Pretty, Pretty Bad
Manhattan’s Real Estate Hangover
As Manhattan starts 2020, residential real estate prospects in New York City look grim for the year ahead. With a stratospheric stock market, low interest rates and virtually non-existent unemployment, why would the co-op and condo market experience a bit of a dip? It doesn’t take an seasoned economist to figure out that buying, owning and selling an apartment in Manhattan has gotten very expensive. In addition, disclosure requirements have minimized the ability of a limited liability company to hide the identities of the principals actually purchasing or selling the real estate. Borrowing from David Byrne, “You may ask yourself, how did we get here?”
Changes in the Tax Laws
On both the federal and state level, Manhattan got wacked big time on the costs of purchasing and owning an apartment. On the federal level, the tax deduction for state and local taxes was limited to $10,000. Deductibility of mortgage interest was reduced to loans having a value of $750,000 from $1,000,000. Deductibility of mortgage interest was eliminated on second homes and deductibility of mortgage interest on lines of credit was materially limited. As if that wasn’t enough of a chilling effect on owning an apartment, New York State increased transfer taxes applicable to both sellers and purchasers significantly. The transfer tax for sellers increased to 0.65% from .04%, once the purchase price goes above $3,000,000. The so called mansion tax for purchasers gradually increases from 1% for purchases of $1,000,000 to $2,000,000 and rises to 3.9% for purchases of $25,000,000 or more. But wait, there’s more…
Excessive Inventory
As reported in the Times in September 2019 by Stefanos Chen, 1 in 4 condos remain unsold in buildings constructed since 2013. That’s a total of 4,100 units. Wow. Even if the tax laws had remained the same, excessive inventory will push prices downward for quite some time. How long developers can continue to hold large inventories, particularly if the economy falters, is another serious factor that could further impact Manhattan’s real estate woes.
Expiring Tax Abatements
With the tacit assistance of the formally Republican controlled New York State legislature, developers helped themselves to a smorgasbord of tax benefits to improve sales of new condo developments. One of the key features of many new buildings was the abatement of real estate taxes for up to 25 years. I won’t get into the weeds on how the abatements came to be or the complicated scheme by which they were applied for and approved, or why the legislature and governor eventually decided to let a significant tax benefit expire. Suffice to say, the idea that a condo buyer would have limited real estate taxes for a significant period of time incentivized buyers to pull the trigger and allowed developers to increase purchase prices. Abatement schemes can be hard to understand. I don’t believe many buyers fully appreciated what the cost of ownership would be once the abatements started to diminish and ultimately end. In fact, another pressure on the market at the moment, is the expiration of many such tax abatements. As reported in the New York Times, in one case, the annual real estate taxes on a two bedroom condo increased from approximately $1,200.00 in 2010 to over $30,000.00 today. The negative impact on pricing and sales cannot be over-estimated as a result of skyrocketing real estate taxes.
Disclosure Distress
You can’t over emphasize the importance of a limited liability company as a vehicle for buyers of condos seeking privacy. New York City put a chink in that armor by requiring buyers and sellers to disclose the name, address and tax ID numbers of all members of the LLC selling or buying a condominium. That was certainly bad enough. In September, in an act of what some thought was temporary insanity, Albany passed a law that required buyers and sellers of 1 to 4 family properties, to disclose the identities of all “natural persons” owning membership interests in the LLC. If an entity owned a membership interest, then the identities of the owners of that entity would have to be disclosed as well. In a town benefiting from (sometimes questionable) foreign buyers as well as high profile wealthy folks seeking anonymity, the idea that there would no longer be any way to shield disclosure of who was buying what, led to an all out assault by the real estate lobby to exclude condos from the new NYS disclosure requirement. In October, a “clarification” was issued stating that condos were not intended to be included in the new disclosure requirements. For the moment, things remain as they were, with some disclosure still required. But first blood has been drawn and there will no doubt be more efforts to increase transparency in New York City real estate transactions.
Cue the Pyscho Shower Scene Music: The Pied a Terre Tax
So, as if all of the above was not enough, last March, some legislators thought it would be a good idea to add an annual surcharge tax on high end purchasers of second home apartments. The tax was intended to apply to apartments with a value of $5,000,000 or more. The graduated tax would increase as the value of the apartments increase. Although it’s hard to say how many of the over 75,000 second home apartments in New York City would be impacted by the tax, there is no question that it would have an additional chilling effect on purchasers in this segment of the market. Fortunately, the tax surcharge was tabled when the mansion tax was increased. Nevertheless, the proposed tax appears to still be lurking in minds of some legislators. Many in the real estate industry are predicting the collapse of apartment sales in Manhattan if the pied a terre tax becomes a reality. That might be a bit of an exaggeration, but any additional cost in owning an apartment, will continue to stress an already fragile marketplace.
The Light at the End of the Tunnel
The old joke punchline is that said light is the headlight of an oncoming train. I guess you’d call that good old fashion gallows humor. It’s not clear how much more economic pressure the New York City real estate industrial complex can handle. New York City is a resilient place. That’s been proven over and over again. Yet there might be a tipping point when the economic burden of owning an apartment forces folks to look for other alternatives.
