In the beloved 1983 film "Trading Places," Eddie Murphy's character learns the secret to Duke & Duke's success in the commodity brokerage business - volume. Similarly, in New York City's commercial real estate market, volume is crucial for the city's economic health. Every real estate transaction generates taxes that contribute to the city's revenue, which, in turn, funds essential services such as education, healthcare, and infrastructure.
Unfortunately, there are currently significant roadblocks hindering the completion of deals in New York's commercial real estate market. The economic impact of reduced activity is not fully understood. However, the solution is simple: when city and state governments incentivize activity, everyone benefits.
Caption: Ben Tapper. Photo: Courtesy of Lee & Associates
Each property sale in New York City generates various taxes. For example, the transfer tax is 2.625 percent of the sale price, and there is an additional transfer tax charged by the state. Consider a $5 million property - the transfer tax alone amounts to $131,250. If there's a new mortgage of $3 million, the mortgage recording tax adds another 2.8 percent, or $84,000. Before any other taxable events occur, the city has already collected $215,250.
Furthermore, property sales lead to renovation projects, creating construction jobs and stimulating the local economy. The sale of materials generates sales tax, while the labor generates income tax. Brokers and attorneys involved in the sale also generate income tax. In the case of vacant properties, brokers are engaged to lease the spaces, resulting in additional income tax. Incentivizing activity not only boosts the real estate market but also provides significant benefits for the overall economy.
However, when activity is not incentivized, or worse, actively disincentivized, the negative consequences become apparent. In New York City, there is a lack of support for landlords trying to collect rents, a backlog in the courts, and laws that favor tenants. This results in tenants occupying spaces without paying rent, both during and after the lease term. Consequently, landlords face significant financial burdens and contract disputes.
On the sales side, property valuations have already experienced declines, leading more owners to hand their properties back to lenders. If profitability is elusive, property owners have little incentive to hold onto their assets. This situation is not unique to New York City; it is a nationwide trend. Incentivizing activity is crucial for generating jobs and tax revenue, which are essential for the smooth functioning of cities.
As this stagnant period continues, New York City's elected officials will face tough decisions. The diminishing leasing and sales volume will inevitably affect the city's ability to pay its municipal employees and maintain essential services. It is crucial for the government to understand that taxing property owners without encouraging transactions is counterproductive and detrimental to the overall economy.
The late Supreme Court Justice Oliver Wendell Holmes believed that taxes were essential for a civilized society. Conversely, a lack of tax revenue can have dire consequences for civilization as a whole. The need for volume in New York City's commercial real estate market extends beyond brokers; the entire city depends on it. It's time for the government to step in, pump up the volume, and support the prosperity of all.
Ben Tapper is the executive managing director of brokerage Lee & Associates NYC.
