Why NYC Rent Is So High (It’s *Not* Airbnb)

eastvillageRecently, Airbnb has received a lot of heat from New York City and State officials, who have accused the company of driving up rents for residents by reducing the available housing supply.  The state legislature has gone so far as to pass a bill levying fines of up to $7,500 against Airbnb users for listing their apartments “illegally” (as in, against a law pushed by the hotel lobby that prevents New Yorkers from renting out their own apartments); the bill sits on the governor’s desk awaiting his decision.

What legislators aren’t discussing is that one of the key reasons behind the high rents in Manhattan has nothing to do with supply and demand, but is government-imposed.  As someone who has lived in and around NYC for much of his life, I’m well aware that taxes are high, but when my landlord raised my rent citing his increased property taxes, I did some digging and found that my landlord wasn’t bluffing: I was astounded at how high they actually are.

In Miami Beach, you can expect to pay 1.39% of your condo’s value every year.  In San Francisco, it’s 1.18% for your house on the hill.  If you like the thrill of gunshots on your way to work, Chicago’s tax rate is 1.86%.

But in New York City, you owe the city between 10.6% and 20.0% of your property’s assessed value, every year. For apartment buildings with more than 3 units, the rate is 12.9%.

Let’s put this in perspective.  In the very residential and fairly affordable (for Manhattan) East Village, a pre-war, 5-story, apartment building with 15 1-bedroom units and a storefront may have a market value of about $5M.  “Assessed values” tend to be are lower than actual market values (both in NYC and most other cities), so you might end up with an assessed value of half the actual value, or $2.5M 45% of actual value, or $2.25M.  That building would likely be subject to the Class 2 tax rate of 12.9%, meaning $290,250 in taxes every year.  A typical apartment in these buildings may be $2,500 monthly, and a typical storefront may be $10,000 monthly, making annual rent revenue $570,000.  In this scenario, 51.0% of your rent money goes to the city in taxes, and that’s in addition to the NYC income tax of up to 3.876%, NYS income tax of up to 8.82%, sales tax on everything you buy of 8.875%, and other hidden taxes like the MTA tax on every taxi ride you take.

But, of course, it gets better.  Brand new buildings — which, these days, are almost exclusively luxury towers — get tax abatements, reducing the tax bill for the rich on their homes to pennies on the dollar.  So, while $1,275 of your $2,500 rent bill for a modest 1 BR in the East Village goes to Uncle deBlasio, the multi-million dollar condo owner a few blocks down may be paying only a few hundred dollars per month.

So, we can blame Airbnb for shitty neighbors throwing parties, but let’s not blame Airbnb for our rent bills: when more than half of my rent goes into the city’s coffers — at least if you’re middle class — I think we know where the problem lies.

[Edit: Numbers updated thanks to insight from /u/Tervia regarding the assessed value.]

[Edit 2: Want to look up your building’s taxes?  You’ll need to find a document that lists your building’s “Actual AV” and then multiply it by the tax rate for your building’s class (if you live in a building with more than 3 units, it’s 12.9%).

6 thoughts on “Why NYC Rent Is So High (It’s *Not* Airbnb)

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  1. “I think we know where the problem lies.”

    Unfortunately, I can’t tell from your post. Are you saying that the problem is two-tiered tax system where very expensive apartments get a lower tax rate? Or, is the problem that apartments are taxed at all? In either case, why mention airbnb?

    Both the tenant and the landlord pay the tax. If the tax went to 0 then your $2,500 rent would go down, but it would not go down to $2,500 – $1,275 = $1,225. It’s more likely to go down by about $600 or so. The tax lowers both supply and demand.

    Converting apartments to short-term rentals lowers the supply of apartments, but it does not affect the demand for apartments. All other things being equal, lowering supply will increase rent payments.

    I don’t understand your conflation of airbnb conversions with tax policy. They both independently affect the amount of rent you pay as a tenant.

    1. The problem lies in the property tax burden on the middle class generally. There are several things that need to happen to make this better: 1) the difference between “Class 1” and “Class 2” effective tax rates needs to be reduced, 2) tax abatements for the rich need to end, and 3) not mentioned, but the rent stabilization/control system needs to be re-thought. As a fourth, the city’s spending in general needs to be reigned in.

      Airbnb is mentioned because legislators are blaming high rents on the company, accusing it of drying up the limited supply. I don’t believe this is the primary reason — or even close to it — that our rents are inflated.

  2. The link for the property taxes is interesting, but for my building it seems to show that taxes cost about 10% of the total rental fees, perhaps less (I’ve been here for a while and others are I think paying more).

    Perhaps it’s that I’m in Williamsburg and this is an old building…

  3. Hi, I have several comments.

    While you may like Airbnb and I may like Airbnb, its absolutely ludicrous to suggest that the activity of Airbnb does not have an impact on supply and thus rents.

    Its great when citizens take the initiative and dig in but the facts as you present them are clearly incorrect.

    First, taxes due are calculated as assessed value * equalizer * tax rate. The equalizer should, in theory, bridge the gap between implied market value and actual sale prices via periodic sales ratio studies. Eliding the equalizer from the calculation render results erroneous.

    Secondly, the claim that Chicago has an effective tax rate of 1.86% is absolutely incorrect. Here are the nominal and equalized rates averaged for all taxing districts in Chicago (sorry too lazy to format):

    | year | nominal | equalized |
    | 2006 | 5.36% | 14.51% |
    | 2007 | 5.05% | 14.37%|
    | 2008 | 4.87% | 14.52% |
    | 2009 | 4.69% | 15.81% |
    | 2010 | 5.00% | 16.50% |
    | 2011 | 5.53% | 16.45% |
    | 2012 | 6.47% | 18.15% |
    | 2013 | 6.97% | 18.55% |
    | 2014 | 6.95% | 18.95% |
    | 2015 | 7.01% | 18.72% |

    Third, attempting to compare taxes as a unit of rental revenue is inappropriate from both a taxation and valuation perspective. Even net income is not an appropriate divisor. The established method is to capitalize net income into an indication of value. You can add the tax rate to yield a loaded rate when capitalizing. Regardless, the relationship between the indicated value and tax dollars is the only appropriate unit of comparison. Even better is to compare taxes per square foot for similar properties, its not necessarily relevant how well the property is managed or how greedy the landlord may be.

    Fourth, the relationship between assessed value and actual market value is tenuous at best. The assessed values are how the tax load is distributed across the district, any relationship to actual prices paid is usually sketchy at best, all legislative jazz aside. Abatements in NY may be unjust.

    Fifth, its not uncommon for real estate taxes to be the single biggest, non debt service, line item for real property. Again, those tax dollars are going to infrastructure and services in the tax district in which the property is extant. Yes, landlords pass on their expenses.

    Finally, and the really important part: the tax rate is due to what the tax agencies (schools, roads, pensions) request. Each tax agency submits a budget levy request. The total of all budget levies is divided by the total assessed value to yield the tax rate.

    If you want schools, bridges, cops and firefighters in Manhattan you need to pay for them (and their concomitant pensions).

    I have to also tack on something here: Even if your landlord got a 100% exemption – he is not going to lower your rent.

    I know its not as click inducing but the fact is that Manhattan has effective tax rates commensurate with other metro areas, lower than many, and the taxes are relatively high so that county services and schools can be paid for.

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