THE WALL STREET JOURNAL
Housing Shortage Reflects the Cheap Cost of Holding Vacant Land
High taxes on buildings and low taxes on land discourage landowners from development
By Konrad Putzier
Nov. 22, 2022 8:00 am ET
Excerpts:
For a glimpse at how a skewed property-tax system worsens the housing shortage in America’s biggest cities, take a look at a 6-acre land parcel in Midtown Manhattan.
The site, located next to the United Nations headquarters, is valued at hundreds of millions of dollars, according to analysts. It is zoned for the construction of around 1,500 apartments in a city that has a shortage of housing and rents near record highs. Yet for the past 17 years, the lot has sat empty, and its owner has paid relatively little in taxes on the property because it doesn’t contain any buildings.
U.S. cities are littered with vacant or sparsely built sites like this one. New York City alone has more than 77,000 lots that are either vacant or have a building that is less than half the size of what zoning allows, according to an analysis of property records by Altus Group for The Wall Street Journal.
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.
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.
Developers, hamstrung by red tape, restrictive zoning rules and high land prices, increasingly struggle to find sites to build on. The reluctance of many property owners to sell their lots worsens the problem.
The role taxes play in keeping land undeveloped is an underappreciated contributor to the country’s housing shortage.
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.
The late developer Sheldon Solow bought the Manhattan site, a former power plant, in 2005, according to property records. In 2007, Mr. Solow said he planned to build more than 4,000 apartments and a 47-story office tower on the site and nearby lots. Mr. Solow built an apartment tower on an adjacent lot. But much of the site, which doesn’t have a mortgage, has been sitting empty ever since.
The site faces an annual property tax bill of around $1.5 million per acre of land, property records show. Neighboring apartment buildings are forced to pay six or seven times that amount per acre.
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.
“Whatever we do,” Mr. Hershman said, “we want to do it right.”
The company is currently updating its development plans and has floated building a casino, according to marketing materials seen by The Wall Street Journal. New York state legislators have approved up to three casino licenses for the New York City area.
Sunbelt cities have also seen an influx of investors who buy up vacant lots to keep them undeveloped and wait for values to rise. The cost of inaction is usually low, particularly in suburban locations, where keeping a few cows on a lot allows landowners to qualify for massive property-tax breaks meant for ranchers.
A vacant lot in front of a new multifamily home under construction in Philadelphia. PHOTO: CAROLINE GUTTMAN/BLOOMBERG NEWS
Lawmakers in Detroit, Philadelphia and Richmond, Va., have proposed reforms that would fundamentally change the way property taxes are calculated. When Andrew Yang ran for mayor of New York in 2021, he called for a higher tax on vacant land.
“What you’re trying to do there is light a fire under those people,” said Josie Faass, CEO of the Robert Schalkenbach Foundation, which promotes land taxes.
Under proposals studied by cities like Detroit, each property’s appraised value is divided into land and building. The rate on the land portion is increased, and the rate on the building lowered. That means owners of vacant land and owners of small buildings on valuable lots see their tax bills rise by a lot, while owners of high-rise buildings or duplexes see their bills shrink.
Pittsburgh had a split-rate tax until 2001, and a number of studies found that it had more building activity than other Pennsylvania cities.
“There can be no doubt that if you shift the tax off of buildings and onto land, you will encourage buildings and discourage land speculation,” said Nicolaus Tideman, a professor of economics at Virginia Tech.
Land taxes have long been popular among free-market economists. That is partly because, unlike taxes on corporate profits, they don’t discourage investment. Adam Smith argued in favor of land taxes and Milton Friedman called them the “least bad tax.”
Landowners tend to oppose them, and calculating two values—land and structure—for a single property is often difficult, though improved databases and valuation software make the job easier. Many cities simply don’t want to tinker with their property-tax system, wary of voter backlash.
The vacant Manhattan lot owned by the Soloviev Group overlooks the East River. PHOTO: JENNIFER KERRIGAN/THE WALL STREET JOURNAL
Write to Konrad Putzier at [email protected]
Comment:
Yes, the role taxes play in keeping land undeveloped is indeed an underappreciated contributor to the country’s housing shortage.
To summarize:
New York City’s property tax system is notoriously opaque, confusing, and inequitable. Rather than fix these problems, New York State has instead layered on a patchwork of complex exemptions and abatements that confuse homeowners and cultivate inequities. Most of these tax breaks favor wealthy communities. For instance, when developers are exempted from the Mandatory Inclusionary Housing rules, an attempt to fix the affordability problem, they are disposed to constructing luxury buildings. But already there is a glut of expensive housing units. Another example is the 421a Tax Abatement which we featured in a previous post. This sweetener reduces a property tax bill by applying credits against the total amount owed, most commonly granted to property developers in exchange for including affordable housing units. Again, in several instances developers are granted a release from the set-aside requirements.
Reforming the city’s tax code is taking up the city council’s and Comptroller’s time. The previous Comptroller Scott Stringer included a vacant land tax in a reform report. Under the City’s current tax code, properties are divided into four “classes”: residential (up to three units), residential (greater than three units, co-ops, and condos), utilities, and commercial/industrial parcels. Each class has a unique tax rate, which is applied to some percentage of assessed value, with the majority of an owner’s tax bill coming from the value of their buildings, rather than the land. A fifth class would contain only vacant and blighted parcels, and tax them on the value of the land. Another fix, adding to the confusion. So much for well-intentioned ideas. The new Comptroller Brad Lander now wants a more uniform tax code, but so far little action.
What seems to escape the political class in NYC is the most obvious solution. A Land Value Tax system is the best way to create new housing on vacant and underutilized sites. This is not a new add-on program; it’s simply a change in the regular property tax structure. Eliminate the land use class system, apply a uniform tax rate to all property’s real market value, and split the total rate. A 2-rate tax system applies a high rate to land assessments and a low rate to building assessments. The resulting high tax burden on vacant parcels eliminates the incentive to sit on vacant land; rather, it would induce landowners to build to zoned capacity levels. Then, owners of vacant lots who build new homes or apartments would not see their tax bills skyrocket.
More than $100 million a year in property tax revenue was being lost because vacant lots above110th Street where most are located were taxed at a low rate as Class1 residential. A revenue neutral land tax causes no revenue loss.
Why is it that state and city elected officials have cold feet when tax code reform efforts point to LVT? Is it simply because they don’t want to tinker with their property-tax system, wary of voter backlash? The housing affordability crisis calls for courageous action, now.
Tom Gihring, Research Director
