Pratt report: to fight "front-running" land buyers anticipating a rezoning, why not a flip tax or new transfer fee? (Applies to Atlantic Yards/M-CROWN)

See collected coverage of M-CROWN rezonings: click here.

Who wins when it comes to rezonings? And can the public get more?

The Pratt Center for Community Development in Fall 2020 released Our Hidden Treasure: Recovering Land Value to Repair and Rebuild" (bottom), drawing lessons from Mayor Bill de Blasio’s proposals and an in-depth case study of land values in Gowanus to show how the city lets value be captured for private gain, not public benefit.

Those lessons apply, indirectly, to Atlantic Yards/Pacific Park, where property flippers were among the big winners, with no public policy to extract much value from their transactions. 

And they also apply, even more directly, to the past, pending, and future rezonings in the M-CROWN zone. Consider, as I recently reported:

• the 1050 Pacific Street parcel sold in foreclosure in 2002 for an unnamed sum, and got mortgages for $1.2 million. After the May 2019 rezoning, it sold for $26 million in December 2021. Added to that parcel was 953 Dean, which in November 2014 sold for $2.3 million and in December 2021 for $4.73 million
• the 1010 Pacific Street parcels in October 2015 sold for $8.5 million; after the May 2019 rezoning. the parcels sold in November 2019 for $20.25 million

If the city had enacted a new transfer fee or flip tax, the public might have captured some of the significant upside in at least some of those transactions. (Of course, if the applicant keeps the property and pursues the development, they keep the upside.)

The value of upzoning

Given the current crisis in New York, it's more important than ever to maximize "all sources of value for public good," the Pratt report argues, including the value of development rights created by the city via up-zonings. 

That, to me, also would include the value of development rights created by a state override of zoning--essentially a one-off upzoning--as with Atlantic Yards/Pacific Park.

Upzoning increases the value of private property. (Remember architect Vishaan Chakrabarti's observation, "Look, there's only two legal ways to create money in the United States, the Federal Reserve and an upzoning. So free FAR [floor area ratio] is worth its weight in gold.")

The Pratt Center argues "that under current practice, up-zonings primarily create private windfalls that fuel speculation and lead to higher development costs, which in turn drives up land prices, exacerbates the city’s affordability crisis, and worsens inequality."

Therefore, according to the report, "Leaders should rethink whether this negative consequence of up-zonings is worth the increased development capacity the city gains from such actions; and when it is, leaders must ensure that the public recovers a portion of the value created."

The report also calls for city-owned property--current, and future--to be used to maximize public good.

Allowing taller, bulkier buildings, and/or allowing residential growth in moribund manufacturing zones makes sense from a theoretical standpoint, adding to general supply and allowing increased revenue that can trickle down with a provision of affordable housing.

But many up-zonings have provoked resistance, the report notes, citing:

• inequity, since low-income neighborhoods of color have born the brunt, while white middle-class areas that are transit-accessible have been downzoned or ignored
• an unwillingness to provide infrastructure and other needs in such upzoned neighborhoods
• city dismissal of community-driven plans calling for deeper affordability and other priorities
• the delivery, even under Mandatory Inclusionary Housing (MIH), of affordable housing too expensive for most locals, given that Area Median Income (AMI) is skewed by "geographic imprecision [the inclusion of well-off suburbs] and by the high incomes of the wealthy"
• concerns of displacements of households and businesses

Speculation in Gowanus

The report offers a case study of speculation in Gowanus (based on a 2019 Pratt Center study), which began changing at the turn of the century, when developers gained zoning variances to convert industrial lofts to housing, and as-of-right industrial-to-commercial conversions became more common.

Meanwhile, upzonings on adjacent Fourth Avenue brought new residents and wealth nearby.

That led to a Department of City Planning study of Gowanus proper, and a rezoning that, at the time of the report, was pending--and has since been passed.  

The graphic below explains, astonishingly, how a property owner in 2018 sold some long-assembled parcels for $61 million, which a year later was sold for $95 million--an astonishing leap in value that had no relationship to current potential revenue but rather the expected rezoning.

The lesson:

The Gowanus case study illustrates the argument that when the City announces its intention to rezone without a strong plan in place to capture some of the value it will confer, the “value uplift” ends up being capitalized into land prices and realized almost entirely by landowners. In such cases, the opportunity to capture value uplift for investment in deep affordability is lost. 

That means “front-runners” anticipating the rezoning grab property--which leaves the original land owners, not the public, as the winners, since, to earn back their investment, the new owners must typically charge luxury prices. 

And more expensive developments do not necessarily deliver increased tax revenues since, despite higher assessments, taxes are typically abated for at least a decade. (It can be longer, for projects gaining from 421-a tax break.)

"While the value of location is collectively generated by all of the people who live in a city, a few individual owners—those with the wherewithal to park capital on land in anticipation of a public sector action—realize a disproportionate share of the benefits of urban economic agglomeration," the report states.

It's worth adding that, when the city agrees to several spot rezonings on or near Atlantic Avenue in the M-CROWN district, that too fuels speculation, even if Community Board 8 asks for deeply affordable housing and some space for job-creating uses.

Potential solutions

The report recommends discussion of three broad proposals, including an option for developers to buy development rights within special districts, which could be used to benefit places--like NYCHA developments--far from such sizzling markets.

• Restructure taxation at the time of property transfer in order to capture value uplift that would otherwise go to “front-runners” and speculators.
• Create Transfer of Development Rights districts or Purchasable Density Bonus regimes that require property developers to purchase the option to densify rather than granting it free of charge via up-zonings.
• Establish social ownership/social stewardship mechanisms that enable land to be transferred to mission-driven organizations devoted to housing justice and economic security.

Restructuring taxation?

What about restructuring taxation? For example, a new transfer fee could be assessed upon a transaction in an area where a rezoning study is under way.

That would require the Department of Finance, or an independent entity such as the City’s Independent Budget Office (IBO), to compare the income value of the property under current zoning and that reflected in the sales price.

"Some proportion of the difference between the two values—perhaps 30%— would be levied on the buyer as a transfer fee," the report says, acknowledging that the policy would be contested because of the fuzziness of such valuations.

Alternatively, a new city capital gains tax could "recover a specific portion of the value conferred by the rezoning, and no more." That would be calibrated to require more from flippers--those owning property for just a short period of time, though the time period wasn't specified.

During an 11/10/20 panel discussion on the report and proposals, George Sweeting, Deputy Director of the IBO, thought the capital gains tax wiser than the transfer fee, which he thought would trigger challenges.

The capital gains tax, he said, does have some precedent in other countries. "I think Vermont has a tax on land gains that could be a model," he added.

Indeed, Vermont has a Land Gains Tax on the sale or exchange of land held by the sellers for less than six years. "The tax goes from a high of 80% for gains over 200% on land held less than 4 months to a low of 5% for gains of less than 100% on land held between 5 and 6 years," as explained by the Institute for Local Self-Reliance.

Purchasable density bonuses

From the Pratt report:

Instead of up-zoning an area, the City would structure land use actions as air rights sales within special districts, giving developers the option to directly purchase additional density. The examples of Hudson Yards and the East Midtown rezoning could be instructive here; in both cases, the City created new development rights and a market for selling them, then used the proceeds to fund public infrastructure. However, in the case of Hudson Yards, property tax breaks effectively eroded the possible value recovery. 

If the City employed transfer of development rights (TDR) or density bonuses as a way of raising revenue, areas in which there is lack of a market for development rights could be neglected as sites for investment. The City could explore a revenue-sharing model that would, for example, enable NYCHA developments that are far from “hot market” areas of the city to share in the revenue generated by TDRs elsewhere. 

The latter idea regarding revenue-sharing was proposed for NYCHA developments in Gowanus but was not, as far as I know, part of the final rezoning.

Atlantic Yards flippers: Freddy's

Atlantic Yards was announced officially 12/10/03, but the first news coverage emerged 7/23/03, in Newark's Star-Ledger, and plans had been percolating for well more than a year.

So, as I wrote in June 2010, the building housing Freddy's, the popular bar at the corner of Dean Street and Sixth Avenue, had become extremely valuable. Owner Fred Chadderton on 10/7/03 sold the building for $850,000 to a trio of owners led by Jason Moore. The transfer was 12/22/03.

On 2/17/05, the new owners agreed to sell the properties to Forest City Ratner for $2,825,000. The transfer was 8/10/05. That astounding profit was eased by $131 million in taxpayer money that reimbursed Forest City for land purchases (not including the Freddy's site).

This is one of several examples.

Atlantic Yards flippers: the team and arena

Of course, the biggest "flipper," so to speak, was Russian billionaire Mikhail Prokhorov, who turned his investment in the Brooklyn Nets and Barclays Center operating company into a huge profit, selling to Joe Tsai. As Slate's Ben Mathis-Lilley wrote in August 2019:

What if, instead of doing this, New York had just bought a stake in the Nets itself, then sold the team after 10 years like Prokhorov did? I’ll tell you what would have happened: It would have $2 billion more than it does now, enough to, for example, cover several years’ worth of the budget shortfall that’s helping cripple New York City’s delay-ridden subway system.

Of course, the argument for a piece of the upside might also be an argument for a piece of the downside in the not-so-financially-successful Barclays Center. But that still would be a gain for the public.

After all, the agreement for a team and arena in the country's biggest city and media capital raises the combined value of the team and arena.

Atlantic Yards failure to capture value: Site 5 & arena plaza

As I wrote in November 2019, a 3/3/10 appraisal of Site 5, longtime home to Modell's and P.C. Richard assessed the value of the city's development rights, $35.6 million, then subtracted the cost of getting rid of the retailers as well as adding subway infrastructure, delivering a final retrospective value of just $800,000.

That was questionable for several reasons. That assumed a value of about $110 per buildable square foot, perhaps reasonable in 2010, but surely generous in hindsight, given that the price per buildable square foot for the project and other sites nearby has steadily risen.

More importantly, as with the other city properties assessed, the appraisal assumed the zoning that existed before Atlantic Yards emerged. That means it ignored that New York State, overriding city zoning, had already permitted at Site 5 a building with 439,050 square feet, about one-third more than current zoning allowed.

That suggests another $12.7 million in appraised value, even at the modest $110/psf.

Still pending is a plan to transfer most of the 1.1 million square feet of the unbuilt "Miss Brooklyn" (aka B1) tower across the street to Site 5. That's of great value to the project's developer, with the overall building site--not just the transferred bulk--worth perhaps $300 million. 

And that developer, at least in its previous incarnation, made the business decision to not build B1, and surely it's not contemplated now. It's also a great boon to the arena operator.

Doesn't the public deserve some piece of the upside?