PRIVILEGE IN THE WASTED LAND: AN ANALYSIS OF LLC OWNERSHIP AND VACANT LAND IN NEW YORK CITY
B Y : S T E P H E N H O S K I N S & M I C H A E L W A R D
RSF – Robert Schalkenbach Foundation
Excerpts:
While academics, advocates, and media pundits grapple with tough questions around how to ease the crushing burden of housing costs, popular discourse has begun to congregate around a few key issues, especially faceless landlords and the stubborn presence of vacant lots.
Concern has been building around the ‘financialization’ of housing by global capital, as real estate is hoovered-up by massive investment funds such as BlackRock and Blackstone. This may ratchet-up the rate of ruthless profit-seeking landlords, pushing homeownership even further out of reach for the middle-class (Vogell, 2022). One uniquely-privileged legal vehicle is the limited liability company(LLC) which enjoys both tax advantages and liability protection. LLCs enjoy several privileges that are highly favorable for investors. Liability is limited within the confines of the LLC, restricting tenants from seeking redress against investors’ personal assets. Profits of the LLC are not taxed like corporate profits but are instead ‘passed-through’ to be taxed as personal income of the owners. LLCs enjoy minimal reporting requirements, enabling owners to remain anonymous (Soener & Nau, 2019). Around 15% of all rental properties in the United States are now owned by an LLC (Travis, 2019).
A symptom of speculation, vacancy indicates the presence of investors who are happy to park their wealth in real estate and profit from rising land values without the hassle of actually having to build or rent empty units (Eckart, 1983; Stanley, 2016). This reduces the supply of housing to both rental and ownership markets, driving-up housing costs. As we will discover, the legal protections provided by LLCs can shape the behavior of landlords, encouraging profit-seeking behavior and speculation by unidentifiable wealthy investors. Vacant urban land can be the bell-weather of urban blight, degrading the local environment and producing a vicious cycle of decline.
In contrast to cities suffering from decline or pockets of urban blight, NYC has largely been on an upward trajectory since the drop in crime rates during the 1990s, observed in the high and rising housing costs. This draws our attention to speculative vacancy. Commonly referred to as “land banking,” this type of vacancy involves investors purchasing land and waiting for land values to rise before selling the property and making off with their unearned profits. Often they will spend time in the interim lobbying for favorable changes to public policy, for example through relaxations of land use regulations, or public investments that will benefit their property such as transportation infrastructure. While studying vacancy in NYC, Kremer et al. (2013) found that unused vacant land was more prevalent in neighborhoods with low incomes and higher population density, possibly also hinting at investors with a speculative motivation hoping to benefit from a wave of gentrification.
The lessons of Henry George help to explain the presence of speculative vacancy: the inherently-fixed supply of land at a given location ensures that increases in a city’s population, productivity or popularity will embed into higher land values, ensuring that landowners can profit from an advancing society, regardless of whether they put their land to work (George, 1879). Where residential rents are anticipated to continue rising, it may often be rational for landowners to hold their property vacant while they wait for that optimal moment, causing persistent vacancies to be observed even in the midst of sky-high housing costs.
Data Description
Here we observe that close to 18,000 parcels are vacant or underutilized in NYC, of which 5,200 are owned by an LLC. This means that, while one in eight (13%) parcels are owned by an LLC across NYC, LLCs own nearly one in three (29%) vacant parcels, a significant over-representation. Likewise, while only 2.2% of NYC properties are vacant, this proportion is more than doubled among LLC-owned properties, to 4.7%. Turning to underutilized properties, Table 3 shows that one quarter of all commercial and residential zoned lots have built less than half of their maximum allowable floorspace. However, among LLC owned parcels, nearly 4 in 10 are classified as underutilized, again indicating an over-representation of underutilization among LLC-owned parcels.
Results
The results above clearly indicate that LLCs are over-represented among the owners of vacant and underutilized land, with nearly every single result being strongly statistically significant. We observe that if a property is vacant, there is a 9 to 15 percentage point increase in the likelihood that it is owned by an LLC. If a property is underutilized, the likelihood of it being LLC owned rises by around 2 to 3 percentage points. Alternatively, properties which are LLC owned are between 2 and 3 percentage points more likely to be vacant, and 1 to 5 percentage points more likely to be underutilized.
Thus, in combination, these results strongly suggest that LLC investors are preferentially buying vacant and underutilized sites. While these results cannot prove a causal relationship between these phenomena, they strongly suggest that LLCs are more likely to engage in land speculation, and may be less likely to develop or redevelop properties under their control.
______________________
NYC should seek to nudge vacant and underutilized land into productive use. One way to achieve this is for the City to create a fifth property tax class which would identify vacant land, and then ensure that these sites are assessed at their full and fair market value, ideally with a tax rate that is higher than that imposed on developed sites. Owners of vacant lots will therefore seek to develop their site and put it into active use, providing much-needed housing or commercial space.
However, some landowners may merely choose to do the minimum possible to avoid such a vacancy tax, for example by turning their site into surface car parking. One alternative approach is to raise tax rates on all land in the city, through a land value tax (CPTR, 2023). Because market values already incorporate information about the highest and best use of each piece of land, universal taxation of land values places a relatively greater financial penalty on landowners who are underutilizing their land, creating incentives to redevelop their property (Murray, 2022). This land value tax could be implemented in a revenue-neutral way by cutting the taxes charged on improvements, giving a tax cut to the many landowners who have already put their site to productive use. Such a shift towards land value taxation would therefore drastically simplify the city’s complicated tax code, while also serving as a de-facto tax on vacancy and underutilization. As this report has shown, such a tax would disproportionately fall on the city’s many anonymous LLC investors, ensuring that they contribute their fair share of the city’s revenues, and nudging them into putting NYC’s hotly-demanded land into productive use.
References
CPTR. (2022a). LLCs in NYC. Center for Property Tax Reform (CPTR). https://llcs-in-nyc.com/
CPTR. (2022b). NYC Vacant Land Map. Center for Property Tax Reform (CPTR).
http://vacantlandnyc.com/
Eckart, W. (1983). “Land speculation and the rental price of housing.” Journal of Urban Economics,
13(1), 1–21.
George, H. (1879). Progress and Poverty: An Inquiry Into the Cause of Industrial Depressions, and of
Increase of Want with Increase of Wealth. The Remedy. D. Appleton.
Kremer, P., Hamstead, Z. A., & McPhearson, T. (2013). “A social–ecological assessment of vacant lots
in New York City.” Landscape and Urban Planning, 120, 218–233.
Murray, C. K. (2022). A housing supply absorption rate equation. The Journal of Real Estate Finance
and Economics, 64(2), 228-246.
Soener, M., & Nau, M. (2019). “Citadels of privilege: The rise of LLCs, LPs and the perpetuation of
elite power in America.” Economy and Society, 48 (3), 399-425.
Stanley, B. W. (2016). “Leveraging public land development initiatives for private gain: The political
economy of vacant land speculation in Phoenix, Arizona.” Urban affairs review, 52 (4), 559-590.
Travis, Adam. 2019. “The Organization of Neglect: Limited Liability Companies and Housing
Disinvestment.” American Sociological Review 84(1), 142–70.
Vogell, H. (2022, February 7). “When Private Equity Becomes Your Landlord.” ProPublica.
https://www.propublica.org/article/when-private-equity-becomes-your-landlord
_______________________________________
Comments by Josie Faass and Stephen Hoskins
Abstracted from: Land Owned by LLCs More Likely to Be Vacant, SHELTERFORCE, April 27, 2023
The appeal of LLCs derives from the fact that they combine the benefits of a traditional corporate structure with enhanced anonymity and reduced tax liabilities: a win-win-win for investors. Unfortunately, those same characteristics tend to encourage bad behavior when this particular legal structure is used for the purpose of real estate investing. For example, it is well documented that LLC owners are more likely than other property owners to reduce costs by minimizing spending on the maintenance of their properties. As a result, their properties experience more rapid deterioration than non-LLC owned parcels, a finding that demonstrates the strategy of short-term rent extraction rather than long-term housing provision enabled by this particular legal structure. The anonymity afforded LLC owners also makes it very difficult for tenants and neighbors to hold owners accountable for delayed maintenance, poor site conditions, and the negative spillover effects of long term vacancy.
These results show that LLC speculators are actively driving the land underutilization and vacancy that are worsening New York City’s housing affordability crisis. In order to get a sense of what this trend looks like on the ground, however, let’s consider two (in)famous examples of LLC land speculation in New York.
This 2-acre plot on 514 11th Ave. was acquired by investor Larry Silverstein using an LLC in 2015. Upon purchasing the site for $100 million, Silverstein immediately demolished the structures on it, leaving behind a large vacant lot in the heart of the city that is currently zoned for commercial or residential development. Several proposals have come and gone for the site, but nothing has been done with it. Even in this disinvested state, the property’s value continues to rise and is estimated to be more than 150 percent of what it was when acquired less than a decade ago.
Given its prime location and favorable zoning, why has the owner resisted reusing the site? A large part of the explanation probably lies in its tax valuation. At just $21 million, the cost of holding the land idle while the actions of the real estate market boost its value is enticingly low when compared with the benefits of speculation.
The 6-acre parcel at 666 First Ave. is evidence of how persistent LLC-driven land speculation can be, even in the face of public scrutiny. Ownership of the property was deftly hidden behind multiple layers of LLCs, but its large size and high value garnered attention, and reporters eventually tied its ownership to the well-known (now deceased) real estate investor Sheldon H. Solow.
This large lot once housed the Consolidated Edison powerhouse, but since that facility was demolished in 2006, the entire block has remained stubbornly vacant. It is currently zoned residential and lies in an inclusionary housing special area, making it a prime candidate for redevelopment into affordable housing. The parcel’s complete disuse hasn’t stymied its appreciation, however. The city valuation of 666 First Ave. has skyrocketed from $29 million in 2013 to around $146 million in 2022—another example of an LLC investor using land speculation to turn a profit in New York City.
What Can Be Done?
And, as is currently being considered in many taxing jurisdictions—including Detroit, Minnesota; Buffalo, and the state of California—policymakers should encourage redevelopment by shifting the burden of their property taxes onto land and away from improvements. New York City would do well to explore such a policy intervention.
The need for affordable housing has only grown more urgent. Addressing the legal structures that facilitate wasteful land speculation and creating a tax environment that encourages the supply of housing are important steps toward ensuring New Yorkers’ access to this basic human right.
Josie Faass is the executive director of the Robert Schalkenbach Foundation, and co-director of the Center for Property Tax Reform, an independent research center focused on issues of equity and transparency in taxation.
