritzy Central Park South. Reform of this program is just one way NYC will achieve affordable housing. I will now return to the issue of undervaluation.

The Burden Shifting Consequences of Undervaluation Exacerbate Unaffordability For Those Who Can Least Afford It

In 2006, a study by the Independent Budget Office brought to the light that for every dollar in value that co-ops and condos are truly worth, they were only assigned a worth of 23.4 cents by the DOF.72 Put another way, The Independent Budget Office found that had an alternate, sales-based methodology been used –the property taxes on condos and co-ops would have risen to be 4.27 times greater.73 This means that the current distortions in the property tax system are so large, and so pervasive, that if they were to be corrected overnight, condo and co-op owners would see their property tax bill raise by 427% percent!

It must not be forgotten that the burden shifting consequences of undervaluation exacerbate unaffordability for those who can least afford it, and this is the heart of the tragedy. This is the reason why New York City has always had stubbornly high numbers of homeless; this is why the homeless population in New York City currently stands at 58,761 people – the size of a small army. Intuitively, doesn’t it seem something has to be wrong in order for the problem to have grown this large? The number of homeless children in New York City right now stands at 23,692. Remember these figures the next time a powerful developer opposes reforming the shady property tax system of New York. It’s ironic to me: the property tax system of NYC is shadier than the gloom cast down on the street by the luxury condos sprouting up around Manhattan.

Final Words on the Current Property Tax System Opponents of change will state the following: “Why should Class 1 real estate have to pay its fair

share of the levy? Why should luxury condos and co-op pay their fair share either? After all, don’t these owners pay more taxes by default since they are wealthy? Doesn’t this make them special in some way?” Well of course it does. How do you think this tax system came about in the first place…?

Now that I have highlighted the shortfalls and indefensible unfairness of the current property tax system, I will now move on to the next section of my paper, which will list a comprehensive number of reforms to the current system.

“Where do you see hope? Where do you see unjust structures?” –Pope Francis

72 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015. 73 1.000 / 0.234 = 4.27X


CHANGE 1: Repeal Section 581 and Instead, Value All Residential Real Estate Using a Comparative Sales Based Methodology

What Do Experts Say about Undervaluation and How to Stop It? “The city exacerbates the problem by selecting partially rent regulated building as comparables

to luxury co-ops. [But] more to blame is Section 581, which requires the city to value condos and co-ops as if they were rental building, rather than by simply comparing them to other recently sold condos and co-ops.”74 My reform is as follows:

• Repeal Section 581 and instead value ALL residential real estate based on comparative sales.

o By law, a comparative sale will be defined as a property that sells WITHIN 5% of the unit in question’s purchase price per square foot.

If, as I previously pointed out, a building’s comparables are equal to $188 per square foot and yet the selling price of the unit is at $4,500 per square foot, then there is obviously an apples to oranges comparison problem. Had my rule been applied in this situation, that type of flagrant apple to orange comparison would be illegal. Under my reform, the lowest comparable -based off of price per square foot- would be $4,275 per square feet, an amount that would result in a valuation 22.74 times greater than what actually took place.75

As a testimonial to how effective this change would truly be, I would like to highlight the following example: In fact, “The city [currently] does use a comparative sales methodology when valuing smaller (1-3) unit residences, and arrives at much more realistic valuations. For example, the DOF currently values Mayor Bloomberg’s Upper East Side townhouse at $17.6 million –or approximately $2,300 per square foot.”76 A sales based methodology works and it should be implemented immediately for all residential real estate.

By passing a law that forces comparative sales to compare apples with apples, the NYC government can earn more revenue and can rectify the undervaluations that lead to an unequal distribution of the property tax. It’s an easy fix that can be implemented today with the swipe of a pen.

The New York City teachers union would steadfastly support this initiative The New York City teachers union would steadfastly support this initiative. In fact, they wanted

to get a similar law passed in 2014 so that it could help to cut class sizes: “The New York City teachers union urged city officials Tuesday to cut class sizes by closing what the union called “tax loopholes” for absentee owners of apartments. The United Federation of Teachers estimated the city could raise at least $900 million a year by giving foreign and other absentee owners a choice: pay taxes on the actual market value of their units, or pay the city income tax.”77 Meanwhile, “The union said reducing class

74 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015. 75 Part one: ($4,500 * [1.00 – 0.05]) = $4,275 lowest legally allowable price per sq. ft. comparable Part two: $4,275 per sq. ft. new comparable / $188 per sq. ft. old comparable = 22.74 76 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015. 77 Brody, Leslie. "Teachers Union Wants City to Close Tax Loopholes for Absentee Apartment Owners." Metropolis RSS. The Wall Street Journal, 9 Dec. 2014. Web. 14 Sept. 2015.


sizes in 100 high-poverty schools next year would cost $30 million in teacher salaries, and would help cement gains that poor students made in preschool.” It is important to note that this nearly identical proposal to mine was estimated to raise $900 million for the city.78 This huge sum, which would be earned by basing residential property taxes off of comparable sales, would pay for reducing class sizes in 100 high-poverty schools 30 times over again.79

$900 million dollars. This number is staggering. To clarify, this estimate of $900 million doesn’t even encompass the tax rate increase on foreigners that I will suggest as one of my later reforms. Instead, that $900 million could be earned simply by enforcing true valuations and having condos and co-ops pay their tax based off of the true market value of their units. “The union said a combination of outdated incentive programs and a dysfunctional tax-assessment system leave many absentee apartment owners paying ‘ludicrously low’ real-estate taxes.” Union President Michael Mulgrew reiterated the main point of this targeted tax reform eloquently: “you should not receive favorable tax treatment unless you are a resident.”80

Responding to Ignorance In response to this teacher union initiative, President of the Real Estate Board of New York,

Steven Spinola, disagreed: “The last thing we want to do is propose a tax that would drive away foreign investors who already overwhelmingly pay a great deal of property taxes.”81

This claim is not factually correct, and I will show you exactly the extent to which this opinion is wrong. As one stark example, I would like to highlight Extell Development Co., the real estate developer behind the One57 tower on West 57th street: “Tax records show that the tax bill last year [2014] for the $100.4 million penthouse was $17,658 for the year ending in June, the equivalent of an

78 ibid 79 $900 million estimated to be raised by a similar reform / $30 million needed for teacher salaries = 30 80 ibid 81 ibid


annual tax bill of $176 on a $1 million house.”82 Examined as an effective tax rate, this $100.4 million dollar condo paid a property tax rate of 0.018%.83 Meanwhile, apartments in New York City face the second highest tax rate in the nation -at 4.000%.84 Examined as a ratio, apartments in New York City pay an effective tax rate that is 227.43 times greater than the tax levied against the $100.4 million penthouse at One57.85 These are facts and they cannot be contested.

After learning these truths, can any rational person agree with Mr. Spinola? Foreign investors pay nothing close to an “overwhelmingly great deal of property taxes.” The fact that the apartment tax in NYC is 227.43 times greater than the property tax levied against the $100.4 million penthouse at One57 says everything.

82 Barbanel, Josh. "Study Details Cost of Tax Break for Luxury Manhattan Condo: One57 Developer Got $66 Million in 421-a Tax Abatements in Return for $5.9 Million in Affordable Housing." WSJ. The Wall Street Journal, 14 July 2015. Web. 25 Aug. 2015. 83 ($17,658 property tax / $100,400,000 condo sale in same year = .000175876 = 0.00018 = 0.018% 84 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 85(0.040000000 apartment tax / 0.000175876 tax on the penthouse at One57) = 227.43


CHANGE 2: Reform and Simplify the Property Tax

The property tax system right now is deceptive, convoluted, regressive, and unfair. For example, recall how the effective tax rate on Class 2 residential real estate is 4.94 times greater than the rate on Class 1 residential real estate; this results in apartment owners in NYC facing the 2nd highest property tax burden in the entire country.86

Under the following reform, the old property tax system would be thrown out entirely and replaced with the following classification system:

Under this new classification system, no longer are certain forms of residential real estate going to pay wildly different tax rates. Instead, every single form of residential real estate -whether it be condo, cooperative, home, or apartment- will face the exact same tax rate. This is fair. What a radical notion indeed. No longer should the system allow certain residential properties to be treated differently than others.

Second, absentee-owners will pay twice the residential property tax that New Yorkers pay. Foreigners, by paying a higher tax rate, will effectively subsidize the cost of housing by helping to pay a portion of a New Yorker’s property tax. Lastly, all other forms of real estate that are non-residential, regardless of what they are, will pay a property tax rate of 1.1X. Recall that under the old system, there was Class 3 real estate (utilities) and Class 4 real estate (commercial/industrial). I see no need to separate these forms of real estate. Now, Class 3 and Class 4 are conjoined. The only distinction that should concern us is the distinction between residential real estate and non-residential real estate. All else is a distraction.

In the chart above, what does X represent? X is a variable representing an unknown number; X represents the tax rate required to balance

NYC’s annual budget. For this reform to be realized, a study would first be commissioned by the New York City government to discover what tax rate X would need to be to balance the budget. Since estimating these rates is beyond my ability as a student, I can only conceptualize the reformed property tax system through variables.

Achieving the 3 effective tax rates listed above would be difficult only because there are many programs currently in place that would try to lower the amount paid for certain forms of real estate, and if these programs were allowed to endure, they would destroy the newfound fairness of the system. For example, the Cooperative and Condominium Property Tax Abatement of 1996 would try to subvert the fairness of the reformed system by creating exceptions for condos and cooperatives. Recall that this law reduced taxes for these 2 forms of residential real estate by 17.5 to 25%.87

86 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. (3.31% effective tax rate on Class 2 / 0.67% effective tax rate on Class 1 = 4.94X larger burden) 87 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015.

Category of Real Estate for Property Tax Purposes Effective Tax RateCategory 1: Residential Real Estate 1.0XCategory 2: Non-Residential Real Estate 1.1XCategory 3: Absentee-Owned Residential Real Estate 2.0X


Consequently, for these 3 effective tax rates to be achieved, it would be true that programs like the condo and co-op property tax abatement would have to be scrapped. If this is the case, so be it. Having rules, and having hundreds of exceptions to rules, is not an ideal system. The current property tax code has more holes and exceptions that what it’s good for. Perhaps that is why the current property tax system of NYC smells so badly of corruption and favoritism; it’s no different than Swiss cheese. In my opinion, the simpler, the more transparent, the more equitable, the better.

Effectively, this new property tax system will have foreigners subsidize housing costs for New Yorkers; it will achieve this by having them pay a proportionately larger share of the property tax burden. All other forms of real estate, such as commercial (Empire State Building), industrial (utilities), etc. will also subsidize the costs of housing for New Yorkers by paying 10% more. As a result, the onerous property taxes on housing will be minimized and the cost will be shifted onto non-residential real estate and onto foreigner homeowners/ renters.

Responding to Opposition from Non-Residential Real Estate Owners Non-residential buildings may see these new tax rates and initially believe that their tax rates will

rise under the new system. In fact, this is not correct. Class 2, Class 3, and Class 4 real estate would all see their tax rates reduced. Only Class 1 real estate would face a tax increase.

It is important to respond to the Class 2, 3, and 4 real estate owners by explaining that under the new system, their taxes would actually be reduced! This is true because under the old system, the undervaluation of Class 1 real estate was so pervasive that the burden of their property tax was being borne for years by the other classes of real estate. Recall the graphic below, which highlights the disproportionate tax burden placed on certain classes of real estate under the old system.88 Under the old system, these non-residential buildings were in fact paying more than 10% above residential real estate property tax rates. Examined as a ratio which compares the share of the city levy to the share of the city market value: The old rates are given below:89

Class 1 burden: (15% share of city levy / 49% share of city market value) = 0.31X



88 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015. 89 "Shifting The Burden: Examining the Under taxation of Some of the Most Valuable Properties in New York City." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, July 2013. Web. 12 Sept. 2015.


Class 4 burden: (42% share of city levy / 24% share of city market value) = 1.75X Ironically, the new property tax system I propose, even with rates set at 1.0X for residential and

1.1X for non-residential, would actually lower property tax burdens for real estate previously known as Class 2, Class 3, and Class 4. Under the old classification system, Class 3 and 4 real estate payed an average tax burden of 2.21X.90 This denotes that their share of the city levy under the old system was more than twice what their market value would have deemed appropriate.

The current distribution of the property tax is very sneaky. For example, note that Class 3 real estate pays the highest and most disproportionate burden of the city’s property tax –at 2.67X. Class 3 real estate is utilities. Therefore, this is a hidden tax. I state this because if the property tax on utility building such as ConEd (for electricity) are high, then ConEd must charge high electricity rates to still earn a profit under this high tax environment. The result of this unfair distribution of the property tax is that electricity bills for New Yorkers are artificially high. The rates are artificially high because they must factor in the overly high property tax that must be paid by utilities. It is important to understand that high electricity bills hurt the poor the most.

Under my reform, Class 3 and 4 real estate would be conflated into one classification, and this one classification would pay a tax rate ratio equal to 1.1. Therefore, these non-residential forms of real estate would see their property tax burdens reduced by an estimated 50.23%.91 Indeed, the undervaluation of certain real estate is so pervasive that even after reducing non-residential real estate’s tax burden by half (50.23%), many apartment owners would still see their property taxes reduced. My reform should be adopted immediately.

90 (2.67 + 1.75) / 2 = 2.21X 91 (1.1 new tax rate – 2.21 old tax rate) / (2.21 old tax rate) = -.5023 = -50.23%


CHANGE 3: Increase Density Through Incremental Increases in “Air Rights”

The following change I will suggest is fairly straightforward and simple, and it will result in significantly more money being earned for the NYC government. With the additional funds my reform will bring in, a third will go towards affordable housing, a third will go towards infrastructure improvements, and a third will go towards NYC schools. The change I will advocate follows:

2. Starting on January 1st, 2016 legislators will pass a law increase the allowable density in NYC each year by the rate of population growth.

3. For each additional increment of allowable density created after January 1st 2016, the government will not allow private real estate developers to build in that newly created area unless they agree to the following, non-negotiable preconditions:

I. If a builder seeks to take advantage of the increased allowable density by building in that new space, they must agree that whatever is built inside of the additional allowable density will be theirs, unencumbered, for 35 years. However, after 35 years, the part of the building that occupies the city’s incremental space will revert back to the NYC government. Thus, the private market can build taller building and earn back their investments over 35 years. And, the one caveat is that the investment would revert back in ownership to the NYC government.

4. Once the portion of the property reverts back to the government, the government will immediately auction it off in a sale, and will use the funds for the following:

I. 33% will build and maintain affordable housing units II. 33% will fund repairs and maintenance for the city’s aging infrastructure

III. 33% will be used to fund NYC schools Has anything like this been done before?

Yes, it has. In an October 2015 article in the Wall Street Journal, it was announced that: “St. Patrick’s Cathedral and other city landmarks may be able to sell so-called air rights valued at up to $1 billion or more to developers across a large portion of Midtown, under a proposal aired Thursday. The transactions would come with a catch: The city would keep 20% to 40% of the proceeds and put them in a fund for public improvements.” “To receive the extra building rights [under the new proposal], developers would either have to buy rights from landmark buildings, or pay for transit improvements, or both.” 92

“Under current rules, landmark buildings -even those already surrounded by tall office towers- can ONLY sell air rights to a property on or across the street.”93 This requirement was seen as too restrictive by the private market, which explains the impetus for why the new proposal was created. “Under the [newly suggested] proposal, all landmarks in the area would be allowed to sell the air rights ALL ACROSS the district without a special city permit that is now required. “The proposal covers an area from roughly East 39th Street to East 57th Street between Fifth and Third Avenues.”94

My proposal increases allowable density much more so than the city’s proposal

92 Barbanel, Josh. "Proposal Gives Midtown Landmarks Air-Rights Flexibility - St. Patrick’s Cathedral and Other Landmarks May Be Able to Sell So-called Air Rights Valued at up to $1 Billion." WSJ. The Wall Street Journal, 29 Oct. 2015. Web. 18 Nov. 2015. 93 ibid 94 ibid


The city’s proposal is different than mine because only 20% to 40% of the proceeds would go to the city, and they would go to the city at the front end -as soon as the air rights sold. My proposal is different because it would give 100% of the proceeds to the city, but only after the private market was able to earn back its investment, plus profit, over 35 years. Additionally, the city’s announced proposal would ONLY apply to landmarks, whereas my additional density would apply across all of NYC. By applying increased density across the entire city, the city’s allowable density under my proposal would rise significantly higher. Furthermore, the city would raise more money because 100% of the proceeds would be kept by the government, rather than just 20% to 40%.

Example of how my proposal would be applied Pretend you are a real estate developer who owns a 100-storey building. Over the past 10 years,

the population of NYC has increased by 5%. Consequently, your allowable density, which is now pegged to the rate of population growth, also has grown by 5%. Now, if you so choose, you have the right to build an additional 5 stories on top of your already 100-storey building; or, you can choose to transfer those density rights to a new building you are planning to build elsewhere in the city. After careful analysis, you choose the former and build an additional 5 stories on top of your already 100-storey building.

Those additional 5 stories are now yours for a period of 35 years as a leasehold interest. Therefore, over a span of 35 years, you can rent out that prime space and earn back your initial investment plus profit. However, since the additional 5 stories were built in incremental allowable density that was created after January 1st, 2016, the 5 stories you had built would revert back in ownership to the city of New York on January 1st 2051 -exactly 35 years later.

At this future date, the government would own, outright and as a fee simple interest, those additional 5 stories created by you, the developer. After acquiring those 5 stories, the NYC government would sell them at auction. With the proceeds from the sale, 33% would go towards affordable housing, 33% would go towards funding infrastructure improvements within the city, and 33% would go towards the NYC school system.

You, the developer who is an influential person representing the interests of the private market, would like this idea for the following reasons: You would be able to build bigger buildings and earn money from those investments over a span of 35 years. Since 35 years is a generous time frame, that duration would be more than enough for you to earn back your investment plus profit. Once you earned your healthy profit back, the city would take ownership of the asset at year 35 and use the proceeds from the sale to better the city in the long run. Good government policy should be enacted immediately.


CHANGE 4: Institute Predetermined, Non-Negotiable Tax Abatement Multipliers for Affordable Housing

One reason why rents are rising so rapidly is because the private market is not building affordable housing and this results in a targeted market failure that only applies to affordable units. “Of 370,000 multifamily rental units completed from 2012 to 2014 in 54 U.S. metropolitan areas, 82% were in the luxury category.”95 “The firm defines luxury buildings as those that command rents in the top 20% of the market. ‘I don’t believe there ever has been a time where we have produced so much luxury rental housing,’ said Susan Wachter, professor of real estate at The Wharton School of the University of Pennsylvania. In Atlanta, about 95% of new apartments have been in the luxury category.”96

What we need is a generous incentive to inspire the private market to build affordable units. The generous incentive I propose will be sufficient to goad developers into building affordable housing. The incentives will be fair, predetermined, and non-negotiable so that the program is ensured to have its benefit exceed its cost. My reform is as follows:

• For every $1.00 invested to build, convert to, or preserve affordable housing, a tax abatement of $1.50 will be earned

How is this different than the 421-a tax abatement? The 421-a tax abatement was a partial real estate tax exemption for the new construction of

multi-family rental housing. However, the program was so corrupt and so abused that it did more to hurt affordable housing than to help. “Wiley Norvell, a spokesman for Mayor De Blasio, said the practice of giving the tax break for condominiums was ‘just indefensible.’ ‘The staggering cost and inefficiency of this program is precisely why the administration sought—and succeeded—in ending 421-a tax breaks for luxury condominiums.”97

421-a cost the city dearly. Please see the following chart to understand just how expensive this program was.98 For fiscal year 2012, 421-a cost New York City taxpayers $1,032.7 million dollars. Meanwhile, 420-C Low-Income Housing -a complete or partial property tax exemption for low-income housing developed by non-profit organizations- was subsidized by taxpayers to the tune of a miserable

95 Kusisto, Laura. "New Luxury Rental Projects Add to Rent Squeeze." WSJ. The Wall Street Journal, 20 May 2015. Web. 22 Aug. 2015. 96 ibid 97 Barbanel, Josh. "Study Details Cost of Tax Break for Luxury Manhattan Condo: One57 Developer Got $66 Million in 421-a Tax Abatements in Return for $5.9 Million in Affordable Housing." WSJ. The Wall Street Journal, 14 July 2015. Web. 25 Aug. 2015. 98 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015.


$76.3 million.99 Examined as a ratio, for every $1.00 the NYC government spent on 420-C Low Income Housing, it spent $13.53 cents on 421-a.100 What does this say about the government’s priorities?

CASE STUDY 3 – An example as to how the 421-a tax abatement was abused - One57

Extell Development Co, the company behind the One57 residential tower on West 57th street, provides just one example of rife abuse of 421-a: Recall that the penthouse condo in this building sold for $100.4 million in 2013 and it paid a property tax that was less than 1/100th of the property tax levied on apartments in NYC –it had an ETR of 0.018% in 2014.101 As if the 2013 sales price of $100.4 million wasn’t enough already, the penthouse went up in value in 2015, “One57, which soars above the southern fringe of Central Park, is home to the city’s most expensive apartment, a $100.5 million glass-walled penthouse.”102

It was reported in The Wall Street Journal that Extell Development received $66 million in 421-a tax abatements on its One57 building in exchange for building $5.9 million in affordable housing.103 Examined as a ratio, for every $1.00 Extell Development put into affordable housing, it received a property tax discount of $11.19. If a public policy is created that results in $11.19 in benefits being lavished on luxury condos in exchange for a pathetic $1.00 of affordable housing, you’re not going to get more affordable housing. You will get more luxury condos. According to the city’s Independent Budget Office, the program was “less cost effective than alternatives.”104 This program was ended by Mayor De Blasio and it was wise to do so.

But, we now need a more just program to take the old one’s place. The rule I propose would curb abuses of the tax benefit from occurring. Under my proposal, had Extell spent $5.9 million on affordable housing, it would have received a much more reasonable ($5.9 million x 1.50) = $8.85 million in tax abatements. From the perspective of this predetermined multiplier of (1.5 x cost), Extell development

99 "Distribution of the Burden of New York City's Property Tax." Furmancenter.org. NYU Furman Center for Real Estate and Urban Policy, May 2012. Web. 12 Sept. 2015. 100 ($1,032.7 million on 421-a / $76.3 million of 420-c) = 13.53 101 Brody, Leslie. "Teachers Union Wants City to Close Tax Loopholes for Absentee Apartment Owners." Metropolis RSS. The Wall Street Journal, 9 Dec. 2014. Web. 14 Sept. 2015. 102 Barbanel, Josh. "Study Details Cost of Tax Break for Luxury Manhattan Condo: One57 Developer Got $66 Million in 421-a Tax Abatements in Return for $5.9 Million in Affordable Housing." WSJ. The Wall Street Journal, 14 July 2015. Web. 25 Aug. 2015. 103 ibid 104 ibid


was given $57.15 million too much in tax abatements –an ironic number given its address.105 Following Up to Curb Corruption in Government

If I were Preet Bharara, the US Attorney for the Southern District of New York, I would try my hardest to pass a law that instituted this reform retroactively –meaning his office would be able to pursue developers like Extell to retroactively recover the $57.15 million dollars the city was cheated in affordable housing. According to his Wikipedia page, Preet has prosecuted nearly 100 Wall Street executives. If that’s the case, it’s time for him to turn his attention towards corruption in the real estate industry and the corruption embedded in the city’s property tax. In fact, if I were Preet, I would start by looking at the highest levels of government. The following bullet points are all direct quotes from a June 2015 article in National Real Estate Investor titled “And the Buck Stops-Where?” and it subtly suggests the exact same steps be taken:106

• “In the wake of the ongoing federal investigation of financial relationships between lawmakers and commercial real estate campaign donors who have business with the state, questions are being raised as to whether New York State Gov. Andrew Cuomo is directly involved.”

• “The Alliance For Tenant Power, a group of activists advocating for stronger tenant protections, is calling on Gov. Cuomo to return $1 million in donations he received from Glenwood Management. “The best way to show that Glenwood is not influencing your decisions in any way is by rejecting their tainted money and saying in public that the scandal-scarred firm should never contribute to you again,” the group wrote in a letter to Cuomo in May, according to the New York Daily News.”

• “Meanwhile, Cuomo’s administration is blocking release of details about the transactions involving New York State and Glenwood, according to the International Business Times. In a letter obtained by IBTimes this week, the New York State Housing Finance Agency stated that it cannot release the documents because it is “cooperating” with the federal investigation.”

• “The New York Post reports that Bharara’s probe moved closer to Cuomo in late May with an indictment alleging that insurance executive Anthony Bonomo, who heads Physicians Reciprocal Insurers and is chairman of the New York Racing Association and a top Cuomo donor, provided a no-show job to Adam Skelos and whose family contributed $250,000 to Cuomo’s campaign.”

Despite this information, Charles Grande -head of muni research in New York for UBS Global Asset Management- is skeptical. Mr. Grande feels that a scandal like this wouldn’t hurt Cuomo even if he is implicated: "Growth hides all sins," he told Crain's New York Business.107 In the City of New York, perhaps Charles is correct.


105 ($66 million lavished on One57 under old 421-a - $8.85 million under reformed system) = $57.15 million overpaid 106 Piperato, Susuan. "And the Buck Stops-Where?" And the Buck Stops-Where? National Real Estate Investor, 5 June 2015. Web. 05 Oct. 2015.

107 ibid

http://www.nydailynews.com/news/politics/group-call-cuomo-return-1m-real-estate-company-article-1.2236898

http://www.nydailynews.com/news/politics/group-call-cuomo-return-1m-real-estate-company-article-1.2236898

http://nypost.com/2015/05/31/preet-bharara-creeps-closer-to-cuomo-with-latest-indictment/

http://www.crainsnewyork.com/article/20150601/ECONOMY/150609996/new-york-bonds-get-aaa-treatment-amidst-inflated-wall-street-payouts


CHANGE 5: Charge The Police For Their Misconduct

Many people remember the controversial police brutality case involving Eric Garner that played out the last few months in New York City. To refresh your memory, I will provide a brief review of the facts: Eric Garner was illegally selling untaxed cigarettes in Staten Island when he was approached by New York City police officers. The officers tried to stop Eric and he became argumentative. One of those officers then put Mr. Garner in a police chokehold that inadvertently led to his death. Although the police officer did not mean for Eric Gardner to die, he did; Eric’s death was a direct result of the officer’s unwarranted and excessive use of force. The widow of Eric Garner, Esaw Garner, sued the city of New York for this affront to justice. Esaw won a $5.9 million settlement against the city as a result of the officer’s misconduct.108

But, my question to you is this: who do you think paid for this settlement? Was is the police officers who paid or was it the generous taxpayers of New York who footed the bill? The answer: generous New York City taxpayers pay the cost for officers’ misbehavior. Please take a moment to

108 Elinson, Zusha, and Dan Frosch. "Cost of Police-Misconduct Cases Soars in Big U.S. Cities." WSJ. The Wall Street Journal, 15 July 2015. Web. 25 Aug. 2015.


review the figure to the right.109 In New York City, for years government-run hospitals were the city’s leading source of liability

payouts; this was primarily a result of medical-malpractice settlements. But beginning in the 2010 fiscal year, there was a significant change: the police department surpassed the city hospitals in total liability payouts.110 Put another way, beginning in 2010 New York taxpayers were paying the highest liability payouts due to police misconduct. Exactly how much in total did this cost New York taxpayers?

From 2010-2014, payouts for police misconduct cases in New York totaled $601.3 million. As you can see, the taxpayers of New York are quite generous indeed. In 2014 alone, police misconduct payouts by the city totaled $165 million.111 If you divided the 2014 total cost of payouts of $165 million by 34,454 -the total number of police officers in New York City- the sum equals $4,788.99 dollars that the city paid, per officer, to settle lawsuits for police misconduct.112 “The numbers are staggering, and they have huge consequences for taxpayers,” says Kami Chavis Simmons, a former assistant U.S. attorney who now directs the criminal-justice program at Wake Forest University School of Law. “Municipalities should take a hard look at the culture of police organizations and any structural reforms that might help alleviate the possibility of some of these huge civil suits.”113 The reform I propose would do just this.

The Wall Street Journal explained it best in its July 2015 article titled Cost of Police-Misconduct Cases Soars in Big U.S. Cities: “Taxpayers foot the bill for settlements one way or another. Cities such as New York, Los Angeles and Philadelphia are self-insured, meaning any payouts come out of city funds. Others have insurance that kicks in at a certain payment level in each case. Smaller municipalities often pool risk with others, but the cost of premiums can increase after incidents occur, much like car insurance”. According to a 2014 study on police liability by Joanna Schwartz, a UCLA law professor, it is almost unheard of that officers pay out of their own pockets.114 I’d like to change that.

Why should taxpayers be held responsible for subsidizing the cost of police misconduct? These payouts on behalf of the NYPD came from a litany of charges ranging from alleged beatings and shootings to wrongful imprisonment. Shouldn’t the police be held responsible for cleaning up the mess they themselves created?

“In New York, settlements and judgments in misconduct cases hit $165 million in FY 2014 -up from $93.8 million in 2010. The number of new claims filed against New York City police, including allegations of police misconduct and damage from car crashes, rose 71% between 2004 and 2013, according to the comptroller. For most of the police departments surveyed by the Journal, the costliest claims were allegations of civil-rights violations and other misconduct, followed by payouts on car collisions involving the police. Misconduct cases were the costliest for New York, Chicago, Los Angeles, Philadelphia, Washington, Dallas and Baltimore.”115

Dallas civil-rights lawyer Don Tittle argues that the increased ubiquity of camera footage and shifting attitudes toward police are affecting case outcomes. “Up until recently, when it came to civil

109 Elinson, Zusha, and Dan Frosch. "Cost of Police-Misconduct Cases Soars in Big U.S. Cities." WSJ. The Wall Street Journal, 15 July 2015. Web. 25 Aug. 2015. 110 ibid 111 ibid 112 $165,000,000 cost of police conduct in NYC for FY 2014 / 34,454 police officers = $4,788.99 per police officer 113 Elinson, Zusha, and Dan Frosch. "Cost of Police-Misconduct Cases Soars in Big U.S. Cities." WSJ. The Wall Street Journal, 15 July 2015. Web. 25 Aug. 2015. 114 Ibid 115 Ibid


lawsuits, there were two groups that had a distinct advantage, where you had to knock them out to win. And that was doctors and cops,” he says. “But with the advent of video, and the changing perception of society, I don’t think police are held in the same regard.”116 I wonder why.

When I was five years old, my mother taught me an important lesson. My mom walked into my room one day and I had toys strewn everywhere. She saw the tornado and explained, “Dylan, if you make a mess then you need to clean it up.” This concise sentence was a helpful life lesson that I internalized at an early age. If I ever made a mess inside my room, then it was my responsibility to clean it up -even when I was a child. Shouldn’t the NYPD be held to the same standard?

In one of his recent novels, Nobel-prize winning economist Joseph Stiglitz cogently explained this same sentiment with more sophisticated logic. To summarize his view down to its essence, he explained, “Anytime someone does not pay the full cost of their actions, they are receiving an implicit subsidy.” Based on this logic, the NYPD is not paying the full cost of their actions and as a result, the NYPD is receiving an implicit subsidy that has cost taxpayers $601.3 million dollars from 2010 to 2014.117 This is unacceptable.

Think about how many affordable housing units could have been built by the city over those four years with $601.3 million. Think about how many additional children the state could have enrolled in universal prekindergarten if it had not been required to subsidize the cost of police misconduct. Imagine how much good could be realized with $601.3 million dollars… Help me to achieve that objective.

Officers Will Pay The Cost for Their Misconduct, Not Taxpayers

No longer should hardworking New Yorkers pay to clean up the mess that police officers themselves created. My mom stopped cleaning up the messes I created when I was five; the city needs to stop doing this with police officers who are adults.

As part of my policy prescription to make affordable housing a reality in NYC, I want to shift the cost of police misconduct away from taxpayers and onto police officers. A law needs to be passed in New York that requires the police force to purchase liability insurance. According to this new law, liability insurance would need to be purchased by each

“116 Ibid 117 Elinson, Zusha, and Dan Frosch. "Cost of Police-Misconduct Cases Soars in Big U.S. Cities." WSJ. The Wall Street Journal, 15 July 2015. Web. 25 Aug. 2015.


NYPD precinct so that in the event of a police misconduct ruling against a city officer, the officers and the city would be protected from the cost.

If as a government, the U.S. requires its citizens to have car insurance and now health insurance, then we certainly should require the NYPD to carry liability insurance -especially when the alternative costs society so dearly. If the police refuse to purchase this insurance, then to pay for any and all police misconduct cases that arise, NYPD officers will have their wages garnished, up to 10% of their pay, to pay for the cost of misbehavior.

This law will clean up the police force over time by reforming the pervasive culture of excessive force and violence. If the police are now required to pay the cost anytime one of their officers errs in judgement, then they will have additional incentives to vet for and hire only rational, competent, and level-headed officers. This would result in less police misconduct cases over time and would reduce the outlandish cost of premiums for liability insurance. Since the police won’t want to pay these outlandish premiums, they will reform the culture of the NYPD quickly to discourage misconduct from taking place.

The City Will Use The Subsequent Savings To Cut Property Taxes For Full Time New York Residents (“Residential Real Estate”)

But, what should the City of New York do with the roughly $165 million dollars in savings it has now harnessed each year? At the end of each year, the City of New York should track the total cost that the NYPD paid for its liability insurance. Since this is a cost that the city was paying for years, the cost has already been built into the state's spending pattern and therefore can be sustained. Consequently, the state should use the total dollar cost of the liability insurance, the cost that the NYPD is now responsible for, and use those additional funds saved to reduce the property taxes for full time residents of New York. This progress will result in a lower tax bill for millions of New Yorkers. Lower taxes will translate to a reduced economic burden for housing and more disposable income that those households can use to further stimulate the state economy.

Responding to Potential Counter Arguments and Concerns If the police force were to begin paying the cost of its misconduct, this would cost each officer

$4788.99 dollars of their pay.118 Understandably, the officers would be very upset with an overnight decrease in salary of roughly $5,000. They would respond by saying my reform is unfair. But, it is important to note that this is a cost they should have been paying all along. Is it fairer to have another officer pay for the misconduct of a colleague or to have a single father or single mother or retired grandmother pay the cost? Effectively, the latter is what has been happening for years. Therefore, it is fairer for the police to pay. The rationale for this is because colleagues will always hold sway over one another and can help the other party to reform. When one bad apple spoils the bunch, the whole bunch then needs to be reformed.

According to Glassdoor.com, a website that tracks salaries, a police officer in New York City (in 2015) makes an average wage of $87,184.119 If the officers did have to start paying for their misconduct, the officers would still receive a living wage; their salary would be reduced to $82,395.01.120 After paying for their own misconduct, the officers would still be compensated fairly.

118 $165,000,000 cost of police conduct in NYC for FY 2014 / 34,454 police officers = $4,788.99 per police officer 119 "Salary: Police Officer in New York City, NY." Glassdoor. Glassdoor, 23 Aug. 2015. Web. 25 Aug. 2015. 120 $87,184 average NYC police officer salary - $4788.99 average cost, per officer, to resolve


Clarifying Misperceptions By no means do I disrespect police officers; in fact, I recognize the work they do is noble and

risky and that they should be compensated fairly for this important job. But it’s true that one bad apple can spoil the bunch. When this happens, we mustn’t demonize the bunch. We must weed out the bad. After acknowledging this, I still think officers need to pay for their own misconduct. $82,395.01 is still a living wage –even in New York City. This reform would do a lot of good for the city’s budget and should be adopted immediately.

What is the best way to implement this reform? Given that this reform will be met with resistance from the New York City police force, it is true

that its implementation may exacerbate relations between the government and the police force. This could ring true especially after Mayor De Blasio’s comments regarding the police. For example, when Mr. De Blasio explained (and understandably so) that he warned his biracial son, Dante, about the dangers of dealing with the NYPD, many police grew upset. So how do we prevent resistance from the police from translating into worsening crime statistics in New York City? Simple: Re-institute stop-and-frisk. Reinstitute stop-and-frisk while simultaneously rolling out this reform. That way, any rise in crime is paired with a rise in proactive policing strategies –and the two will negate each other’s effects.

Concluding Thoughts The pervasiveness of misbehavior from officers suggests they believe they are above the law,

and we know for a fact their pay is already above that of the median New Yorker. Let’s use that banned chokehold –the one which inadvertently led to Eric Gardner’s death- to put a chokehold on a massive taxpayer subsidy for officer misbehavior. Stop the police from frisking taxpayer’s wallets.

If you add the $4788.99 subsidy per officer to the 2015 average wage of a NYC police officer, their total pay equals $91,972.99. Given that the NYS median salary for 2015 is only $84,381, this means that for every dollar the typical New Yorker earns, police officers earn $1.09.121 So don’t cry for the police. Cry for the 23,692 homeless children in NYC as of June 2015. These 23,692 children have been cheated of funding for social services to afford a subsidy for alleged beatings, shootings, and wrongful imprisonment.


police misconduct cases = $82,395.01 121 Step one: $87,184 average NYC police officer salary - $4788.99 average cost, per officer, to resolve police misconduct cases = $91,972.99 Step two: $91,972.99 police officer salary + benefit of subsidy / $84,381 the NYS median salary for 2015 = $1.09 step three: for every dollar the typical New Yorker earns, police officers earn $1.09

CHANGE 6: Provide Incentives for Developers to Build Both Affordable Housing Units and Micro-Apartments

Recall from the graphic to the right that my suggested property tax reform is fair, transparent, and aligns with the interests of the private market. However, I will recommend making 1 additional change to the effective tax rates shown above.

The 1 change I will recommend is the addition of a tax abatement for 2 favored forms of residential housing: affordable housing and micro-apartments. According to a 2014 study by the nonprofit research group the Urban Land Institute, micro units are typically defined as apartments of less than 350 square feet, with a fully functioning kitchen and a bathroom compliant with the Americans With Disabilities Act.”122 However, some cities define units as large as 500 square feet to be micro.123 For these 2 forms of residential housing the effective tax rate will be lowered by 10% to a rate of 0.90X. The tax rate will be lowered to 0.90X through creation of the: “NYC Property Tax Deduction for Micro-Apartments and Affordable Housing”

Why do these 2 forms of residential real estate deserve preferential tax treatment? These 2 forms of residential real estate deserve preferential tax treatment because they provide

numerous benefits to society. Total rent for a micro unit is 20% to 30% cheaper than a conventionally sized apartment, although rents per-square-foot can be higher.124 A 20% to 30% cheaper rent is significant, regardless of whether rents per-square-foot are higher. The government would do well to subsidize any form of residential real estate that has the ability to reduce rents by such an impressive

122 Ramey, Corinne. "Micro Units Are Coming to Queens." WSJ. The Wall Street Journal, 7 Oct. 2015. Web. 04 Nov. 2015. 123 Hudson, Kris. "Cities Try to Lure Young Professionals With Cheap 'Micro' Units." WSJ. The Wall Street Journal, 13 Dec. 2013. Web. 04 Nov. 2015 124 Ramey, Corinne. "Micro Units Are Coming to Queens." WSJ. The Wall Street Journal, 7 Oct. 2015. Web. 04 Nov. 2015.

Category of Real Estate for Property Tax Purposes Effective Tax RateCategory 1: Residential Real Estate 1.0XCategory 2: Non-Residential Real Estate 1.1XCategory 3: Absentee-Owned Residential Real Estate 2.0X


amount. “In recent years, officials in many of the nation's most expensive housing markets have

embraced ‘micro apartments’ as a way to provide less-expensive housing for young renters. They are betting that the tiny apartments -generally the size of a hotel room for about half the rent of a full-size apartment- will attract young professionals and recent college graduates, helping to revitalize city centers.”125 This is a very reasonable assumption to make.

“Micro apartments started gaining popularity decades ago in large cities coping with rising rents, including New York, Seattle and Washington, D.C. The complexes often have communal spaces such as large lobbies and restaurants where tenants can socialize. Developers reason that many young tenants would prefer communal space to personal space and would rather spend money socializing than on rent.”126 Mayor Michael Bloomberg understood developers’ reasoning as well. In fact, in 2012 he created a design competition for tiny apartments called “adAPT NYC.” The competition resulted in 55 units being built, with sizes ranging from 260 to 360 square feet.127 This form of housing is viable, and it is gaining prominence and popularity as its benefits become better understood by the public.

Jessica Yager, deputy director of NYU’s Furman Center for Real Estate and Urban Policy, also recognizes the benefits of micro apartments: “There is a lot of hope that micro units can help meet the housing needs of increasing population, meet the demand for density, and help reduce sprawl. But community opposition, regulatory barriers and financial issues, including difficulties in getting financing, can hinder development.”128 Jessica has faith in micro units and so should New York City.

"This is not a short-term phenomenon,’ said John Infranca, an assistant law professor at Suffolk University in Boston who specializes in land-use law and has studied micro-apartment projects in several cities. ‘There is going to be demand for this housing going forward.” “The [trend] of an increasing number of singles in cities is staying steady across the country. Developers believe that single people in their 20s and 30s will accept less space in exchange for lower rent, even in cities where rent levels aren't especially lofty.”129

I also believe that many different people will accept less space for a 30% cheaper rent. It’s all about benefits and trade-offs. “There are plenty of people, mostly affluent younger workers, who are absolutely willing to live in fairly tight surroundings, even with a roommate or two, to live in these superstar cities,” said Stockton Williams, executive director of the Urban Land Institute’s housing center.”130 If more micro units are built in NYC, a larger supply of the housing stock will be classified as affordable. Therefore, the government should subsidize both affordable housing as well as this promising form of residential real estate. Because of the benefits these most favored forms of residential real estate provide to society, their modest, preferential tax treatment is more than justified.

125 Hudson, Kris. "Cities Try to Lure Young Professionals With Cheap 'Micro' Units." WSJ. The Wall Street Journal, 13 Dec. 2013. Web. 04 Nov. 2015 126 ibid 127 Ramey, Corinne. "Micro Units Are Coming to Queens." WSJ. The Wall Street Journal, 7 Oct. 2015. Web. 04 Nov. 2015. 128 ibid 129 Hudson, Kris. "Cities Try to Lure Young Professionals With Cheap 'Micro' Units." WSJ. The Wall Street Journal, 13 Dec. 2013. Web. 04 Nov. 2015 130 Ramey, Corinne. "Micro Units Are Coming to Queens." WSJ. The Wall Street Journal, 7 Oct. 2015. Web. 04 Nov. 2015.


CHANGE 7: Use EB-5 Funds to Build Affordable Housing Units

What is EB-5? EB-5 is

immigration reform for the 1%. The EB-5 Visa program is a method for foreign nationals to obtain a green card by investing money in the United States. 98% of all EB-5 applications use something called the “regional center” method to achieve their purpose. Under this method, foreigners must invest a minimum of $500,000 in either a high unemployment or rural area and the investment must create or preserve at least 10 US jobs. A regional center is simply an investment vehicle managed by a third party, and the regional center assumes the responsibility of creating the requisite number of jobs. Two years into the project the investor must complete an I-829 form which demonstrates the jobs have indeed been created. If approved, the immigrant investor will then receive permanent residency and may apply for U.S. citizenship.131

How will my change be structured? To realize my reform of the use of EB-5 funds, the following law must be passed:

EB-5 Housing Affordability Act: III. Pursuant to this law, 90% of all EB-5 funds spent within the state of New York must go

towards affordable housing units. • Of the 90% of EB-5 funds required to go to affordable housing:

i. 70% will go towards building affordable housing units, and ii. 30% will go towards improving the existing stock of affordable housing units

IV. The remaining 10% not earmarked for affordable housing can be used as the private market deems appropriate.

Why does the government need to encourage the private market to develop

131 Mahmoodi, Arian, and Jan De Roos. Financing Hotels via EB-5. The Center for Hospitality Research. Cornell University, 2015. Web.


affordable housing units? The government needs to encourage the private market to develop affordable housing because on

its own, the private market is simply not building them. “Even though construction of multifamily rental properties is running at the highest level in decades, the overwhelming majority of new units—more than 80% in the nation’s largest metropolitan areas—are luxury.”132

The incentive for this is simple: “The difference in costs between installing granite countertops and stainless-steel appliances is so slight compared to buying land and installing elevators that economists say developing a luxury apartment and a mid-tier one comes out roughly the same.”133

“Andrew Jakabovics, senior director of policy development and research for Enterprise Community Partners, an affordable-housing group, reiterated the same phenomenon: ‘The gap between what is the top of the market and what’s truly affordable has gotten so large that the odds of the new stuff ultimately becoming affordable is much smaller now than it has been in the past.”134 The private market prefers to build luxury units because it results in higher profits; but, this choice leads to a deficiency in the supply of affordable units. Looked at another way, affordable units are not being built because: “Construction costs are generally too high to justify building new complexes for low- and middle-income tenants.”135 Municipalities across the US are slowly recognizing this trend is destructive, and they are taking immediate action to build more affordable units. For example, in June of 2015, San Francisco unsuccessfully tried to pass a 45-day moratorium on luxury housing

132 Kusisto, Laura. "Rents Rise Faster for Midtier Apartments Than Luxury Ones." WSJ. The Wall Street Journal, 16 Aug. 2015. Web. 22 Aug. 2015. 133 ibid 134 Kusisto, Laura. "Rents Rise Faster for Midtier Apartments Than Luxury Ones." WSJ. The Wall Street Journal, 16 Aug. 2015. Web. 22 Aug. 2015. 135 ibid


construction.136 CASE STUDY 4 – Unaffordability in San Francisco

As a brief aside, I’d like to take a moment to compliment San Francisco’s most recent efforts to achieve affordable housing. In San Francisco’s November 2015 municipal elections, voters were asked to approve $310 million in bond funds to finance, build, and acquire affordable housing. Additionally, the voters were asked to decide whether to institute an 18-month ban on housing construction of any kind that is NOT affordable housing; this ban was to span the city’s rapidly gentrifying Mission District.137

Proposition A, the $310 million in bond funds to create affordable housing, was passed with 74.25% of voters saying “Yes”. The 18-month ban on all housing construction that is NOT affordable, Proposition I, was defeated with 57.2% of voters saying “No.”138 As a result of Proposition A passing, property taxes will rise for residents. Please see the following graphic for how much the property taxes on residents are expected to rise in order to pay for this initiative.139

In my opinion, San Francisco’s initiative to use $310 million of public funds to build affordable housing units is a phenomenal idea. Time and again the private market has shown itself unable to build affordable units, thus resulting is a severe market failure in certain locations like New York and San Francisco. Whenever a market failure occurs, the responsibility to act rests with the government.

Salim Furth, research fellow in macroeconomics at the Heritage Foundation, pointed out the following in response to Proposition A’s passage: “Organic affordability occurs when permitting is prompt and free from political constraints.”140 I certainly agree with Salim that San Francisco’s affordability problem is compounded by overly strict land use regulations and a slow permitting process. However, Proposition A is a step in the right direction.

But, why have the city’s own taxpayer’s pay for the new housing when you can get foreigners to pay for it? As a result of the citizens of San Francisco passing Proposition H, their taxes will increase.

136 Lazo, Alejandro. "'Airbnb Initiative' Would Limit Home Sharing in San Francisco." WSJ. The Wall Street Journal, 24 Oct. 2015. Web. 25 Oct. 2015. 137 Lazo, Alejandro. "'Airbnb Initiative' Would Limit Home Sharing in San Francisco." WSJ. The Wall Street Journal, 24 Oct. 2015. Web. 25 Oct. 2015. 138 "City of San Francisco Housing Bond Issue, Proposition A (November 2015)." Ballotpedia - The Encyclopedia of American Politics. N.p., Nov. 2015. Web. 18 Nov. 2015. 139 ibid 140 Furth, Salim. "In San Francisco Ballot Outcomes, Wins for Affordable Housing." Blogs.WSJ. The Wall Street Journal, 4 Nov. 2015. Web. 18 Nov. 2015.


Instead, the government should require EB-5 funds from foreigners to pay for more affordable housing. Who is Using EB-5 and How Much is Being Raised?

The largest real estate developers in New York City are using EB-5 funds, and they are raising billions of dollars with this program. “Related Cos, the developer behind Manhattan’s massive Hudson Yards project, is using $600 million of EB-5 funds to finance this 1 project.” In total, the Hudson Yards development is estimated to cost over $20 billion and will be larger than the Rockefeller Center. Brooklyn’s Barclays Center was built with more than $475 million in EB-5 funds. World Trade Center developer, Larry Silverstein, is raising $250 million in EB-5 funds to finance his new 937-foot tall Four Seasons hotel downtown. The Durst Organization, another New York developer, used $260 million of EB-5 funds in 2013 and 2014 for two apartment towers; in total, the EB-5 funds comprised 15% of the building’s total construction cost. For 2014, EB-5 money funded nearly $4 billion dollars of investment.141 This source of money is legal, abundant, and it should be used today as a funding source to build affordable housing. Imagine how many affordable housing units would be built with 90% of $4 billion dollars. That’s enough affordable housing for an entire city.

Overcoming Potential Problems It’s important to remember that this EB-5 program is a government program on the federal level;

so, it is not up to the NY state legislature to renew the EB-5 program. This is not within their power. So, if the politicians in Washington, DC choose to not renew the program, then what happens? Do we just give up?

No, it’s very simple. Should this occur, the New York legislature should come up with its own EB-5 program –they could even call it the NY-EB-5. Under this change, a law would have to be passed. This law would stipulate the exact same rules as the old EB-5 program at the federal level. However, NY State does not have the power to grant US citizenship to a foreigner seeking a visa. However, the NY State legislators DO have the power to grant New York state citizenship. Immigration reform can now happen at the state level, and it will create jobs and affordable housing for New York at the same time.

141 Brown, Eliot. "Hot Source of Property Financing: Visa Seekers." WSJ. The Wall Street Journal, 9 Dec. 2014. Web. 25 Oct. 2015.


Pope Francis, during his recent address to the US Congress on September 24th, 2015, pointed out the following regarding immigrants: “In recent centuries, millions of people came to this land [the US] to pursue their dream of building a future in freedom.”142 Therefore, who are we to prevent foreigners from realizing the sacred American dream?

The Statue of Liberty will forever be the symbol of New York, not the barbed wire fences that certain politician’s desire. Let’s pair immigration reform with building affordable housing units. Let’s “Make America Great Again,” actually.

September 24th was the first time in history that the pope has addressed a joint session of Congress. During that speech, he stated: “We, the people of this continent, are not fearful of foreigners, because most of us were once foreigners. On this continent, thousands of persons are led to travel north in search of a better life for themselves and for their loved ones, in search of greater opportunities. Is this not what we want for our own children?”143 A NY-EB-5 program is very easy to create and it should be developed immediately.

142 "Pope Francis Urges Congress to Treat Immigrants in 'humane and Just' Way." Theguardian.com. The Guardian, 24 Sept. 2015. Web. 26 Oct. 2015. 143 "Pope Francis Urges Congress to Treat Immigrants in 'humane and Just' Way." Theguardian.com. The Guardian, 24 Sept. 2015. Web. 26 Oct. 2015.


CHANGE 8: Strengthen Disclosure Laws to Prevent Shadow Ownership of Real Estate

What exactly is the problem? The problem is simple: international buyers are using shell companies to buy real estate and to

avoid taxes. By using shell companies, foreigner owners are trying to avoid a New York City law stating that those who have apartments and stay in New York City more than 183 days are considered legal residents and are required to pay city income taxes.144 Many of these foreign buyers are trying to avoid paying city income taxes and so they are in essence avoiding taxation through the use of anonymous shell companies.

Recall that an estimated 89,000 of the city’s condos and co-ops -valued at $20 billion based on city tax assessment data but with an actual estimated fair market value of $80 billion- are owned by people who claim to be nonresidents of the city.145 Furthermore, a growing number of high-end real estate transactions have been taking place through the use of limited liability companies. “More than half of New York condominium sales above $5 million last year [2014] were to limited liability companies.”146 This shell game has made the market less transparent and therefore increasingly alluring for foreign buyers wishing to maintain anonymity with their purchase. This anonymity is bad. It leads to tax evasion and it cheats the city of revenue it needs.

My solution to the problem is simple. Pass 2 laws that state the following: 3. By law, those who have apartments and stay in New York City more than 91 days are

considered legal residents and are required to pay city income taxes. 4. Any residential real estate purchased through a shell company will be assumed to have

been purchased by a resident of the city, and will be treated as such for the purpose of taxation.

I. If a purchaser of residential real estate wants to contest the city’s blanket

144 Saul, Stephanie. "New Disclosure Rules for Shell Companies in New York Luxury Real Estate Sales." The New York Times. The New York Times, 20 July 2015. Web. 25 Aug. 2015. 145 ibid 146 ibid


assumption of residency, the burden is on the foreigner to prove they are indeed non-residents of the city and therefore not subject to the city’s income tax.

First, by lowering the threshold number of days at which residents are required to pay city income taxes, the city can earn more money for social services. Second, by placing the burden on foreigners to disprove they are residents of the city, less foreigners will be able to avoid paying the city’s income tax. This change is good because the increased tax revenue will come from foreigners and not from New Yorkers. If more of the tax burden is carried by foreigners, it will result in a commensurately decreased burden on New Yorkers. This is good government policy.

Further Information Regarding the Problems of Shell Ownership In many states, limited liability companies can be established without disclosing the names of the

real, or “beneficial” owners. In plain English, this means that you could have created an LLC, purchased a $5 million apartment with the LLC, and then on the signing documents you could have put down the name of your estranged Aunt Susan rather than your own. “Previously only one member of a limited liability company had to be identified, and frequently that member was a nominee who did not have a real interest in the property.”147 Accepting that foreigners are engaging in this practice to remain anonymous and to avoid city income tax, my solution will solve this problem. In fact, I am not the first person to recognize that changes need to be implemented. Bill de Blasio also suggested changes to increase transparency and my additional reforms will only strengthen his efforts.

“Seeking to increase transparency in the luxury real estate market, the de Blasio administration has imposed new disclosure requirements on shell companies buying or selling property in New York City. The changes will help remove a ‘veil of secrecy’ surrounding high-end real estate sales by requiring that the names of all members of a shell company buying or selling property be disclosed to the city, the finance commissioner, Jacques Jiha, said."148 “The new rules affect a form known as NYC-RPT Real Property Transfer Tax Return, which is filed with the city when property ownership is transferred and identifies both the seller and the buyer of the property. Under the new rules, all members of a limited liability company must be identified, along with their taxpayer identification numbers.”149

Still, “others questioned whether the rules went far enough. Douglas A. Kellner, a Manhattan lawyer who specializes in identifying and returning stolen assets, said that because the form did not require disclosure of beneficial owners, they could omit their names from the limited liability companies and add another layer of ownership -such as an offshore limited liability company or trust- to conceal their identities. ‘They’re just inviting another layer in order to conceal it,’ Mr. Kellner said. It doesn’t solve the problem.”150 I agree. This shortfall is the reason my additional reform must go through. It makes it more difficult for tax evasion to be carried out because it lowers the threshold for when people must begin to start paying city income tax, and it places the burden on the foreigner to disprove he/she is a resident of the city.

“The director of the Treasury Department’s Financial Crimes Enforcement Network, Jennifer Shasky Calvery, will summarize exactly why these actions are necessary: “In short, greater transparency of beneficial ownership information would make it more difficult for criminals to hide their purchases of luxury real estate through the use of shell companies.”151 The 2 laws I have suggested should be passed today.

147 ibid 148 Saul, Stephanie. "New Disclosure Rules for Shell Companies in New York Luxury Real Estate Sales." The New York Times. The New York Times, 20 July 2015. Web. 25 Aug. 2015. 149 ibid 150 ibid 151 ibid

http://topics.nytimes.com/top/classifieds/realestate/locations/newyork/newyorkcity/manhattan/?inline=nyt-geo


CHANGE 9: Raise Property Taxes on Absentee-Owners and Foreigners

What type of government policy do we have if the state sits by idly as the wealthy of the world drive up residential real estate prices through speculation and inflated demand, thus displacing New Yorkers, and nothing is done to serve as a countervailing force? I would argue that we would have a very ineffective system of government whose inaction results in unnecessary burdens being placed on residents of the city. Currently, that is exactly what is happening. To better understand how New York government can tackle the problem of unaffordable housing, as a case study let us look to a city that implemented a rational reform that NYC would do well to adopt –Israel. In fact, Israel’s residential real estate market has many similarities to New York’s residential real estate market when it comes to demand drivers: both are heavily influenced by foreign investment.

CASE STUDY 5 - Unaffordability in Israel Many Jewish businessmen and women from around the world loved their religion and identified

with their Jewish culture, heritage, and homeland. In order to take a more active role in this rich culture, many Jewish men and women from around the world decided to buy second homes in Israel so that they could visit the country they admired whenever their schedules permitted. “One reason for high housing prices in Jerusalem, say economists, is the demand caused by the fact that so many homes are bought up by wealthy Jews from abroad, who use the apartments just a few weeks a year, when they visit for holidays or for the summer.152

In order to own a second home across the world, by definition, you have to be wealthy; and, many of these Jewish men and women were not price sensitive when it came to residential real estate prices in Israel. Consequently, negative externalities resulted from this influx of demand. At the time, Jerusalem’s then mayor, Nir Barkat, described some popular neighborhoods in the country as “ghost towns” at certain times of the year, when almost all the foreign owners were to be found at their residences abroad.153

When wealthy and successful Jewish people from around the world starting buying up much of the residential real estate supply in Israel, it resulted in inflated demand where moneyed foreigners were able to pay a higher price for their homes than actual residents of Israel. Since demand was artificially inflated from wealthy foreigners, and supply did not grow proportionately fast to accommodate the inflated demand, residential real estate prices in Israel began to rise. Israel was now a country experiencing affordability pressures for housing.

Equally true is the fact that the demand for residential real estate from foreigners in New York is also very strong. With the rising middle class in China recently supplying more money to some of China’s wealthiest citizens, you can understand how these newly wealthy are influencing the most recent wave of real estate acquisitions in New York. It does not take much convincing to point out to someone that New York City is very cosmopolitan; from this, you can see that the New York market is similar to Israel’s because wealthy foreigners have a demand for housing in the city and the resulting increase in demand drives up housing prices for all. With New York City’s infamously high barriers to development, it is no surprise that even with the current construction boom taking place spurred on by the Fed’s near-zero easy monetary policies, the supply growth still isn’t enough to keep housing prices down. “At the Time Warner Center, 37% of the condominiums are owned by foreigners.” However, what I find more interesting is the fact that 16 different foreigners who have owned in the building have been the subject of government inquiries in the past, the charges have ranged from abuse of political

152 Lev, David. "Absentee Owner Tax Could Slash Jerusalem Rent Prices." Israel National News. Israel National News, 10 Nov. 2011. Web. 12 Sept. 2015 153 ibid


office to fraud.154 How Did Israel Respond to Affordability Pressures Caused by Foreign Demand?

With resolve. In a December 2013 article in The Times of Israel, it was explained to the public that “the Knesset Finance Committee last week approved a two-year law that will double the arnona, or property tax, on apartments that sit unused for much of the year. Aimed at encouraging absentee owners in expensive cities like Jerusalem and Tel Aviv to rent out their apartments to young couples and families, the increased arnona fee will apply to apartments sitting empty for nine consecutive months.”155

According to Finance Ministry figures, there are more than 46,000 such apartments in Israel, and the cities most affected are Tel Aviv, with more than 4,700, Haifa, with around 3,445 apartments, and Jerusalem, with an estimated 3,429 empty apartments.156 However, Jerusalem’s deputy mayor at the time Ofer Berkovitz, acknowledged that Jerusalem’s number of absentee-owned apartments was not certain and that it could actually be closer to 10,000 empty apartments.157 “We’ve been studying this situation for four or five years,” said Berkovitz, “even before the social justice protests. Jerusalem doesn’t have enough affordable housing and there aren’t enough options.”158 Equally true is the fact that New York City is also lacking options and is in dire need of a solution.

New York City’s problem is nearly twice the size of Israel’s. Israel only had 46,000 ghost apartments while New York City has 89,000.159 For every one ghost apartment that Israel had in 2013, New York City currently has 1.93 ghost apartments.160

However, Israel’s tax increase on absentee owners was still too lenient from my point of view. Israel’s increased tax was too lenient because it only applied to apartments that sat empty for nine consecutive months or more. Thus, people could avoid the increased tax by vising for one or two days every eight months.

Lower the Absentee Threshold Timeframe For an Increased Tax to 3 Months If a NYC resident were absent from their home for more than 3 months out of the year, then they

would face a doubling of their property tax under my proposal. The 3 month time frame would not have to be consecutive; so, if you were gone one week and back the next -and this carried on until you were out of the state of New York for 3 months and a day- only then would you face this tax. In fact, I think this policy is very generous because it allows a person to be absent 1 out of every 4 days in the year. This is more than enough time to vacation, travel, and visit family and friends.

If this tax change went through, what would happen? Realistically, I doubt most people would sell their properties. Many of the people who own

second homes in NYC are extremely wealthy and their New York property is simply a pied-a-terre to visit capriciously. These people are not price sensitive and most would be willing to pay the increased property tax. This is also fine because more money would be raised to pay for social services.

154 "A Summary: The Hidden Money Buying Condos at the Time Warner Center." The New York Times. The New York Times, 07 Feb. 2015. Web. 23 Oct. 2015. 155 Steinberg, Jessica. "In Fight against Jerusalem’s ‘ghost Apartments,’ Taxes May Not Do the Trick." The Times of Israel. The Times of Israel, 24 Dec. 2013. Web. 12 Sept. 2015. 156 ibid 157 ibid 158 ibid 159 Saul, Stephanie. "New Disclosure Rules for Shell Companies in New York Luxury Real Estate Sales." The New York Times. The New York Times, 20 July 2015. Web. 25 Aug. 2015. 160 89,000 NYC ghost apartments / 46,0000 Israel ghost apartments = 1.93


What would the city do with the additional money raised? In essence, absentee owners would pay their property tax twice. Therefore, the first property tax

they pay should go to the city’s budget as normal. The second property tax levied would be set aside in a specific fund separate from the city’s budget. The creation of a second fund is imperative because it would prevent injustice and bureaucracy from pilfering the proceeds. Each year, the total proceeds inside the fund would be used for two thing: 50% would be used to build and maintain affordable housing units. The other 50% of the funds would be voted on by taxpayers of NYC to determine what their preference would be for spending the money. The results of the vote would last three years, meaning that every three years the city residents would have to re-vote on how to spend the funds for the next three years. Here are the following options the taxpayers would be able to vote for:

1. The funds would be used to fund and/or expand a tax credit to employers who hired homeless people.

2. The funds would be used to purchase books and school supplies at New York City schools. (As a requirement, the money would ONLY be used for school supplies for students and nothing else.)

3. The funds would be used to pay for the upkeep and continued maintenance of New York City’s homeless shelters.

4. The funds would be used to clean and improve the dilapidated subways of New York City. As a requirement, 50% of the money MUST go to janitorial workers and other cleaners. The other 50% of the money MUST go towards paying for capital expenditures to improve the aging infrastructure.

5. The money would be divided equally among the four projects. To better understand the effects of this policy, let us look at two extreme scenarios:

1. Despite the increased tax, none of the foreigners sell their units due to price insensitivity. 2. Because of the increased tax, all of the foreigners decide to sell their units -89,000 units

in total go on the market. Scenario One: As a result of this policy prescription, wealthy, price insensitive foreigners from

across the globe would maintain their home despite the increased taxes on it. This would be good, as the increased taxes from foreigners would help to pay for rehabilitating the homeless, paying for school supplies, funding the homeless shelters, and cleaning and improving the subways. All of these are good and just causes that need funding. Why not have wealthy foreigners pay for the initiatives?

Scenario Two: On the other hand, if all of the foreigners decided to sell their homes due to the increased costs, this is also a good thing. Under this scenario, 89,000 residential units would now go on sale simultaneously. The increase in supply on the market would drive down prices because the supply of for sale properties would increase more precipitously than the demand for the units. To remain competitive among a market with 89,000 for sale signs, the absentee owners would have to lower the sales prices –resulting in lower acquisition costs for New Yorkers. Either scenario is a win-win.

Residential Real Estate Comprises But a Small Fraction of the Investable Universe Real estate comprises 12.2% of the investment universe in the US (with $8.0 trillion in the

commercial real estate market, $25.3 T in bonds, $17.2 T in residential real estate, and $15.0 T in equities).161 Therefore, residential real estate makes up but a small sliver of the investable universe. How

161 DeRoos, Jan A. "Asset Management in a Portfolio Management Context." Hospitality Asset Management - HADM 6220. Ithaca, NY: Cornell U School of Hotel Administration, 2015. Print. *please note: these numbers exclude single family homes, as these are not considered investment grade assets*


small is that sliver? In fact, residential real estate comprises only 3.20% of the total investable universe.162 That amount is inconsequential. If this tax increase were to make residential real estate unattractive to foreigners, then so be it. If 3.20% of the investable universe is no longer viable, there is still 96.8% that is. I will now move on to my next reform.

162 Step one: ($8.0 trillion commercial real estate + $25.3T in bonds + $17.2T in residential real estate + $15T in equities) = $65.5 trillion. $65.5 trillion is the total value of all real estate in the US. Step two: $17.2T total residential real estate value in US / $65.5T total real estate value in US = 26.26% Step three: 26.26% of 12.20% = 3.20% Step four: All residential real estate, when aggregated, makes up only 3.20% of the investable universe (in the US).


CHANGE 10: Raise the Capital Gains Rate on Foreigners Who Own Residential Real Estate

Demand is soaring right now for commercial and residential real estate due to low interest rates. This speculation on residential real estate inadvertently drives up the long run cost of housing. This dilemma can easily be changed with the reform I will introduce in the following section. But first, we must answer the following question more in depth:

Why is demand for real estate soaring and to what extent? Actions by the Chinese government are increasing the demand for US real estate. For example,

recently China has received a lot of criticism from the US for devaluing its currency. China’s government chose to devalue in order to maintain its export-led growth strategy. However, for wealthy Chinese, the threat that their money will be worth less tomorrow makes large purchases of real estate in the US look attractive –they are a form of capital preservation.

“Investors are pushing commercial real-estate prices to record levels in cities around the world, fueling concerns that the global property market is overheating. The valuations of office buildings sold in London, Hong Kong, Osaka and Chicago hit record highs in the second quarter of this year [2015], on


a price per square foot basis, and reached post-2009 highs in New York, Los Angeles, Berlin and Sydney, according to industry tracker Real Capital Analytics.”163

And, price is not the only factor that is flying high: “Deal activity is soaring as well. The value of U.S. commercial real-estate transactions in the first half of 2015 jumped 36% from a year earlier. In all, banks had $1.7 trillion worth of commercial real-estate loans outstanding at the end of the first quarter of this year [2015] -just 2.6% shy of the record hit in the first quarter of 2009.”164As you can tell from these excerpts, current demand for real estate is extremely robust for historical standards. However, roughly a decade of easy monetary policy from the US Federal Reserve bank is more responsible for explaining the strong demand for real estate. “By keeping interest rates low, central banks around the world have nudged income-minded investors into a broad range of riskier assets, from high-yield or ‘junk’ bonds to dividend-paying stocks and real estate. Historically low interest rates have buoyed the appeal of commercial real estate, especially in major cities where economies are growing strongly.”165 Why? Low interest rates are causing investors to dabble more in real estate in search of higher yields.

Right now a 10-year US treasury bill is yielding a return of roughly 2.20%; this is anemic at best. Meanwhile, New York real estate has a much more robust average return of 5.70% on a 10-year hold.166 Therefore, real estate is more attractive to investors due to its higher return on investment. I mention this because it is imperative to understand that strong demand for real estate has important implications for affordability. For example, 2015 US commercial real-estate prices are up 93% from a low in 2010. But meanwhile, 2015 apartment buildings have more than doubled in price since their November 2009 lows.167 Therefore, increased demand for real estate is affecting apartment affordability the most. When demand for residential housing is extremely robust as a result of low interest rates, it drives prices up and results in unaffordability. This must be discourage through tax policy.

We must recognize that when foreign investors/speculators bet on residential real estate appreciating in New York, it is detrimental. When this occurs, affordability goes down and more people become rent burdened. “In New York and northern New Jersey -long considered a pricey place to rent- affordability has worsened significantly in recent years. Renters in the city historically paid about 25%

163 Patnaude, Art, and Peter Grant. "Surge in Commercial Real-Estate Prices Stirs Bubble Worries." WSJ. The Wall Street Journal, 12 Aug. 2015. Web. 27 Oct. 2015. 164 ibid 165 ibid 166 ibid 167 Hilsenrath, Jon, and David Harrison. "As Commercial Real-Estate Prices Soar, Fed Weighs Consequences." WSJ. The Wall Street Journal, 11 Dec. 2015. Web. 12 Dec. 2015.


of their incomes on rent and now [2015] pay 41%.”168 The following change I recommend will prevent this: Raise the capital gains tax rate on residential real estate to 95%; ONLY apply this onerous rate to foreigners and absentee-owners.

o NOTE: This extremely punitive tax rate will ONLY be applied to foreigners and absentee-owners of real estate. Absentee owners will face this high tax only for capital gains harvested from RESIDENTIAL real estate. For example, should these individuals earn a capital gain on ANY OTHER FORM of commercial real estate, that tax rate will remain unchanged.

What is my rationale? Simple: The current capital gains tax rate on residential real estate in New York must be raised

because it will create a permanent disincentive for speculators to invest in it. By disincentivizing foreigners from speculating in this 1 particular class of real estate, an asset class that makes up just 3.20% of the investable universe, the long run equilibrium prices for housing will go down. Thanks to this reform, inflated demand for housing from moneyed foreigners will no longer displace New Yorkers.

New York Residents will NOT Face this Punitive Rate This punitive tax rate will only apply to foreigners and to absentee-owners. It is important to note

that when foreigners and absentee-owners buy residential real estate in New York –it is either because this will be their second home or because they want a secure form of capital preservation with a higher return than the US 10-year treasury yield. These individuals are not price sensitive, and they don’t need to own second and third homes in New York. If these people want to visit New York, they can stay in one of over 400 hotels in Manhattan alone. New York has some of the greatest hotels in the world. Let them be used. Foreign individuals do not need to speculate in residential real estate, for it drives up long run equilibrium prices and exacerbates unaffordability for people who actually live in the city. And if these foreign individuals are looking for secure investments within New York, then they are free to invest in the stock market or literally any other form of real estate, besides residential, without facing this high tax rate.

What would the city do with the extra money raised from the tax? Initially, this tax will rake in a windfall for New York City. However, over time these additional

funds will entirely erode as foreigners and absentee-owners avoid investing in NY residential real estate like the plague. This tax change must go into effect immediately because it will prevent foreigners from cashing out before the new tax law comes into effect. If this tax change passes immediately, the NYC government will be flush with funds from foreigners.

Here is what should be done with the extra money raised: The government should estimate the city’s revenue differential between the old, more modest, tax and the new 95% tax. The positive revenue differential should then be estimated each year and set aside in a special fund by the government. At the end of the year, property taxes for New Yorkers, should then be lowered by the amount equal to what is in the fund. This wise money management will result in a temporary reduction in the tax burden for many city residents funded by the punitive rate on moneyed foreigners.

New York residents and those who live in their property full-time will NOT face this punitive tax

168 Kusisto, Laura. "Renters Spent a Record-High Share of Income on Rent This Spring." Real Time Economics RSS. The Wall Street Journal, 13 Aug. 2015. Web. 25 Aug. 2015.


rate. New Yorkers will still be able to own residential real estate and sell it for a capital gain. However, absentee-owners and foreigners will not be as lucky. Absentee-owners and foreigners should face this high capital gains tax rate because they are driving up the cost of housing by speculating on residential forms of real estate. They need to be permanently disincentivized from investing in this class of real estate, and my reform will achieve this. If foreigners and absentee owners want to speculate, let them do it with non-residential real estate or with the stock market. That is a good thing and that is encouraged.


CHANGE 11: Raise the Minimum Down Payment Required of Foreigners to 45%

CASE STUDY 6 - Unaffordability in Hong Kong As a brief case study, let us look at the broken housing market of Hong Kong. Hong Kong is the

MOST unaffordable place to live in the entire world. “Demographia, a U.S. think tank, in a recent study comparing median incomes with median housing prices, ranked Hong Kong property as the least affordable in the world, with home prices on average 17 times annual income, well above the 10.6 for second-place Vancouver. New York ranked seventh, with a 6.1 ratio.”169 According to a calculation of data provided by the Hong Kong government, since 2007 incomes [in Hong Kong] have risen about 42%, but home prices have soared 154%.170

The reason for this meteoric rise is simple: Hong Kong is unaffordable for the same reason New York is unaffordable: The Wall Street Journal said it best in a June 2015 article, “Hong Kong, much like London and New York, also is seeing strong demand from wealthy investors from other countries looking for safe places to park their money, with much of that investment coming from mainland Chinese buyers. While these investors go after higher-end Hong Kong property, they are helping boost prices in general, making it tougher for people simply looking for a place to live.”171

When foreign investors inflate demand for real estate, it has severe consequences on affordability. “For [Hong Kong residential real estate] investors, the rising values have paid off. Since the start of 2009, the Hang Seng Properties Index, which tracks nine property stocks, has risen more than 100%, while the benchmark Hang Seng Index has only increased 94% in the same period.”172 This

169 Steger, Isabella. "In Hong Kong, the Apartments Are Fit for a Mosquito: Much like London and New York, Demand from Investors Is Pushing up Prices of Even Tiny Apartments." WSJ. N.p., n.d. Web. 18 Nov. 2015. 170 ibid 171 ibid 172 ibid


inflated demand is a real problem and it needs to be curbed. The change I propose will effectively achieve this goal.

One of the easiest ways to discourage foreign investors from buying residential real estate is to raise the minimum down payment required of them so that there is a higher barrier to entry for home ownership. Therefore, I recommend that for residential real estate owned by foreigners ONLY, the NYC government raise the minimum down payment required to buy a home to 45%. Please note that only foreigners would face this additional barrier. New Yorkers would not. Additionally, since this would only apply to residential real estate, foreigners would still be encouraged to make investments in others forms of assets across the city –such as in the stock market or nonresidential real estate.

How Would This Minimum Down Payment Affect Foreigners?

As mentioned prior, New York property is the 7th least affordable in the world, with home prices on average 6.1 times annual income.173 If it takes the median New Yorker 6.1 years’ worth of income to purchase a home, then a 45% down payment requirement means we can roughly estimate the following: It would take foreigners 2.75 years’ worth of income to afford a 45% down payment.174 Please see the footnote at the bottom of this page for how this number was calculated. Since many foreigners, even the wealthy ones, will not be able to hand over almost 3 years’ worth of their income to pay for a down payment, less foreigners will buy residential real estate and prices will drop according. This is a win for affordable housing in NYC and should be implemented immediately.

173 ibid 174 (6.10 years of income to purchase a NY home * 0.45 minimum down payment) = 2.745 years’ worth of income to afford this new, onerous down payment.


Concluding Thoughts

The costs and benefits for each of the reforms I have proposed were carefully studied, with months of research done to back up my findings. After a full semester of studying the contentious issue of affordable housing, I have reached the conclusion that the benefits to society, for each and every one of my proposals, outweighs its costs and negative externalities. Consequently, the full faith of my convictions underlie each of my proposed reforms.

I am very clear in my intentions regarding reformation of the property tax. I firmly believe that we must shift a larger portion of the property tax burden onto foreigners. If this occurs, a commensurate reduction in the burden will result for New Yorkers. At the end of the day, that is exactly what we are trying to achieve –a reduced burden on residents. Foreigners don’t vote in elections either, so taxing them more is sustainable in the long-run. Additionally, properties that have long avoided their fair share of the city’s property tax must be held accountable. Nothing in this world happens in a vacuum. When a building evades its fair share of the property tax, the burden of raising sufficient revenue to pay for the city’s expenditures then falls onto others. In the current system, the current burden falls hardest on apartment renters.

If there is one single take away that I can communicate in this paper, let it be the following: reforming the property tax code of NYC is of paramount importance. If this can be done, half the battle is already won.

Thank you for reading my paper.


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