The Real Deal New York

Real estate pros: Pied-à-terre tax would slam market

Buyers could back out of pricey deals, opt for lower-priced homes, say insiders

September 24, 2014 08:25AM
By Tom DiChristopher

From left: Senator Brad Hoylman, Hall Willkie, Carol Kellermann, Steven Spinola and John Burger

From left: Senator Brad Hoylman, Hall Willkie, Carol Kellermann, Steven Spinola and John Burger

UPDATED, Sept. 24, 6:37 p.m.: This week, State Senator Brad Hoylman indicated he plans to introduce legislation that would levy a tax on pieds-à-terre. While the bill has yet to be introduced, the specter of such a proposal has some real estate insiders and tax policy experts sounding dire warnings about the chilling impact the levy would have on the market.

The legislation, based on a proposal by the Fiscal Policy Institute, would amend the Real Property Tax Law, allowing the city to tax pieds-à-terre at escalating rates depending on the value of the property. At the low end, homes owned by non-residents worth between $5 million and $6 million would be subject to a surcharge equal to half a percent of the value of the unit. Condos and co-ops valued above $25 million would be charged $370,000, plus 4 percent on excess over $25 million.

The Fiscal Policy Institute estimates that such a measure would generate $665 million in tax revenue. The institute notes that the policy is engineered to drum up most of that money — 83 percent — from those whose pieds-à-terre are in the top bracket.

“The pied-à-terre tax addresses the free rider problem of the super-rich non-resident,” Hoylman told The Real Deal. “Currently, non-residents who purchase luxury apartments don’t pay their share towards city services and infrastructure maintenance because they’re exempt from income taxes. I think the pied-à-terre tax is a simple and fair way to fix that.”

But Steven Spinola, president of the Real Estate Board of New York, cautioned that the threat of hefty new taxes on homes would have an immediate impact on buyer sentiment at various price points.

“The problem is that when you propose this kind of economic hit on any segment of the market, you’re putting a significant chill into the market,” said Spinola. “What’s going to happen while there’s this uncertainty about whether or not this tax is going to be adopted?”

One possible result, said Spinola, is that non-residents will seek to renegotiate prices to offset the new tax burden. If would-be buyers back out of deals, prices could begin to fall in the face of softening demand, real estate professionals said.

“I think the talk probably puts a lot of potential sales on hold because people aren’t going to be able to predict what the tax impacts are,” said Carol Kellermann, president of the Citizens Budget Commission. “Uncertainty is never a good thing.”

According to Kellermann, the proposal does not pass what she calls a simple two-step process for assessing a new tax. The first step is to ask whether the city needs additional revenue, and if so, how much. The second step is to determine the best way to go about raising that revenue.

She said the legislation doesn’t seem to address either of those questions, and instead appears calculated to correct what some see as unfairness in the housing market — namely, that part-time residents enjoy tax-funded benefits without paying for them.

“It’s not good tax policy to use a property tax to exert pressure or extract something from individuals that you think should be contributing,” said Kellermann

Senator Hoylman took issue with the notion that the city does not need to raise additional revenue.

“Our city needs new lines of revenue to address critical infrastructure needs,” said Hoylman. “Anyone who suggests otherwise obviously hasn’t been to one of the public housing developments in my senate district in Manhattan or across the five boroughs.”

He also pointed to the city’s chronic shortage of affordable housing and the “crumbling infrastructure of our public housing, mass transit and city colleges” as sources of financial shortfalls with no solution.

In explaining its rationale behind the proposal, the Fiscal Policy Institute wrote, “These [pied-à-terre] owners bid up the price of NYC residential real estate, and since they don’t spend much time in these units, contribute little to the local economy compared to full-time residents.”

The idea that pied-à-terre owners aren’t contributing because they don’t live in New York and pay taxes annually is flawed, said Hall Willkie, president of Brown Harris Stevens. The problem with the logic is it fails to factor in the outsized impact that wealthy part-time New Yorkers have on the broader economy.

“I think it’s in the interest of New Yorkers and the New York tax base to attract as many people who invest in real estate and go to restaurants and go shopping as possible,” said Willkie. “This is going to scare them away.”

Indeed, some industry insiders are particularly concerned about the effect the tax would have on international investors, who are increasingly purchasing second homes in New York City. John Burger, a top broker with Brown Harris Stevens, said if the legislation became law, it could potentially jeopardize Manhattan’s position as the leading international safe haven for blue chip real estate investment.

“I can’t imagine that given how incredibly profitable foreign investment has been in elevating the Manhattan market to a new historical high that this would be regarded as a wise idea,” said Burger.

  • Tyrannosaurus Rex

    “Luxury” will get more expensive. Isn’t that what luxury buyers want?

  • none

    how would they define a pied-a-terre?

    If a non resident rents out the apartment would that be still considered a pied a terre?

    • Putin Snowden

      thats an investment you noob.
      pied-a-terre is when the apartment just sits vacant until the owner comes back.

  • Arguendo

    The problem is the disconnect in messaging. People all around NYC are complaining that housing is completely unaffordable to anyone not subsidized by the state. The only solution is to either increase supply or decrease external demand to an extent that would decrease housing costs across the board and make it possible for New Yorkers to afford to live in NYC.

    Burger is right to state that foreign investment has had a huge role “in elevating the Manhattan market to a new historical high”. What he is missing is that many view this as a bad thing. Complaining that a new tax will chill the market sounds legitimate until one remembers that the stated goal of the public is to do just that.

  • SandysWake

    I enjoyed this story a lot and as a professional with 16 years in NYC real estate I can only share this: NYC is not only for it’s residents, but for the 50 million tourists that come every year. It’s home to the UN. It’s the financial capital of the world. These things are not occupied by just New Yorkers, but the world population. A tax on people who live outside of the city for owning a home in NYC is unfair, unjust and bad for the city. Finally, we’ve all had our fun having DeBlasio be mayor, please let’s not make that mistake again and get that hack out of the city and back to whichever borough he came from.

  • Gimmie Shelter

    I really feel bad for the poor rich people who are asked to pay their fair share of taxes, they are so use to the lower classes paying, this is long overdue. The rich should pay to play, not play everyone else for fools.
    Those who live and work in NYC would benefit from lower housing cost and a broader tax base who all pay their way.
    The uber rich will still flock to trophy properties on Park Ave and all other well healed areas. Money really is no object for them, they just don’t like to part with it when there is a chance to make others pay instead.

  • dc10023

    Arguments that this will kill the foreign make demand for 25+ million condos/coops doesn’t make sense. As the writer said, more likely would be instead of offering $100million, would offer $95.5 million. Sellers would be made to eat the cost (4.5% hit on the developers of the new high end condos).

  • Realtor John

    The question here is not so much whether the “rich” are asking others to pay for them, and shouldn’t really be about whether they are dodging some sort of tax payments, either. Taxes are paid on every transaction and with the exception of abated buildings, ongoing taxes are collected as well. Those buildings with tax abatements are only abated *now* because they will transition into levies that will be so much more significant for the city than before there was any building to draw taxes.

    So where do pied-a-terres come into the discussion? A pied-a-terre basically provides a way for someone outside of the city to infuse the city with their money through purchase and ultimately associated taxes on both the transaction and Real Estate Tax while not adding the congestion and burden to the city to support their presence for more than a small portion of the year. It isn’t like these “rich” are spending less on their common charges, maintenance bills, or taxes than their neighbor resident. If anything, they are already spending a significant amount more on a per-use basis than someone that lives in an apartment full time.

    Perhaps the real discussion here should be around whether we believe it is fair for rich people to be rich or whether we want New York to be a place where foreigners can or should bring their money. If we say that we don’t want foreigners to be encouraged to invest their money in our economy, then we have to wander about how that will affect the rest of us.

    Regarding the earlier comment about the rich needing to “pay to play”.. I doubt this statement really means that people should “pay” their fair share for how much they “play”, as that might indicate that subsidies would be removed for lower income housing and that part time visitors or commuters should actually pay less than those of us that live here 24/7 and enjoy all of the benefits that the city has to offer on a full time basis. If we need to collect more money, then we should figure out how much we need to collect then find the best way to do so. If that means we need to impose a tax on pied-a-terres, then lets talk numbers and alternatives. But we must consider all of the implications when doing so.

  • MB

    Future tax adjustment is not considered in the law. Today we have a mansion tax to pay of 1%, if the purchase is above $1M. This law was voted decades ago and was never adjusted for purchasing power (inflation). Now with $1M you may buy a 1 bed room or a studio in Manhattan, and for that you will be paying “mansion tax”. So in years to come the tax, unless adjusted by inflation, will have effect beyond the specific population that is targeting now. There are few places in the world with higher taxes than NYC, still we live in City that is absolutely dirty, with broken streets, very few schools… So, how this revenue will be used to improve our lives should also be clarified in the law. Hopefully, it will go to infrastructure, tangible educational improvements, better streets, improvements in transportation (eg Manhattan East-West connection; North-South Brooklyn connection, Queens and the Bronx housing development and retails areas that will create jobs, etc). Every tax looses its purpose when resources are miss-used.

  • obeegirlkenobi

    PLEASE TAX THESE RICH PEOPLE. It’s not fair that New York’s working class finds affordable housing harder and harder to come by, while the super-rich are buying up homes they don’t even live in. 100% behind this legislation.

  • BubbaJoe123

    Is somebody who’s buying a $25M pied a terre really going to be scared away by $370k a year in taxes? Hardly.

  • Hot_Mess

    “We may safely leave them the shell, if we take the kernel.”
    – Henry George

    You want this tax. Without it you are seeing some of the most productive land on earth being withheld from use. Mind you, this sort of tax is not an effective remedy. Only a Land Value Tax truly is.

  • Oouch

    The pied a terre market is not an edifice. It is largely two tier. The ultra rich are generally buying ultra pricey empty box over hyped poorly designed buildings that could never support high resident density without becoming smelly slums. Seldorff type architects are depending on low density usage to support their brands or the seams will split. Then on the other side of the equation are the foreign investors buying in commodity condos all cash driving the price of units for people who actually intend, gasp, to live in them. The high income working New Yorkers who are often couples each in the mid six figures are flipping out in fury as they realize that after taxes without high assets they are getting murdered when they borrow heavily to buy their $5,000,000 loft or apartment that they ‘deserve.’

    Standing on the sidelines is the rest of the nation going to care deeply about this drama? Think not.

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