The Daily Dirt: Should taxpayers subsidize a 37% vacant office building?

One thing that has never made much sense to me is discretionary tax breaks.

I’m talking about the exemptions handed out on a case-by-case basis by industrial development agencies.

For example, the Nassau County Industrial Development Agency (IDA) is considering a request from Manhattan-based TKF Real Estate for $434,700 off the sales tax for construction materials, equipment and furnishings and up to $134,625 off the mortgage-recording tax if TKF buys and renovates a 37-percent-vacant office building from Scott Rechler’s RXR.

TKF founding principal Dennis Friedrich and co-investor Ric Clark, also want a 20-year property tax deal, including a multi-year freeze on the current bill of $1.7 million, Newsday reported.

Friedrich (a former Brookfield executive) and Clark would buy the four-story, 288,000-square-foot building at 1000 Woodbury Road in Woodbury for $23.5 million and spend $8 million on renovations — but are telling the IDA that the deal is very risky and doesn’t pencil out without the subsidy.

In that case, they say, the once-thriving property would likely limp along in a “marginalized state” and continue its “cycle of stagnation,” producing little tax revenue for the county, and tenants would lease in Suffolk County instead.

Suffolk, of course, has its own IDA handing out tax breaks like Santa Claus to compete with Nassau. This is what watchdog groups call the “race to the bottom.”

Reality check: The vast majority — probably 99.9 percent — of real estate deals are made without optional hand-outs. Asset prices are determined by something called the market. Maybe you’ve heard of it! Sometimes I wonder if IDA board members have.

Let’s assume TKF is telling the truth and the project wouldn’t work without the break they are seeking. In that case, they would offer Rechler less than $23.5 million. Rechler would either accept the lower amount, find another buyer or abandon his mortgage and let the lender foreclose.

In that case, the building would be sold for its market value — a lesser price that, factoring in renovation expenses, would make it a profitable investment.

The other scenario is that TKF is bluffing, and would do the project even if Nassau County taxpayers don’t subsidize it. TKF execs are already in contract with RXR and clearly like the building and 14-acre site. “This is a great location and I think … with some fresh ideas we can get back to” 85 percent to 95 percent occupancy in three years, Friedrich told the IDA, according to Newsday.

Like any policy, discretionary tax breaks have tradeoffs. In some cases they help society by making good things happen that otherwise wouldn’t. But it’s impossible to set up a system that consistently accomplishes that. When you have humans, let alone political appointees, making decisions based on gut feelings (or worse), tax breaks will be given to projects that would have happened anyway.

In part because my brother was in this field for his entire career, I can say with confidence that most companies make real estate decisions with little or no thought to discretionary tax breaks. Only afterward do they ask their tax department or an accounting firm to see what breaks they can get from the locality. 

What we’re thinking about: Will TKF get the tax breaks it seeks from Nassau County? Should it? Email me at eengquist@therealdeal.com.

A thing we’ve learned: There’s a 10 Downing Street in the West Village. It’s an apartment building. Studios are listed for $5,100 and $6,500.

Elsewhere…

— The podcast Freakonomics has updated its episode about rent control. Spoiler alert: Economists still hate it. But now they have new research to support the theoretical reasons it does more harm than good, including a detailed look at the results of rent control in San Francisco and an interview with an economics professor from Stockholm, where rent control has Swedes waiting 10 to 30 years for apartments and spawned a criminal black market.

— Apex Development Group, based in Great Neck, Long Island, is the developer behind a controversial multifamily project proposed for the Arrow Linen property at the border of Park Slope and Windsor Terrace. The project has attracted a fair amount of media attention but none of it has mentioned Apex, which was not named in the rezoning application. But the project appears in plain view on Apex’s website and on LinkedIn.

The nearly 300,000-square-foot project will bring more than 300 units of “new, high-quality housing affordable to the surrounding community,” the LinkedIn post says. But that’s only if local Council member Shahana Hanif approves the rezoning. NIMBYs are pressuring her to downsize the development, while pro-housing advocates are calling for a full build-out.

— New York City has the most fatal accidents involving pedestrians of any U.S. city, a new report finds. If that sounds like fake news, give yourself a pat on the back. What matters is the rate, not the total. And New York’s pedestrian fatality rate is the lowest per capita, the same report found. Given the amount of walking New Yorkers do, the low fatality rate is even more impressive. However, the report did not show the fatality rate per mile walked.

— Real estate data is often deceiving as well. In recent years, reports have found the fastest-rising rents in the nation were in Jersey City. However, that doesn’t mean rents were soaring for tenants who remained in their apartments. Such reports only capture data from listings, not from renewals. And the listings in Jersey City were disproportionately from new, luxury buildings, of which an enormous number have gone up in recent years.

Closing time

Residential: The priciest residential sale Thursday was $11.2 million for an 8,000-square-foot townhouse at 312 West 88th Street on the Upper West Side. Deanna Kory and Ileana M Lopez-Balboa of The Corcoran Group had the listing.

Commercial: The largest commercial sale of the day was $174.1 million for 43 West Street and 24 Oak Street in Greenpoint. TF Cornerstone bought the two lots that total 356,520-square-feet. 

New to the Market: The highest price for a residential property hitting the market was $11 million for a 9,180-square-foot townhouse at 7 West 82nd Street on the Upper West Side. Ariel Ben Ezra of Oxford Property Group has the listing. Breaking Ground: The largest new building application filed was for a 108,559-square-foot, four-story commercial building at 83 Wythe Avenue in Williamsburg. Jeremiah Zuidema of Archimæra Architecture filed the permits. — Matthew Elo