The Wall Street Journal recently published an article (behind a paywall) entitled “Housing Shortage Reflects the Cheap Cost of Holding Vacant Land.”
As the subheading says “High taxes on buildings and low taxes on land discourage landowners from development.” Georgists, including those leading ones quoted in the article, know this to be true. But for the uninitiated, the Journal cites a study:
Altus, which is a real-estate analytics and advisory firm, counted private lots larger than 3,000 square feet that are likely suitable for development.
If the owners of these lots all developed buildings with the maximum size allowed under current zoning, they could add an estimated 858 million square feet of housing and commercial space, according to Altus. That is equivalent to 306 Empire State Buildings.
Around 96% of these sites are zoned for residential use, Altus said.
To make the theory more relevant to those on the ground, the Journal cites a specific property, which just happens to be 1-2 blocks from where I live:
The blocks from the article are, from the upper left going downward to the lower right yellow box:
5 Tudor City Place (where my late father used to live): Size: 0.49 acres, 2022 annual property tax bill: $4.21 million, Tax per acre: $8.59 million.
685 First Avenue: Size: 0.74 acres, 2022 annual property tax bill: $8.51 million, Tax per acre: $11.50 million.
666 First Avenue: Size: 6.34 acres, 2022 annual property tax bill: $9.71 million, Tax per acre: $1.53 million
The last property – 666 First Avenue – is vacant, and clearly taxed far less than the other two properties. It’s also worth noting that 685 First Avenue is a high-priced rental building, commanding much higher rents on average than the land-marked 1920s 5 Tudor City Place, part of the Tudor City development. It’s common for new developments to be taxed at ~10X the rate of vacant lots just next door or across the street, as this one is.
Clearly, there is a bias towards taxing buildings at a higher rate than vacant lots, thus encouraging preservation of the latter, and discouraging creating the former. From the Journal:
Some economists and housing advocates say there is a common factor behind all this vacant land: a property tax system that combines low taxes on land with high taxes on buildings.
“There’s no incentive to do anything except to sit on it,” said Joshua Vincent, president of the think tank Center for the Study of Economics, which advocates for property-tax reform.
Many cities and counties, including New York, calculate taxes by estimating a property’s value and then charging a percentage. Because vacant lots or lots with small buildings tend to sell for far less money than, say, high-rise apartment towers, they usually end up with much lower property-tax bills. The rationale for this tax treatment is that owners of valuable buildings are better able to pay big property tax bills.
But an unintended consequence of the tax system is that it discourages developers from building housing, economists say. Once owners of vacant lots build homes or apartments, their tax bills usually skyrocket.
Property taxes are one of the biggest annual expenses for new apartment developments, said Kory Geans, chief investment officer of rental housing developer Middleburg Communities.
However, the tax rates are only part of the reason the site has remained undeveloped for years. According to the developers:
Michael Hershman, CEO of the family company, now called Soloviev Group, said the tax value didn’t influence the company’s decisions. “No developer likes to hold land undeveloped, particularly in premier locations,” he said.
Getting zoning approval took a few years and later the pandemic prevented construction there, the firm said. And at other times, Mr. Hershman said, the firm was too busy with other projects.
Although lately, the idea of building a casino has been floated, originally the developer proposed a mixed-use multi-family super-block collection of towers complex.
I was present at some of the contentious Community Board 6 meetings where the proposal, and a diorama, were presented. The plan is now over 5 years old, so it would have to be resubmitted to the Department of City Planning (DCP) and go through the local ULURP (Uniform Land Use Review Procedure) process again. The casino would almost certainly be opposed by CB6 (as it would by me). CB6 is currently opposing a casino at the Water Club – a restaurant maritime vessel now looking to be repurposed after closing down for the Covid-19 pandemic, that is located just a few blocks away at 30th Street and First Ave.
The new proposal obsoletes the old office/residential plan and restarts the review process. Further complicating development is the fact that Sheldon Solow died at age 92 and was known for his litigious activities, while being challenged by various local community groups who didn’t want to see towers on this super-block site. Some people wanted 40th Street (my street) reopened to the Franklin D Roosevelt access road (aka Avenue C), cutting through the super-block combined from 39th – 41st Streets. These contentions, plus the elder Solow’s health issues, probably had as much, or more, to do with the site being left vacant after Consolidated Edison’s old steam plant was torn down, as did the relatively high tax on future development on the site. Additionally, there were years of detoxifying the brownfield site, followed by using it as a staging area for 685 First Avenue’s construction, across First Avenue (and just down the block from me). These kinds of hyper-local concerns did not make it into the WSJ article, apparently. My late father would have looked out over the site from his Tudor City apartment, as would many other Tudor City residents of 5 Tudor City Place, who have also participated in trying to block development of the site for several years.
Zoning vs. as-of-right development is at least as much of an issue in building decisions in NYC as taxation, though more recently, the June, 2022 expiration of the 421-a tax abatement has disincentivized development too. Reforming the tax code has taken up the city council’s and Comptroller’s time too. Comptroller Brad Lander wants a more uniform tax code, claiming he and other relatively well-off landowners are under-taxed due to discounts for co-ops and condos vs. rental property. You can read about his office’s proposals here: https://comptroller.nyc.gov/propertytaxreform/. According to this powerful local official’s statement, the problem is:
New York City’s property tax system is notoriously opaque, confusing, and inequitable. The current property tax system significantly favors wealthy neighborhoods over working class people: homeowners in Staten Island, Southeast Queens, Eastern Brooklyn, and the Northeast Bronx sometimes pay three times the effective tax rate of homeowners in Manhattan and brownstone Brooklyn.
It also taxes rentals at roughly double the effective tax rate of condos and coops. These inequities disincentivize rental housing development, entrenching expensive and inefficient tax breaks like 421-a that subsidize market-rate development at a time when affordable housing is urgently needed.
Rather than fix these problems, New York State has instead layered on a patchwork of complex exemptions and abatements that confuse homeowners and entrench inequities.
He is referring to the notorious 4-class tax system New York City has been using for about half a century, tweaked and modified, but never overhauled. He states:
We propose reforms guided by the principles that any property tax system should be fair, simple, and transparent. Our recommendations include:
- Treating small residential properties equally, including 1-3 family homes, condos, coops, and 4-10 unit rental buildings.
- Creating targeted owner relief and deferral programs to prevent changes to property taxes from pushing seniors or other vulnerable New Yorkers out of their homes.
- Eliminating the tax disparity between new rental and homeownership multifamily buildings to facilitate rental development.
- Establishing a new targeted affordable housing tax incentive that matches the level of subsidy to the level of specific and genuine affordability the building will offer.
Nowhere in these proposals is there a call, or even acknowledgement, of the Land Value Tax. He may know of it, but I’ve never seen him mention it. His predecessor, Scott Stringer, did include taxing vacant land higher in an old reform report (cited by me in an old Common Ground NYC petition):
In 2007, Borough President Stringer published “No Vacancy? The Role of Underutilized Properties in Meeting Manhattan’s Affordable Housing Needs.” The report found that in Manhattan 74 percent of vacant residential buildings and 71 percent of all vacant lots are located above 96th Street. Additionally, more than $100 million a year was being lost because vacant lots above 110th Street were taxed as Class 1 residential properties.
Borough President Stringer issued a series of recommendations, including advocating for legislation to reform tax policy to spur development of vacant property and prioritize affordable housing. A year later, Governor David Paterson signed a bill authored by Assemblymember Herman D. Farrell and State Senator Jose Serrano that amended the property tax equalizing the treatment of vacant land throughout Manhattan by taxing all vacant land as Class 4 property.
I’m not aware that Stringer ever proposed a city-wide Land Value Tax either.
The Land Value Tax is a major solution to the chronic and growing problem of under-building and high rents or costs of apartments. In fact, some of the recent attempts to fix the problem were actually count-productive.
- The 421-a tax abatement just results in higher property values and more money being turned over to financers of developments, like banks, instead of going towards city coffers and the common good for the Common Ground.
- Lowering taxes on individual homeowners, while welcomed by those who already own homes and who wish to eventually sell them at a profit, actually raises the cost and rent of apartments for those who do not already own units. Some of Comptroller Landers’ well-intentioned but misguided efforts to provide “tax relief” fall into this category too.
The local Yes In My Back Yard (YIMBY) group, Open New York, has part of the answer too, in their mission to build bigger everywhere. However, this is too simplistic, as shown by the glut of high end luxury buildings that go up whenever developers are unleashed from Mandatory Inclusionary Housing (MIH) limits in New York City. We already have a glut of expensive units and it takes months, or even years, of paying costly brokers to sell them. Working class and low-income rated units are subject to a lottery system, so great is the demand for them.
Probably, a combination of YIMBY actions, including more flexible zoning + Georgist Land Value Taxation is the best combination of policies to create new housing, but this does not seem to be on anyone’s radar.