The Answer Column: Do Landlords Get Tax Breaks For Vacant Retail Space?

By Carol Tannenhauser

Readers email WSR all the time with tips, problems and questions. Commenters regularly offer opposing views and versions of the facts, often with absolute certainty. So, where can you go for the final word?

To our new Answer Column!

We’ll do the research and get back to you with an answer. No issue is too big or small. All questions will be respected if respectful. No doubt other people wonder about the same things you do, and this is a way to get the facts and information out.

For example, Christian Toth emailed us the other day asking for clarification on a question that keeps coming up in the debate about disappearing mom-and-pop shops: Do landlords get tax benefits from having empty stores?

“It’d be great to get an analysis of exactly what the tax situation is for these empty storefronts,” Toth wrote. “Business loss therefore deduction? No deduction but pure loss? Different in every case?

“If you have a past article on the subject I’d appreciate being directed to it.

“If not, I’ll bet a lot of readers would also appreciate one.”

To answer his question, we called an Upper West Side landlord and leading tax attorney, who said the following:

“…there is no benefit to the landlord derived from leaving retail space vacant. There is no tax benefit other than the fact that s/he receives less income and therefore pays less tax. It would be similar to taking a cut in salary just to pay less in taxes.

“Furthermore, when a space is vacant the landlord not only loses the rental income and the contribution by the tenant to his/her real estate taxes, but also incurs the broker fees and renovation costs when the space is rented…

“The landlord can petition for a reduction in real estate taxes because of an alleged diminution in the value of the property due to loss of commercial rental income, however this will not offset the economic loss suffered as a result of vacant space.”

Do you have a question? Write it in the comments or send it to westsiderag@gmail dot com.  Subject: Answer Column

COLUMNS | 109 comments | permalink
    1. Matthew says:

      So why are there so many empty storefronts?
      With so much surplus supply why aren’t the commercial real estate rents plummeting?

      • Robert S Boynton says:

        Yes, THAT is the question I want an answer to. Is it pure greed, or is there another reason for why some of these places sit empty for years…?

      • Lord Of The Slice says:

        and the question is:

        “So why are there so many empty storefronts?”

        and I quoth:

        “THE RENT IS TOO DAMN HIGH~!!!”

        /end quoth

      • T says:

        Partially because real estate taxes are insanely high. Also the amount of different types of businesses that can succeed has been reduced by people shifting to buying online

      • H says:

        Most likely a long-term economic calculation. Simplistic example but rent at $5,000 a month and you may get a tenant. But wait it out and rent at $25,000 per month and if you’re lucky to land a tentant, you’ll get in 2 months what it would have taken 10 months with the lower rent. Once it is rented at the higher rents the “lost” revenue from the place being vacant for a while will be made up plus some.

      • UWS says:

        The simple answer is this: they are trying to pull a Donald Trump.

        Long Answer: Many of these landlords purchased these retail spaces at very high prices based on now unrealistic retail rents they had expected to receive. And these landlords took out bank loans. These landlords were expecting a certain amount of cash flow (retail rents) to pay the monthly bank payments. But these monthly bank payments were based on high valuations which is no longer the state of the market. So the landlord now has 2 options: (1) Rent the space out at a much lower than anticipated amount (e.g. current market rents) and not have enough cash flow to cover the bank’s monthly debt payments. Thereby suffering a monthly loss for decades as retail leases are typically for 10 years or more OR (2) Keep it vacant and stop paying the bank. In effect, they are forcing the bank to renegotiate their loan either by forgiving a significant amount of their debt in order to make the property cash flow positive or rework the payment terms. Otherwise, the landlord would just walk away from the property since their initial investment (down payment) has already evaporated with the market’s decline. Why compound the problem by renting it out and taking a loss every month?

        From the bank’s perspective, the only other recourse it has is to foreclose and take back the property. But it’s an expensive and lengthy process and because the property was purchased during the market’s peak, the bank will probably not recoup all of the money they lent by foreclosing. So there is an incentive for them to work out a deal with the current landlord.

        But if the bank ends up foreclosing, it will allow them to sell it to another landlord at a much reduced price, allowing said landlord to rent the space out a a much lower rent to reflect the current market. Or if the landlord is successful in renegotiating the loan terms, it will allow them to rent it out at the current market rates and not take a monthly loss.

        So it will eventually be resolved.

        Until then we are at an impasse until one side blinks – leaving the streets filled with vacant storefronts.

    2. Bill says:

      Thanks, West Side Rag! Love you guys!

      (But hate vacant retail space).

    3. Sherman says:

      Excellent article. This tax attorney is 100% correct (and I’m writing this as a CPA).

      Unfortunately, there’s a concept called irrational disbelief. No matter how much evidence is presented as irrefutable proof of something there are still people who will refuse to believe it.

      Kind of like the expression “don’t confuse me with the facts. I’ve already made up my mind”.

      • Jim says:

        It seems that JP just proved your point.

        • Sherman says:

          Exactly! There are still people numerous ignorant people ranting that there’s some tax break landlords get that incentives having empty space and that the tax attorney in the interview is a liar.

          That said, there are numerous reasons why there is so many empty storefronts, namely that the economy has changed.

          Small groceries, butchers, fish stores etc – which were once all over the UWS – can’t compete against big stores like TJs and Whole Foods (not to mention devices like Fresh Direct).

          Small retailers can’t compete against big box retailers and online services like Amazon.

          Landlords oftentimes have difficulty finding any business to rent their space. Furthermore, landlords might be in long term negotiations with a prospective tenant only to have the tenant flake on them.

          Landlords also might not want to lock in a tenant for a long term lease if the landlord believes there’s another business out there that might be willing to pay a lot more in rent.

          I was in a nice part of Miami a few weeks ago. There was a lot of empty storefronts there as well.

          This is unfortunately a national problem. It is not only NYC. The world changes and the economy changes.

          Ranting about secret tax conspiracies and greedy landlords does not solve the problem.

          • MJ says:

            Sherman please explain this part of the article. Seems like a loophole.

            “The landlord can petition for a reduction in real estate taxes because of an alleged diminution in the value of the property due to loss of commercial rental income, however this will not offset the economic loss suffered as a result of vacant space.”

            • EricaC says:

              What that means is that the taxes may be lower if you can’t rent out the space. It reflects the fact that the property is not as valuable as the city/state concluded when they set the tax rate. So, your expenses are smaller – but not enough to make it profitable, just less of a loss.

            • BronxBoy says:

              I saw that too. I think the explanation is going to be the reduction of real estate taxes is nowhere near the lost income, even when you net out the income tax.

            • Sherman says:

              What part don’t you understand?

              Let’s say for instance the landlord can collect $100K a year in rent.

              The real estate tax reductions he is applying for will not cover this list rental income. It might be $25K or so.

              Therefore, the landlord might have a reduction in real estate taxes but he is still behind $75K if he had rented the space. There is no chance a reduced real estate tax ( which incidentally is not guaranteed) will offset lost rental income.

    4. JP says:

      There is a clear benefit to raising rents so high the commercial tenant must vacate and then the space sits empty for years!
      Landlord is rewarded in some fashion or they’d fill the space. I don’t believe these quotes above from the UWS landlord/tax atty are the beginning and end of the conversation. There has to me more to it. Thanks for sharing them, however.

      • EricaC says:

        There is a reason – there are some who say that it is the length of the normal lease. So, if a normal lease is 10 years, and a landlord thinks, things are ok now but the economy is going to boom in two years so I could charge $50 a year for ten years if I sign now, but $100 a year if I wait two years, then it makes sense for them to wait two years (because 8x$100 > 10x$50).

        I’ve mentioned before two possible ways to shift the calculation:

        – if someone doesn’t rent the space out at least 3 out of every 5 years (or some other ratio that reflects “normal” vacancy rates), they can no longer treat it as a business for tax purposes. That would convert all the costs from deductible business expenses to non-deductible personal expenses, which would make the calculation of how much you lose by leaving it empty more negative. This would probably require federal action, though, to be enough of a push, so probably not workable.
        – in DC, they apparently impose HIGHER property taxes on storefronts that have been left vacant too long. I’m told by a realtor in DC that by imposing these higher rates, it creates an incentive not to wait for a better time to rent and has been successful, but I don’t know myself.

        Another mechanism, if lease length is really a problem, is to shift the risk of future opportunities to raise rents from the landlord to the tenant – shorten the length of the lease, or raise the rent if prevailing rates go up. That would be unworkable for mom and pop businesses then.

    5. Ellen says:

      There should be a vacancy tax! If that doesn’t incentivize landlords to rent their properties at a reasonable rate, then at least the city would reap some financial reward.

    6. Greedy landlord says:

      They sure do. Depending on the circumstance it pays to keep the store closed. If they find a good sucker to rent it out they will.

    7. Buddy says:

      Perhaps it would be a good idea to ask the same question to an attorney who is not a landlord. I’ve found that real estate people sometimes offer specious information tending to support their industry’s interests.

    8. sam says:

      Then why do some UWS storefronts stay vacant for years on end?

      • B.B. says:

        You do realize that many of these commercial/retail space on UWS like elsewhere are owned by co-ops.

        They like other owners of commercial space seek to maximize their income.

        It also is *NOT* easy to rent commercial/retail space. Smart landlords don’t just give leases to every Tom, Dick and Harry that wants to open up something.

        Places want to see a solid business plan, deep finances in place, references, etc… Not every new business can even get a business bank account for just a start.

        Consider more than half of all new businesses fail within their first three years. If you have a ten year retail lease (shortest most LLs will give), just as with residential the business is responsible legally for the remaining time on lease regardless.

      • Okie says:

        Glad this guy wasn’t elected. His “argument” is predicated on the landlord making more money by “playing the market” wih his loan proceeds – ridiculous on the face of it.

    9. Drew says:

      One reason for stores being empty especially ones that have been around for a long time. They signed leases ten years ago and figured out the volume would be affordable. Ten years later taxes went up landllords raised the rent. Hourly wages are 15.00, so many more laws regarding time off that are new. Less customers walking into retail the growth of the internet. Would you invest in a store today? Of course nail places that don’t have inventory and great concept Resturants are doing
      business.

    10. Big Earl says:

      Retailers have been losing customers year after year. Less people shop at stores opting instead to go online. Storefront after storefront empty for years. Sections of Columbus look like a sad wasteland of commerce. Big chains able to throw their money around like the New York Yankees i.e. Starbucks close store after store because even they can’t afford rents. BUT YET, rents continue to rise and don’t go down. Rather than declining rents stores sit vacant for years. The whole situation breaks about every economic principle known to mankind. It makes zero sense.

    11. RobbieTheK says:

      The usual example given is holding out to get 3x the current rent. So rather than $1,000 a month they want $3,000 a month. If they wait a year to get the $3,000 then they’d need just 4 months to make back the lost year. Now multiply by 10. So going from 10k to 30k a month = good reason to hold out.

    12. Catherine says:

      But thats not true. As I understand it, landlords can claim the loss at the would be new ( higher ) rent.

    13. James Serra says:

      I would like to know if apartment landlords get tax benefits from having empty apartments? Many of the luxury apartments raise the rents even for apartments that have been vacant a long time. It seems they use some formula based on the time of year and number of vacancies to change the rent almost on a daily bases, and don’t take into account how long the apartment has been empty.

    14. robert says:

      The reason for the vacant store fronts is very simple your local elected’s and the usually band of self appointed community leaders. As a 53 year resident of the UWS there have always been some vacant store fronts a few when times were good and more when they were not. a few years ago these folks started looking for ways to stop chain stores from moving in by limiting the size of each induvial store front. It was sold as “saving the mom and pop store”. Sorry to say but by the 2010’s they were long gone. This same action was done on the UES several years before the UWS with the same disastrous results. At the time of the change on the UWS those that pointed out the failure of previous versions of this policy where laughed at. So we got this idiotic policy. Because of this limitation of storefront size a merchant has to be selling something small as storage space is limited and being a desirable area the average price per square foot is quite high

      • B.B. says:

        Irony is those zoning changes were meant to prevent Walmart and other large chain stores from taking over large block long retail spaces.

        Fast forward to now Amazon.com, Jet.com, Chewies.com, Walmart.com and the rest are doing exactly what those elected officials tried to prevent.

        So while the competition isn’t a Walmart down the street, it is a much larger Jet.com (owned by Walmart) who is selling more goods in NYC than any brick retail could.

    15. JMF says:

      Of course what the Tax men are saying makes sense. HOWEVER, can someone present a good rationale from the landlord’s perspective as to why they allow places to sit vacant? Are they just foolish and greedy. Is it that in the long run it pays (bc eventually higher tenant moves in)? Are they just bad business people? It’s not like landlords of rental apartments actively choose to let units sit empty for months or years (they lower prices, give free months, etc.). So, why is the equation different? If you say it’s not the taxes, it must be something else? Does it put them in lower tax bracket? Can they write off certain losses make it worthwhile? It is such common practice that there has to be a logical explanation?

      • Jay says:

        How do you know the landlords aren’t trying to lease their space?

        The process is long and any party can back out and then the process has to start all over again. Everything takes longer than it should in this city and just because you see an empty storefront, it doesn’t mean nothing is going on.

      • B.B. says:

        First you are making the assumption each and every vacant store front in NYC is beating back well qualified applicants with sticks, that just isn’t true.

        Just because some guy’s bored mistress, wife or daughter wants to open up a little shop selling tchotchkes or otherwise dabble in some sort of retail, it does not follow every LL must rent them space.

        Look at how many stores/businesses opened on the UWS of late and closed a year or few afterwards. Those that manage to remain open and or last longer are usually founded by immigrants who besides pouring their life savings into the business, work themselves and family members to death trying to keep the place going. This often drawing very little money because the place just isn’t generating huge cash flow.

        Look at how many places have closed with marshal signs posted in widows. That means a LL had to go into court and bring nonpayment proceedings. Now they are not only stuck with a vacant space, but may never see a penny of the back rent owned, nor collect (as per contractual right) remained of rent for balance of lease.

        So yes, like residential commercial landlords have a right to be picky about to home they rent space.

        Getting a tenant into a space is relatively easy. OTOH getting rent paid on time, and or removing said tenant if need arises, that is more difficult.

    16. Christine E says:

      It is my understanding that, in some cases, landlords who want to borrow money, collateralized by their building, can improve property value by having empty storefronts, which will be appraised at “market” value, versus having occupied storefronts, if those current commercial leases are below market value. Bank appraisers will use actual cash flows, in the case of active leases, and estimated cash flows, in the case of vacant spaces. In the case where the owner/appraiser can find comparables (undoubtedly taking the higher commercial leases in the area) in excess of the current lease value, the property will be “worth more” vacant.

      It makes the most sense in cases where a landlord owns many properties, and can keep borrowing in rotation to pay off older loans with new ones, especially as commercial rates (and thus collateral value) continues to rise. It makes less sense for buildings where that is the only property owned.

      • Woody says:

        It’s refreshing to read something written by a poster who obviously made an effort to suggest a reasonable and fact-based hypothesis. This stands in direct contrast to some of the wackiest comments I’ve ever heard whenever this topic comes up.

    17. Jon says:

      Can’t a landlord claim depreciation expenses on vacant property which could be used to offset other income? In other words, their total after-tax income is better off having the vacant property than not having it at all (although of course, it’s not as high as it would be if it were rented)

      • Woody says:

        You asked and answered your own question by stating that a landlord’s net income will be lower if the space is vacant. Depreciation happens whether property is vacant or leased. What’s missing is the rental income. It’s really that simple.

        • Jon says:

          Depreciation is a unique and meaningful tax benefit to real estate as an asset class, though. I think If the benefit were taken away (or reduced/restricted), you would see fewer vacant store fronts, for a couple reasons. First, without depreciation the effective cost of carrying vacant real estate is higher, so it would be on the margin less appealing versus other investments (especially if one does not have a strong view on appreciation). Second, without depreciation driving down cost basis, you would have smaller unrealized capital gains that create friction discouraging investors from selling vacant properties.

    18. richard marks says:

      This is an interesting answer that there is no tax advantage for the landlord to keep their space vacant. Then why do they not rent it? Certainly some of the property is too expensive for most businesses to rent, but some properties remain vacant for many years. The northeast corner of 86th street and Columbus Avenue, for instance, where a coffee shop used to be, has to be vacant for at least 5 years. It’s prime space, certainly some business could afford it. Alternatively the landlord could lower the rent. But there it sits, vacant for all those years. This is the case with other properties as well. So why do they remain vacant for so long? Thank you

    19. Amelia says:

      I am not an accountant but I heard if they use a tenant such as a bank or duane reade as the “market rent” so no lower paying tenant “mom + pop” will rent which is why they do it from a business perspective using “market rate ” as the loss pays more on write off than the “mom + pop” rate with rented store in rent would pay. Are u saying that’s not true?

      • Woody says:

        You should have stopped after “I am not an accountant”. It’s been demonstrated many times that there is no such thing as a write-off for vacant space beyond depreciation which happens no matter what.

    20. Barb says:

      Great question! I wonder if we are really seeing that people and businesses slowly move away and don’t see NYC as profitable? NYC had a deficit of 2.8billion in March, NY I think had 2 billion. Yesterday I read a scary study that 44% of New Yorkers want to move away in the next 5 years. I just hope this empty storefront thing is not a sign of a bigger problem this city might have.

      • Woody says:

        Of course it’s a problem for high-taxed states when federal deductions for state & local taxes is severely reduced. People and businesses flee to more hospitable tax environments.

    21. NYWoman says:

      The absorbency rate for commercial retail on the UWS is low: there’s more space available than what’s needed. So why do landlords ask for high noncompetitive rates UNLESS there’s a financial benefit? re: Passive Loss Deductions There is a “complete exemption from the rules–that is, landlords who qualify as real estate professionals may deduct ANY amount of losses from their other non-passive income.” Property owners WROTE the tax laws. Please tell me I’m wrong, but seriously, if you were losing money year after year as an investor, it would make no sense.
      https://www.nolo.com/legal-encyclopedia/can-you-deduct-your-rental-losses.html

    22. drg says:

      This is not rocket science.

      The reason there are so many vacant UWS storefronts is quite simple:
      A concerted effort to drive UWSiders and posters on West Side Rag completely bonkers

    23. Jill Schreier says:

      NO

    24. WS says:

      RE professional here with decades of experience on the UWS with stores.
      The reason there are more vacancies now is mostly due to Amazon and other online shopping. Just take a look at your lobby. Vacancy fluctuates just like the stock market or any other trend and right now it’s high as landlords, merchants and shoppers adjust. There just aren’t enough people who want to open stores at the moment. No need to panic on a macro basis. It will even out.
      To clear up three other common misconceptions:
      1st: Landlords and brokers don’t set rents. They can ask for whatever they want, but TENANTS SET RENTS by signing leases, and none are forced to.
      2nd: Rents are always going up. No. They have been falling fast for about 3 years now and are back to late 90’s levels on the UWS, unadjusted for inflation.
      3rd: Landlords make easy money. Hardly. A look that the history of almost every older building on the UWS reveals it has been lost in a bank foreclosure at least two times. Being a shopkeeper is hard, but so is being a landlord.

    25. rs says:

      This answer is incomplete and disingenuous. Many of the empty properties are not owned by individual landlords but REIT’s. In an REIT that holds many properties the lost income is a relatively small percentage of overall income and the lost income from empty properties is charged against profits from other properties, thereby reducing the overall tax bill.

      • Sherman says:

        What you are writing makes zero sense.

        It makes no difference if the landlord is a REIT or an individual or a Martian.

        There is zero chance a landlord somehow comes out financially ahead by writing off lost income against profitable locations in a real estate portfolio.

        There is not a landlord in the city – or the country for that matter – who is deliberately keeping property empty in order to get some kind of financial windfall from tax benefits.

        • EricaC says:

          Actually, there is some truth to this. Tax losses can be valuable to shelter profits. It is an old game and rampant in the real estate industry. People who know the tax code can be very creative.

    26. Tom says:

      Maybe politicians can stop approving new high rises with massive amounts of retail on ground level/basement. (Unless have long term lease IN HAND))

      • B.B. says:

        Ground floor retail occurs via zoning. If proposed building must include retail as part of the zone, that is what must go in said space. A developer just cannot decide to replace ground floor retail with say residential. They can ask city for a variance but that opens up a huge can of worms and problems.

    27. Rak says:

      As I understand it, if a property sits vacant, there is no impact to the landlord as long as they don’t depend cashflow from rental income to pay the mortgage. Also, they probably own a few buildings so if one property loses, it can be written off as a loss against the others that do gain to reduce tax burden.

      As for vacant storefronts as it relates to continued closures, here’s my humble opinion. I’ve operated a few retail establishments so speaking from what I’ve observed:

      Many of the leases (if not all) in the city are structured as triple-net (NNN). This allows a landlord to pass through certain expenses to the tenant such as property taxes, CAM, insurance etc. Despite the tenant not being an equity holder in the building, the business becomes responsible for a proportionate share of the property tax increases which can almost be the same amount as rent – as the lease ages. It puts a huge burden on small businesses and perhaps causes some to close as they can’t handle the total cost.

      The other tough part for the business is they pour a ton of money into rebuilding the space which effectively increases the property value of the building. Well, when that happens and the landlord has had time to pay off some of the principal of the loan, they can refinance the property and make a ton more money. However, when they do refinance, that benefit is not shared with any of the renters.

      If the city would not allow or cap pass-through expenses to the tenant, that would help businesses. In addition, figure out a solution for some shared benefit when a building owner refinances the property.

      • Woody says:

        I find it hard to believe that as a business person, you espouse such views of how the system should work. What you’re advocating is ludicrous and places all the downside risks on the landlord and nothing on the tenant. Taxes go up, landlord pays. Tenant closes, landlord loses rental income. Landlord refinances, tenant shares his money.

        I also don’t understand this wacky notion about landlords benefiting from tenants making improvements. Landlords deliver empty space and expect it to be returned empty at the end of the lease so they can lease to another tenant who will improve based on their specific needs.

        • Rak says:

          Instead of trolling comments, why don’t you propose a solution?

          What’s the issue with capping property taxes for a tenant? I’ve leased a 500 sq/ft place in the west village. In Year 1, I was paying $1,200/yr in property taxes. In Year 6 of my lease, I was paying $36K / year in property taxes on top of rent. If that landlord was responsible for the taxes, what is their downside as an equity holder in the building relative to a retail operation bearing that cost?

          You also seem to believe that a space is always left in the same condition from when it was first leased. When vacated, can no incremental value can be placed on the unit based on improvements, who previous tenant was or surrounding tenants? If so, shouldn’t the rent remain the same based on its condition? No, if rent increases so does cashflow. If cashflow increases, so does value. If value increases so does property taxes upon assessment. And if value increases, why wouldn’t landlord refinance? That’s how money is made in real estate. Rental income is nominal profit for most landlords. They make money by trading the property on a multiple. If they refinance, what the issue with a portion of it providing an abatement or tax break for the tenants? I’m obviously advocating for small business here…propose a solution if you have one.

          • Bruce E. Bernstein says:

            @Rak,

            you quote year 1 property taxes on your 500sf space as $1,200 per year. By year 6, they were 36,000 / yr.

            i don’t mean to call what you say into question, but this doesn’t seem possible. the property taxes increased in 5 years by 3,000%?!?!?

            even a 50% increase in 5 years would have been very large.

            • Rak says:

              @Bruce,

              Fair to question as its been quite shocking to me. Here’s the breakdown: Given the NNN lease, we are responsible for a proportionate share of the property taxes over the base year from which the lease was signed. The proportionate share was 7.5%. In our base year, the property tax on the building was $511K and at Y6 came in at $979K. That’s an increase of $468K over that period. 7.5% of that is $35.1K which is what we had to pay. The largest increase happened during the Bloomberg era where the tax rate the city imposed was around 13.1%. Since, it has dropped to about 12.7% but is still high.

              Talk to any small business owner, they will likely share the same grief. Nevertheless, it is a significant cost and does have an impact on running a business.

              There are certainly solutions so I hope some progress can be made.

            • Woody says:

              You’ve misstated and exaggerated the magnitude of your increase in real estate tax payments.

              Your tax bill the first year wasn’t $1,200 but $38,325. In the 6th year, it was $73,425. The increase of $35,100 represents compounded annual increases of 11%.

          • Woody says:

            Your approval isn’t needed to make whatever types of comments suit me. I also don’t need to propose solutions in order to make comments. If you had a thicker skin, you wouldn’t be so offended when someone points out that your comments are ludicrous.

    28. Caitlin says:

      Carol, the following is the best and most plausible explanation I’ve seen. It comes from Wayne Conti, bookstore owner in the Village (by way of the excellent series of mini documentaries by Disappearing NYC) who explains that once landlords increase the theoretical value of their commercial properties, they can siphon out the equity via loans that they then invest in acquiring other properties. Akin to a pyramind scheme but completely legitimized by our banking and real estate industries which value leverage above all else, the “free money” is laying waste to small business commerce in the city. It would be great if you would dig into this and write up a piece that demonstrates the seriousness of this particular “tool” that is eviscerating our avenues commercial well-being. It is of course compounded by internet e-tailing and other factors. But I don’t understand why no one is talking about the leverage ploy that seems to be triggering so much of this crisis.
      https://www.facebook.com/DisappearingNYC/videos/vb.2165954380304402/396486050928610/?type=2&theater

      • Jay says:

        This is a “plausible” explaination for those who are just looking to confirm their own incorrect assumptions.

        Nothing in that post is fact-based.

    29. Juan says:

      As a rational person (with an degree in economics), if I saw that the lease of my tenant ends in 6 months or a year, I would start looking for a new tenant. I would also look around the neighborhood and note all of the competing empty space.

      As it gets closer to the end of the lease, if I seem to be having no success finding a new tenant, I would work with the existing tenant to keep them around, even if it is just a year-to-year lease, because one would think that some income is greater than no income. I have no idea why it does not play out this way.

    30. Lucas says:

      If you own multiple properties or have multiple sources of income, then an empty property that is likely creating losses / expenses could be used as a tax deduction / write-off. Similar to when you buy a stock and you sell it for a loss.

      Many real estate investors / owners have used their real estate assets as collateral for loans. They have borrowed against the value of their real estate assets. This means that they want the value of their assets to be as high as it can be. The largest driver of the value of these real estate assets is the rental income they provide. As such, the landords / real estate investors try and show the lenders as high of a rental income as possible. Lenders do not seem to check whether that is indeed the case, often lending on what the real estate owner claims to be the rental income. So if they had a tenant that paid $10,000 a month and then left, the real estate investor may want to keep that now “imaginary” $10,000 a month rental income and keep the store empty rather than rent it out to a new tenant at a hypothetical $7,500 a month and have the lender call the loan or ask for more money as collateral.

      There is NO way there would be this many empty storefronts if it was as simple as making $0 or making $10,000 a month.

    31. Sid says:

      You asked a single landlord this question, and took their word for it? Cmon…

    32. BeBest says:

      This is an intersectional issue that extends beyond greedy landlord (although I would argue they are the biggest problem). there is also the issue of big corporations vs. mom and pop and the expense of starting a small business, especially when potential business owners have so much of their income tied up in exorbitant rent for their living spaces.

    33. IH says:

      That last clause seems important:

      “The landlord can petition for a reduction in real estate taxes because of an alleged diminution in the value of the property due to loss of commercial rental income, however this will not offset the economic loss suffered as a result of vacant space.”

      Presumably this is public information, but requires followup. How many such petitions have been filed (and how does that compare over time)? What percentage of the real estate tax has been forgiven in the average such case on, say, Broadway?

      The “however” clause is misleading as it balances opportunity cost (income not earned) with actual cash savings (taxes not paid).

    34. Carol says:

      “The landlord can petition for a reduction in real estate taxes because of an alleged diminution in the value of the property due to loss of commercial rental income, however this will not offset the economic loss suffered as a result of vacant space.”

      And there is the loophole! Lower taxes while waiting for higher renters.

      • MJ says:

        Yes, I think you are right. If they were really losing money, they would rent it out. I’ve heard from a small business owner on the UWS that these landlords “sell their tax credits”. Does anyone know what this means? I admittedly, don’t.

        I think these landlords would rather it sit empty and wait for a national chain to pay the price they want. Clearly the price is higher than it’s valued at or it would fill quickly. Look at Casear’s Pizza. That owner was driven out by high rents. But years later, no one is paying what the landlord was asking for. If the landlord was losing money, he’s get someone in there to at least get some income, no?

      • EricaC says:

        Yes – but they still have to pay those lower taxes while waiting for income. Lower taxes does not mean profit, it just means smaller loss.

    35. Schmuel says:

      Not sure if someone else provided the real answer as there are too many to read. there is a real answer though and I am glad I do not use any of these ‘CPA’s’ answering here to do my taxes. the answer harks to one of the reasons Trump will not release his tax returns. Many of these Landlords are just plain wealthy. At the end of the tax year they are looking for losses on their balance sheet to lower their tax liability. Cash flow during the year may be set back by the existence of these vacant stores but cash flow does not seem to be a problem. Some end up paying no taxes as a result of losses, losses that are self inflicted.

      • Sherman says:

        Your rants make absolutely no sense but go on believing this nonsense if it makes you happy.

    36. Christian says:

      Thank you very much for being so responsive, WSR!

    37. nycityny says:

      For those who surmise that there is a magical tax deduction that makes vacant properties profitable – what you’re saying is that less rental revenue is better than more, with zero being optimal. Then why would landlords want to increase rental income if earning less provides a tax advantage? Why kick out a low-paying tenant in search of a higher paying tenant if that eats into your magical tax deduction?

      Of course there is no logic to this kind of thinking. Earning more revenue is better than earning less, even though it leads to higher income taxes. Earning $100K/year from an employer is better than earning $50K/year even though the former amount puts you in a higher tax bracket. I mean, is the goal to have the lowest tax liability or the highest net income?

      It’s all just math. More money in your pocket is better than less.

    38. EricaC says:

      I think he left out a discussion of the treatment of the expenses involved in maintaining the space.

    39. slodier says:

      Commercial (and residential!) RE taxes go through the roof – landlords have to raise rents to pay taxes – minimal wage $15/hour – small business can’t afford either = empty storefronts. RE taxes had become the main (!) cash cow for the city and that starts the vicious circle. So for the proponents of the “empty storefront tax”: do you wish to punish businesses too, for not renting a space you want them to rent?
      Maybe you should spend your energy on electing officials who understand economy and not just mooch others’ money by raising taxes to the point of destruction.

      • Bruce E. Bernstein says:

        landlords to not have to raise rent to pay real estate property taxes. As has been note many times by commenters on WSR and also noted above, property taxe increases during the life of a lease are passed through to tenants in standard nYC commercial leases.

        • renter says:

          Bruce you are 100% correct but it is an obscene amount of money for businesses to shoulder on top of rent payments. Whether you want to call it rent or CAM/RE Tax reimbursements, its all the cost of doing business as a tenant so RE Taxes DO have a lot to do with it.

          • Bruce E. Bernstein says:

            @renter, do you have a current retail lease on the UWS? if so, what percentage of the retail lease are the property tax payments? I am very curious.

            I had commercial leases in the 1990s and 2000s (Flatiron, Lower Manhattan) and the property taxes were not a substantial portion of the lease. By my recollection, less than 10%, maybe less than 5%. not the 33% quoted in the hypothetical example above.

            but maybe things have changed.

            In any case, the one of the biggest reasons for closing small stores with retail commercial leases on the UWS are the huge increases asked for by the landlords when the leases expire. these have NOTHING to do with property taxes, as any property tax increase was already reflected in the previous lease.

            businesses closing because of huge rent increases requested by landlords are frequently documented by WSR and other media sites. In some cases, the space then lies vacant for many years.

      • EricaC says:

        Your comments suggest that you support the recent tax reform law, which was premises in large part in the notion that if you reduce tax rates, people will spend more, thereby greasing the wheels of the economy and ultimately resulting in higher revenues through increase economic activity.

        If that theory is plausible, why do you find it implausible that raising the minimum wage would result in higher retail spending, thereby greasing the wheels of the economy and ultimately resulting in higher revenues through increase economic activity?

      • EricaC says:

        Oh – also, apparently it worked in DC. Or so statistics would suggest.

    40. SY says:

      Are there any business incentives for small businesses to open a store in the UWS?

    41. cashisking says:

      It’s all about cash flow at the end of the day. If a building owner is sitting on a vacant unit for years it tells you one thing, they do not NEED to rent it. The cash flow that the rest of the occupied units are generating is adequate to meet the owners financial goals. Any incremental income is obviously immaterial so there is no benefit to lowering the rent just to get a tenant. Also tinkering with rents affects the valuation of the building as values are based on projected cash flows. So again there is no benefit to lowering the rent and decreasing building value when the current value already reflects the vacant units! In addition building owners aren’t in the charity game just to appease the neighborhood. Cash flow is your answer. I work in commercial real estate so I happen to know what my bosses investment motivations happen to be. ANY investor will tell you the same. Cash is king.

      • Bruce E. Bernstein says:

        @CashisKing:

        Your argument is actually one of the few that makes sense: a lower lease lowers the VALUATION of the building; a higher price on an empty space increases the valuation.

        in other words, it’s not about the profit / loss statement but the balance sheet.

        i would like to point out to you that this is the OPPOSITE of “cash is king.” Even if the landlord rents it out at a lower rate, the landlord is getting more cash.

        What you are saying is the landlord DOES NOT NEED the extra cashflow. The landlord PREFERS to have a higher asset on his/her balance sheet, which benefits him in a number of ways: greater borrowing power (future leverage) and perhaps a greater sales price.

        • Woody says:

          It isn’t accurate that a higher ASKING price on VACANT space increases a property’s valuation. The valuation is based not on what a landlord ASKS for but what he actually RECEIVES. But a lower ACTUAL rent does decrease a property’s valuation. Lenders and appraisers don’t value a property based on just what a property owner tells them he wants to rent the space for.

          • Bruce E. Bernstein says:

            @Woody,

            I be ver said anything about valuations based on ASKING rents.

            There have been several comments on this thread that have made the point about how an empty storefront can actually increase the valuation of the building. See @christene e above and @ben, who works in real estate banking, below. They say that valuations are based on MARKET PRICE including “comparable.” Thus it is in the interests of all the landlords not to allOw rent to fall, to keep the comparable very high.

            In this market, actual retail prices should be falling rapidly. The landlords apparently are keeping retail prices artificially high, even to he extent of allowing many spaces to stay vacant.

            • Woody says:

              This is what you wrote: “a lower lease lowers the VALUATION of the building; a higher price on an empty space increases the valuation.”

              If the space is empty, then the market price you’re referring to for valuation is an ASKING price.

          • cashisking says:

            @ Woody : Sorry, but you are incorrect. Valuations are indeed based on rental rates associated with existing leases but there are also a series of leasing assumptions that significantly drive the valuation. Appraisers do in fact value a building based on a great deal of speculation associated with vacant units, rental rates, lease expirations and renewal %’s, and the holding period of an asset, all of which constitute an actual AND projected cash flow that results in a building value.

      • EricaC says:

        Out of curiosity – since you actually have a basis for answering. If you raised the cost of vacancy (by raising property taxes on properties kept vacant for more than X years or disallowing deduction of expenses on properties kept vacant for X years), would that shift the incentives at all?

        • cashisking says:

          @EricaC No it would not as operating costs and taxes are passed through to the tenant in most leases. Any additional taxes only add more burden to struggling tenants. This is why landlords laugh at a vacancy tax.

      • Sherman says:

        Your analysis makes no sense.

        If “cash is king” then how would a landlord come out ahead by foregoing rental income?

        Please explain how a building owner can increase his cash flow by not having rental income.

        There are numerous reasons why a landlord has empty space. The landlord might have trouble renting the space for the price he wants and he might feel it’s worth foregoing a few months or even years of rental income rather than locking in a tenant for many years who will pay a subpar rent.

        There is not a landlord in NYC who is deliberately foregoing rental income in order to somehow increase cash flow or his building’s valuation or to get a tax windfall.

        This is a bit like chopping off your leg in order to lose weight.

        • cashisking says:

          @ Sherman: What I said was that any incremental cash flow from leasing a vacant unit is not deemed material enough as the existing cash flow from rented units was already meeting the investor’s financial goals. In other words, leasing the vacant unit at ANY rate (market or less) is considered “gravy” so why not just wait until you find the tenant willing to pay the asking rent to make that “gravy” taste even richer.

    42. Jeffrey says:

      Why would landlords rather get no rent than a lower rent?

    43. Bruce E. Bernstein says:

      I want to make two points about the comments above.

      1) the argument that “retail stores can’t succeed because of the Internet” is provably false. there are thriving commercial strips all throughout the outer boroughs. the Internet and Amazon exist in Queens and Brooklyn, the last i looked.

      Yes, the Internet affects demand for “real life” store-bought products, in some cases. But that means that retail tenants can pay less, so there is less demand for retail space — so rents come down! and in such a market, you would keep the good tenant you have without asking for an increase on expiration of the lease.

      And yet we see landlords in Manhattan again and again asking for large rent increases. if retail rents have come down, they obviously have not come down ENOUGH on the UWS.

      This is what is known as a “market failure.”

      2) Two commenters above identified very plausible economic reasons for the empty storefronts. they basically made the same argument, in different ways. And i have read similar analyses before.

      @Christine E said:

      “…landlords who want to borrow money, collateralized by their building, can improve property value by having empty storefronts, which will be appraised at “market” value, versus having occupied storefronts, if those current commercial leases are below market value. Bank appraisers will use actual cash flows, in the case of active leases, and estimated cash flows, in the case of vacant spaces. In the case where the owner/appraiser can find comparables… the property will be “worth more” vacant.

      “It makes the most sense in cases where a landlord owns many properties, and can keep borrowing in rotation to pay off older loans with new ones… ”

      @Cashisking said:

      “… tinkering with rents affects the valuation of the building as values are based on projected cash flows. So again there is no benefit to lowering the rent and decreasing building value when the current value already reflects the vacant units!”

      thus, it is not about the tax on OPERATIONS, or the profit from operations. it is about the balance sheet of the real estate property owner, and how that larger balance sheet, reflecting LOWER operating income, benefits the landlord.

      Shouldn’t we recognize this from following trump’s real estate shenanigans? Look at all the games he played to raise the paper valuations of his properties. this produced no extra cash flow from those properties, but it allowed him to borrow more for other projects.

      The real estate business is about location, but it is also about “leverage”: how much one can borrow against assets. if the assets can be made to look greater, the borrowed cash increases.

    44. B.B. says:

      Again, you cannot discuss retail without speaking to the seismic changes brought about by online.

      Physical retail is no longer just in competition with the guy across or down the street, but someone perhaps hundreds of miles away. More to the point that business lacking a physical retail plant off the bat has lower costs (certainly when compared to NYC), so they can charge less. Things only got worse when online began offering free shipping and or returns.

      Most of those whinging about the supposedly high retail vacancy rates in NYC (and that includes politicians), just don’t have a clue how expensive it is to operate a brick store or whatever in this city.

      Utilities, sewer, labor, a vast and bewildering array of taxes, surcharges, fees, assessments, license requirements, and so forth make New York (state and city) one of the least business friendly places in the country.

      Many business owners large and small simply are realizing they are far better off without a physical location, going with all or mostly online instead.

      Remember how you would see RE brokerage offices all over the place? Well you don’t as much anymore do you? Well large segments of residential and commercial real estate sales and leasing has moved online.

      As the last of Boomers and their elders head to the Grand Sleep; things are only going to get worse for physical retail.

      Millennials, and the generations after them are totally plugged into “online”. For the youngest it is really all they know. That is going to have (and is having already) a huge effect on all sorts of retail, hospitality and other sectors.

      Controlling commercial rents isn’t going to solve things much either. Unless there is demand smart retailers wont touch a physical space unless rents are at near give away prices. Again they just often can stay with online and make their money.

    45. Bruce E. Bernstein says:

      thanks to WSR and Carol Tannenhauser for this fact-based new feature! Good job.

      I think if people are interested in this issue, and in getting to the bottom of the vacant storefront problem, you could do a lot worse than attend Boro Pres Gale Brewer’s presentation on Thursday night 3/28 at Community Free Deomcratics (CFD). Gale and her office are outstanding on analysis and policy recommendations on issues like these. Here is the blurb from another WSR entry (get there early, i expect a crowd):

      “On Thursday March 28 at 7:30 p.m., the Community Free Democrats will be hosting a meeting focused on the problem of vacant storefronts on the Upper West Side with the Upper West Side Save Our Stores group. Manhattan Borough President Gale Brewer will be the featured speaker. The meeting is at Goddard Riverside, 593 Columbus Avenue (88th Street).”

      • UWS says:

        Gale contributed to this problem with her zoning change limiting storefront size and her current approach seems to ignore economic realities. She plays into the politically expediency of blaming greedy landlords without looking for a real solution.

    46. B.B. says:

      Another thing:

      Many retail places are closing because owners are either (sadly) dying off, and or simply just want to retire.

      The wave of Baby Boomers isn’t just confined to offices or whatever, but plenty of retail is or was owned by those of that generation (and or their parent) and they are now reaching a stage in their lives when they’ve had enough. The common reason given is “we just want to do other things….”.

      Todaro Bros in mid-town east is closing for just that (stated) reason.

      http://evgrieve.com/2019/03/todaro-bros-is-closing-april-2-ending.html

    47. B.B. says:

      People you want to know why “so many empty storefronts?

      Just walk down any street on recycling collection day and you’ll have your answer. Mountains of shipping boxes all placed out for garbage collection.

      Enter lobby of your building any time of day and well into the night and you’ll find packages galore.

      You can’t walk the streets for not being hit by a some delivery guy on a bike (foot or motor powered) delivering food or whatever.

      *That* is why retail is dying my friends. Everyone has come to love the convenience and or just become too lazy, busy or whatever of having things delivered.

      People can pester elected officials all they want; and that body can propose or even enact all sorts of laws. However the genie is already out of the bottle.

    48. UWS Pedestrian says:

      Does the Parks Department plan to create a separate inland path for cyclists to avoid accidents due to both pedestrians and cyclists using the Riverside Park esplanade?

    49. UWSLIFER says:

      Firstly, as many others have mentioned, thank you WSR for having the presence of mind to make this answer column. Secondly, how on earth is asking a single individual who clearly has interests in the industry even close to an adequate exposition of the issue?

      Lastly – and I would love for someoneone with greater knowledge than myself on this issue to correct me if I am wrong – but one glaring loophole is that landlords can claim different valuations to different entities. For example, to their bank or other lender, a landlord can claim that a vacant property is worth the “market rate” once rented, thereby securing larger loans and inflating the value of their assets, all while claiming to the government a diminution of value, the opposite of what was claimed to the bank, so as to pay less propert taxes while the storefront sits empty.

      Even without a much needed vacancy tax, one solution seems quite simple—property should be valued once and for all by an arbitrator and this same value should be used by both the bank and the government to determine asset values, loans, and property taxes. No more artificial depreciation for taxes and artificial appreciation for loans. Interested to hear if this seems obvious and reasonable to anyone else.

    50. Ben says:

      I work in Real Estate banking and I’ve thought a lot about this…

      I think that there are so many vacant storefronts in our neighborhood because the rent is too high. There is a shift in the retail climate to online shopping AND physical competing retail options have emerged in NYC to include Hudson Yards, the financial district, Brooklyn and Long Island City (etc.).

      Retail rents need to come down, however, landlords do not want to do that because if they lower the rent for one person, they have to lower the rent for others. Additionally, I imagine that there are political pressures from other business owners/brokers (who get paid overtime if the tenant stays) because lowering the rents would cause all sorts of issues and loss. But, I do think it is happening.

      From a Real Estate Banking perspective, there is a loophole for the business owner. If the business owner takes out a loan on the property, and there is a vacant storefront, “market rent” gets applied for the vacant space. Therefore, the value of the property generally reflects a fully leased property. The bank will then lend on this number and the property owner can extract a lot of cash (generally up to 70%). Considering retail rents exceed residential rents, this inflates the property value without considering the risk associated with leasing the space. The owner gets his/her money and the risk is shifted to the bank in the event of default.

      In this fashion, the owner IS realizing an advantage for the vacant space:

      – Keeping the rents high keeps other tenants from abandoning their lease agreements or demanding lower numbers

      – Politically, other powerful business owners like this because if one person lowers rent dramatically it can have a catastrophic effect

      – the owner can still borrow on the property “as if” the retail space was leased at market levels. Therefore, financially, it doesn’t affect the owner in the short or mid-term.

      Hope that is helpful.

      • Woody says:

        I would challenge your rationale that an owner realizes an advantage for the vacant space because “market rent” gets applied for the vacant space. You also said that the value of the property generally reflects a fully leased property.

        Real estate lenders are much more sophisticated than what you make them out to be and not easily bamboozled by owners. They know the market better than the owners and will not ascribe an unrealistically high market rent to future cash flows just because the owner gives them that number. They know where the real market rate level is especially when there is a high vacancy rate.

        • EricaC says:

          Why do you think real estate lenders are so sophisticated? The financial crisis makes it pretty plain that they weren’t ten/fifteen years ago . . . .

        • Ben says:

          @ Woody,

          I work in this industry and applying market rent is exactly what happens. In fact, it’s currently the standard market practice and it inflates the property value.

          To speak to your point, after the inflated value is determined (by projecting market rent and then dividing this figure by a capitalization rate), a lump sum figure of say 6-9 months rent is deducted from total value to account for “rent loss” associated with the lease-up vacancy. The deduction is so nominal that it seldom affects the overall property value after rounding. It is an honest practice when things are actually being leased in 6-9 months. But, it is a sophisticated loophole when the owners are keeping spaces vacant into perpetuity.

          Keep in mind that the bank WANTS to originate the loan because this is how they make money.

          Banking is competitive. If one bank is willing to loan more on a property than another, the client (or borrower) will take the loan from the bank that is willing to lend more. Therefore, the banks actually promote this behavior because it keeps them in business…with more clients (borrowers). This holds true up until a large crash.

          There are some smaller banks that have become tighter in their lending practices but this is the exception right now, not the rule. I think it is contributing to the vacant storefronts.

      • Bruce E. Bernstein says:

        @ben,

        Very clearly explained. Thank you.

        I think you’ve hit the nail on the head, or close to it. And it’s a classic “market failure”.

    51. Sara says:

      Let’s also not exaggerate the issue: we have a lot of amazing retail and restaurants on the UWS. There are certainly neighborhoods in the city with much less retail.