by Lindy Davies
I recently ran across a block in Manhattan that serves as a microcosm of the hindrance and dysfunction that is built into today’s economy. The forces we see on this block are at work all over New York, and in every other city in the country — but this is an especially vivid example.
Here we have the West side of 7th Avenue, between 23rd and 24th streets in the up-and-coming neighborhood of Chelsea. There’s a subway station on the corner, the IRT West Side line at 7th Ave. Despite the high desirability of the location, the block sports a string of impressively obsolete buildings, all of them built in 1920 — except 224, which has stood on that corner since 1880, and was remodeled in 1989. (Click on the picture for more detail.)
Only one of these parcels has sold recently; 230 sold in 2012 for $4.25 million. Oddly, the city still lists its market value as $934,000, of which the land supposedly accounts for only $411,000. Nevertheless, it’s obvious that the $4.25 million price was for the land, not the 94-year-old building, which will soon be demolished. Hence, we can safely say that this piece of land, 80 feet long with 20 feet of frontage on 7th Avenue, is worth $4.25 million, as are the rest of the 80×20 lots on this block. We can assume that the lot under 224, on the corner, directly atop the subway station, is worth even more.
Now, let’s stop a moment and consider what that means. New York City tells us that the land under these seven buildings is worth six and a half million dollars — which seems an impressive sum to normal people. However, the market says that the land under these seven buildings is worth at least thirty million dollars.
Why should we care about that? It’s simple: we should care about that because we care about affordable housing, unemployment, high taxes, urban sprawl and climate change. As the 21st-century becomes more and more urbanized and interdependent, it’s vital that we stop squandering our most valuable natural resource.
Let’s put it another way: Had something better been built on these seven Manhattan lots, many more people would have been living and working in Manhattan. The taxpayer-funded city infrastructure is already in place: there’s the subway station on the corner, and each lot is zoned for a much bigger building than stands there now. Where have all those people been living and working, for the past 94 years? On the streets? In the sprawling suburbs? In Afghanistan and Iraq?
Healthy cities need to pay for infrastructure, but secure public revenue is a constant struggle. Economists agree that land values are a highly suitable source of public revenue. Land cannot be hidden, nor taken away. Its value is created by the investments and activities of the entire community. Because of these facts, a tax on land value cannot be passed on to users of land, or to consumers of products. In other words, a tax on land values does not diminish production.
Let’s put it another way: people who use land have to pay for it, one way or another. Either they bestow a windfall on a private landowner, who did nothing to earn it, or they can pay the community, in return for the public investments that created the land value in the first place.
Other taxes do diminish production: sales taxes lower demand for products; income taxes depress hiring of workers. Land value taxation has none of these disadvantages. But, it’s dicey, politically. Homeowners and real estate speculators don’t want to hear about it. It might be worth the effort — if only land didn’t offer such a small contribution to the tax base.
Oh, but wait a minute — land value turns out to be a much bigger part of the tax base than the official figures deem it to be! Do you see where I’m going with this?
Let’s move on down the block to our next example. It turns out that the three buildings at 232, 234 and 236 have many things in common: they are all two stories, they were all built in 1920, and they all have the same owner, “Chelsea 7 JV LLC.” They were three separate tax lots until this year; now they are a single lot on the tax rolls. Clearly something big is planned for them. One might expect their assessment to be revised upwards because of this, but no — in an amazing feat of assessment magic, these three tax lots have become one, and their value has actually decreased! Let’s put it another way: down the street, an identical lot recently sold for $2,702 per square foot, but these three lots are apparently worth only $86 per square foot. No doubt this is just a temporary anomaly in the tax rolls, an informal subsidy, perhaps, for the cost of razing the obsolete buildings.
I imagine, though, that the commercial tenants — there seem to be six of them in these three tiny buildings — are all paying just as much rent as they have been paying all along. Soon, however, they’ll have to go; rents will skyrocket.
Which brings us to the condo on the corner, The Chlesea Royale at 200 West 24th Street. Despite its grandiose name, this is really a modest structure by current New York standards. Built in 2004, it houses 20 two-bedroom condos (including two more-luxurious penthouses) and one ground-floor commercial condo. (Incidentally, the builders certainly expected a tall building to be erected next door; why else would they not have enhanced their condo-units’ value with downtown-facing windows?)
If we stop to consider that over 70% of New Yorkers live in rented housing, and apartments like the ones in this building rent for $4,000/month and up, we might wonder why this building houses condos and not rentals.
The reason is that under current tax conditions, condominiums were the profitable choice. Condo units are taxed as if they were rental apartments, but sold and priced as private homes. And, mortgage interest is tax-deductible for the buyers; residential rents, alas, are not. These are “modest” Manhattan condos — there are many more expensive ones — yet their annual cost, including mortgage, common charges and property taxes, will be around $140,000. That’s an elite level of housing affordability — and yet, for Manhattan condos, these are unostentatious. Condos in this building sell for between $1.2 and $2 million apiece, and they are taxed at less than 1% of their selling price. Tenants in rent-stabilized apartments tend to have far lower incomes, yet face higher property tax burdens.
Condos are the overwhelmingly profitable choice in the market for new housing in New York City. But what about the poor schmoes who cannot scrape together a down payment, or qualify for a mortgage? Alas, they have to pay top dollar for a dwindling supply of rental apartments.
Might there have been more affordable housing in New York City, had the tax system not encouraged the owners of those seven lots (and many thousand more) to sit, and wait, as long as they liked, til the price was right? In Progress and Poverty, Henry George described a wedge that lifts the rich higher and grinds the poor lower. Make no mistake: this is the engine that pushes it.