Real Estate Confidential

Friedenberg, Daniel M.

1 The most striking fact about New York in the last decade is the realty boom. Wherever one goes—in the heart of old Manhattan or the farther outskirts of the Bronx and Staten...

...Then Zeckendorf went to a mortgage company and borrowed $6,750,000 at 41/2...
...The labyrinthine mind of Mr...
...But only the very rich can afford to make such investments, for they require enormous outlays of cash, rarely can be mortgaged to a significant extent and usually show a carrying loss...
...Since the alternative for the tenant was to run his own electrical lines all the way down the building in order to tie-in with the main service, he was at the mercy of unscrupulous landlords...
...Except for the few remaining owners of integrity—or fools, according to one's terms—this has long since been discarded...
...Again not coincidentally, the survey indicated that New Yorkers lead the nation in total personal incomes...
...For a speculator to construct office space according to good standards, he would be forced to rent at a figure much higher than his competition...
...Since the average equity runs less than one-third of the building cost, it is not hard to see why so much money pours into New York construction today...
...The result is that he received an annual tax-free return of over 30%, his investment, in effect, being returned in three years through the depreciation alone, above and beside the profit from rent, and then sold at another high additional profit subject only to a tax of 25...
...The insurance company refused to sign the lease, though it kept on assuring the investment builder it would honor its commitment...
...The future of Park Avenue above Grand Central was clearly understood by most old-time investors, as is the future value of land in areas directly abutting the present midtown nexus...
...in a sense he thus bought the building with the building's own money...
...It is still possible to buy land located in proximity to Lincoln Square for about $35 a foot, which should certainly triple in value within the decade...
...Since the tenant would have to pay the same retail rate to Consolidated Edison Company, it did not hurt him, whereas the owner received the advantage of the larger or wholesale rate...
...By the time he sought financing the money market, in one of its perennial swings, had become very tight...
...Several years ago one of the City's most prominent builders decided to go ahead with this project...
...The purchase, sale, rent and general investigation of property is a category so large in its implications that almost any and every expense is legitimate...
...Furthermore, the depreciation on • The new Real Estate Investment Trust Act extends the syndicate method on an even vaster scope...
...Suppose a builder has completed a structure...
...An investment builder was going to build on an inside plot when it struck him that a large insurance company, occupying the adjacent corner building, was in need of additional space...
...A recent adaptation, the block base and tower, has become popular not because the builders underwent some weird conversion to artistic values, but rather because of the rising costs of roofing material and plumbing for the numerous setbacks...
...He found one such gentleman who was willing to give aid...
...The author of this article has participated in the postwar building frenzy from its inception...
...Since properties are judged according to their return to the investors, the effect has been quite simply to double values...
...As the first step, he will sell the Drake to a syndicate that will give him $½ million cash over a present $412 million mortgage...
...An adequate air-conditioning system should have zone controls for each face of the building and separate zone controls for the upper and lower parts...
...The variations by which speculators have achieved success with this method are as infinite as the cunning of the human mind...
...In one tragic case that recently occurred, an honest superintendent of a newly completed office building was fired by the management company because he tried to service the tenants according to decent standards...
...Men like the Uris Bros., Erwin Wolfson and the Tishmans have skyrocketed into multimillionaires within short years by realizing the unique advantages of leased land or what is called a leasehold...
...A tremendous apartment project, occupying a magnificent location in the center of Manhattan's East Side, has just been completed...
...for neither leafy elms nor elegant Park Avenue structures can withstand the path of progress as conceived by builders...
...He went to the owner of the structure and was berated by him because he did not work for the benefit of the building...
...and into his pocket as normal profit from rent collection...
...Suppose a realty outfit has made $100,000 after taxes...
...The engineer, rich in his own right, was a partner in one of the largest realty syndicates...
...Originally created to solve the problem of inflation on long-term leases, this clause has become a bonanza in the hands of ruthless landlords...
...Commenting on this metropolitan concentration over two decades ago, the well-known social critic Lewis Mumford referred to the new Trinity of finance, insurance and advertising...
...Clean" is a general word, meaning something to one party and another to the next...
...The fact that one large hotel or apartment suite stays vacant merely reflects the vagaries of renting...
...It is to the builder's interest, however, to convince tenants that huge floor areas are ideal because the larger the cube construction, the cheaper it is to build...
...FEE BUILDING—The classical method of construction is to buy the land outright, called the fee simple, and then build...
...The results are lamentable because it is impossible to clean properly at this speed...
...At the same time the money is fully liquid, since the stocks can be sold within twentyfour hours...
...The attraction of the syndicate is its tax position...
...And, what is extremely important in the spring and autumn seasons, where there are wide oscillations of temperature in the same day, the installation should be equipped with what is called "100% fresh air," or oversized entry ducts, that permit the air to be completely replaced by new fresh air in a short period of time...
...For a short time New Yorkers can look from the east side of Sixth Avenue and 52nd Street across a vacant plot, recently purchased by Uris Bros., toward a group formed by the RCA building, the Time-Life Building and the Equitable Life Building...
...The corporation is subject to double taxation, first on normal income and then on dividends...
...As the principal owner of Diesel Construction Company, the largest construction company in New York City, and the sponsor of Grand Central City, which will be the largest office structure in the world (now renamed Pan Am Building for its principal tenant), Erwin Wolfson presumably found this deduction of use...
...Recently the same plot was sold, after two additional turnovers, at over $100 a foot...
...But the tax authorities refuse to allow depreciation on land itself, following the sound theory that land cannot wear out...
...The technique is simple...
...The builder makes a profit "coming and going": from the government as accelerated tax-free depreciation...
...When this malpractice was revealed, the owners then changed their tactics...
...If the present movement continues, New York City will soon resemble a grotesquely enlarged medieval town, with each caste in its own quarter...
...And the process feeds on itself...
...A corollary of the 100% land usage and maximum setbacks is the application of glamor to the public parts of the structure...
...IV In trying to analyze the social consequences of the favorable treatment afforded to building, the first thought to strike even the most superficial observer is the resulting architectural mediocrity...
...Erwin Wolfson has a style: loft construction of the 1920s, built ten times larger...
...Nor is this all...
...Another popular aspect of real estate is its fat expense account allowance...
...To this one gimmick alone can be attributed the violent cycles and distortions of the American economy...
...And we are starting on the assumption that the landlord indicates the correct footage to begin with...
...The Goelet Estate acquired the blockfront on the south side of 42nd Street between Lexington and 3rd Avenues, on which the Galbreath interests erected the Socony Mobil Building...
...This new equity money enabled the job to proceed...
...In the case of a building containing 15 elevators and some 400,000 square feet, this contract would run about $37,500 annually...
...Then again, this same owner must see that his business is going on satisfactorily...
...The speculator with the original idea was left out in the cold, and it was not until several years later, when his structural engineer fired a draftsman, that the truth came out...
...This means that the tenant pays for 1,200 square feet additional on each floor...
...In effect, this means that the landlord receives between 7% and 12% more rent for the same space...
...In one case (the specific location and exact details shall remain nameless for obvious reasons), a speculator netted a cool million dollars in cash for six months of control...
...This is part of a vicious cycle, because builders feel compelled to erect new structures, knowing that even if they rent only with some degree of success, they can immediately sell at a profit...
...The return to the syndicate (it is reported in the trade) will be guaranteed at approximately 12%, with the rent being reduced in proportion to the reduction of the mortgage...
...The poor honest man was ignorant of the fact that the owner received a "piece" of the money made by cutting standards and charging extras...
...in one sense, the conniver is the embodiment of American Success...
...A recent survey of the National Bureau of Economic Research showed that since 1949—which not so coincidentally was the birth of the realty boom—there has been a trend toward more wealth in the hands of fewer people and that already by 1953 only 1.6 per cent of the country's population held 30 per cent of the nation's personal wealth...
...The public really admires its dream fulfillment in megalomania...
...A buyer, surprised at the low price, promptly appeared...
...And he has now begun to observe a repetition of the overbuilding of the 1920s in which, like fabled Midas whose touch turned everything to gold, the city will throttle itself...
...A large plot in a key part of Manhattan remained covered with rundown buildings for many years...
...ONE of THE BIGGEST extras in office maintenance is the cleaning contractor...
...Syndicates are permitted a single tax denied to corporations on the peculiar basis that no tax ruling has specifically called them to account...
...They did not want to get back the land...
...One of the newest ways to gouge tenants is known as "rent inclusion," referring to the including of electrical charges in the base rent...
...This is the method prevailing in many European countries...
...Permitting the construction of Pan Am Building—due north of Grand Central Station—which will dump 25,000 additional persons in the heart of midtown, is an act of municipa] madness...
...The Astor Estate, for example, anticipated the development of Park Avenue as a financial community and purchased several large plots between 46th and 59th Streets in the 1940s...
...By a sort of hypnosis unrelated to reality, many tenants have been convinced that tremendous floors are more amenable to modern office layout...
...A certain Mr...
...The Prudential Insurance Company, which had indicated an interest in providing mortgage money, obligingly bought the two buildings before they were completed and leased them back to the builders...
...It must bewilder the senses of the spectator, this awesome chopping down and regurgitation of concrete and steel...
...If the speculator can manage to build in his individual name or that of a partnership, the profits are again enhanced, since he can apply the depreciation against his own total income, which is usually taxed higher than the corporate level...
...the property, which is a tax-free item, goes to the corporation and not the stockholders when a property is held in corporate form, while it goes tax-free directly into the pockets of the individuals in a syndicate...
...But again, the question of "fair return" is relevant since most builders feel that a job is losing money if they do not "get their money out" in six or seven years, which means a 14% or 177 profit before taking advantage of the accelerated depreciation deduction...
...III Real estate is subject to other tricks beside tax juggling...
...It might be added that the speculators themselves are not solely at fault, since many aspects of the elevator and air-conditioning industries are virtual monopolies...
...When a potential tenant wants to see the latest show on Broadway or stay overnight at the best hotel or be provided with the consolations of a call girl, these are all reasonable accommodations to the problem of realty advancement...
...The first building to which he applied this technique was 2 Park Avenue...
...Several years ago, for example, a large financial institution was approached by a speculative builder who thought the institution might be interested in letting him develop a property which it owned...
...those on the inside of realty laugh at such petty antes...
...it is their representatives who control the legislatures and sit on the courts...
...Another common method of "thinning" taxes is by means of creating a management corporation distinct from ownership...
...Certain old estates still follow this approach: the Astors and Goelets are still with us...
...Its history is unusual...
...The Salmon Building, 500 Fifth Avenue, at the northwest corner of 42nd Street, was acquired, for example, by means of this technique...
...If it takes this money and reinvests it in another proposition, the profit is again subject to full tax at the 52% rate...
...By mass transit 40,000 persons can be transported on the same amount of roadway that will only carry 1600 persons in private cars: or 25 times as many...
...Wherever one goes—in the heart of old Manhattan or the farther outskirts of the Bronx and Staten Island—construction is seen...
...In a market like that of the last years, where stock values have shot up, this is particularly significant because a sale then would only be subject to capital gains or a total of 257 tax on the rise in value of the stocks...
...Public housing brings the lucky poor together, and high rents keep the unlucky poor segregated in ugly slums...
...X., to take an actual example, built an apartment house in the East 50s several years ago...
...The success of the campaign on the part of builders to convince tenants of the necessity to rent tremendous floors is one of the most striking phenomena of real estate today...
...He borrowed what seemed 65% of the money for the job from an insurance company, but in reality the mortgage represented over 80% of the cost...
...But this is not all...
...It would seem that nothing is spared in this massive demolition and rebuilding...
...Also, it is just as easy to build a large building as a small building, since the same number of trades are involved...
...The insensate march of Manhattan realty values reflects the disease of modern times, for in this city is collected all the bureaucratic and non-productive functions of the American economy...
...No matter what the builder did, he was unable to raise money...
...Since the prime rule of building is location first, last and always, the concentration becomes worse with each passing year...
...The Chase Manhattan Bank, which had sold him the plot, was concerned...
...This money he needed for the purchase...
...The system must have return ducts for the stale air, extended not only into the different zones but also into the areas subdivided by masonry or ceiling-high metal partitions...
...The Astors, Goelets, Rhinelanders and Schermerhorns profited by the tremendous expansion of New York City in the early part of the nineteenth century...
...Perhaps the most startling case of banditry in the history of New York City real estate occurred very recently...
...And the transport, meeting with clients at night clubs, restaurant bills, etc., are fairly regarded as legitimate business expenses...
...an old-time builder whose development of Washington Square North sparked the postwar boom in Greenwich Village, decided to erect a mammoth office building...
...And the focal points of traffic are two small Manhattan zones: from Bowling Green on Broadway to Fulton Street in the downtown area, and the Park-Sixth Avenue complex in midtown...
...Human rapacity being what it is, "inclusion" soon developed into a new racket...
...Measurement of electricity is a difficult process since it involves many fluctuating factors such as line loss, demand charges, seasonal use variations, etc...
...A peculiar refinement of the Chrysler-Graybar purchase was that the owning corporation he was going to acquire had several million dollars in its bank account...
...If an individual invests in the stock market, he must pay a normal tax on dividends...
...The price seemed ridiculous but the broker said: "Take it...
...Depreciation, like amortization of mortgages, should be after taxes, and not represent a tax-free return...
...In former times, owners built up their own crew of cleaning women, who worked on an average between 1600 and 1800 square feet an hour...
...And New York City might be renamed Rothville for the architectural firm of Emery Roth & Sons, whose monotonous variations on Speculator Style have dotted Third Avenue and Park Avenue with squat boxes...
...Another method by which landlords receive rent for useless square footage is by calculating as rentable area the enclosures of the peripheral air conditioning, a practice universally accepted...
...This is known as the collapsible corporation, a device only recently authorized...
...The report did not indicate that more children die of rat bites in the slums of the metropolitan area than elsewhere...
...They divided property into equity, the cash they put in, and that money contributed by the mortgagee...
...And sometimes he has a dullwitted nephew who then appears as a new mechanic or central control inspector...
...Furthermore, since at each sale a new depreciation allowance is set up based on the new selling price, by raising prices the syndicates in practice add tax-free dollars to the income of their investors...
...Rudin to acquire financing...
...This is known as depreciation...
...Building after building, hotel after hotel, apartment after apartment, has fallen to the scythe of the syndicates...
...Objective studies indicate that between 12,000 and 20,000 square feet is the ideal layout space for big firms...
...The terms of this new financing were so liberal that $2 million of the $3 million was returned to the gentleman who had stepped in...
...The builder asked his structural engineer to draw preliminary plans for a new building...
...Operating through a new corporation, he borrowed money from other sources to close the transaction and then immediately withdrew the money from the bank account he had now acquired to pay off his borrowing...
...The structure had a value, according to traditional standards, of something less than $10 million...
...A standard item of modern leasing is the inclusion of the so-called "escalation clause" which provides that all increases in labor and maintenance costs, as well as taxes, are paid by tenants in proportion as their occupancy or rent is to the total occupancy or rent of the entire structure...
...The Uris Bros...
...Craters yawn in what were pleasant meadows, metallic booms and tiers of steel loom against the sky, overhead bridges span entire sidewalks with scaffolding and the pressure hammer constantly gnaws at the vitals of the pavement...
...He bought a plot, now called 80 Pine Street, and projected a structure of almost 900,000 square feet...
...It is only part and parcel of business that expensive Christmas presents must be sent to one's clientele...
...No special genius is required to foresee such developments...
...What the speculator does is withhold awarding the contract for elevator maintenance during the first year the new building is open...
...Cost of construction has risen to the point that a speculative formula has evolved to substitute tinsel for quality...
...The landlord would thus pick up as extra rent a bonus of almost $.10 per square foot...
...He set up a new corporation for a $60 fee...
...The whole swollen apparatus of leasehold building, accelerated depreciation, capital gains tax and syndicate operation forces a wild spiral of building and speculation which must load weight on weight until the realty market may collapse in a horrible shambles...
...Sometimes, of course, land speculation does produce fabulous profits...
...The speculator not only saves on tax techniques and cheap construction, but on renting and maintenance methods...
...From the small truck farmer whose lot on Staten Island happens to sit adjacent to the bridge now being built over the Narrows to Brooklyn, to the Bronx junk dealer whose yard abuts the junction of the Hutchinson River Parkway with the Cross Bronx Expressway, we are all familiar with such luck...
...The difference between a good and bad air-conditioning installation runs as much as $3 per square foot in a modern office building and, since the average structure today is over 300,000 square feet, this item alone can save the builder almost $1 million...
...REAL ESTATE management is singularly adapted to multiple corporations in common ownership...
...And, in a continuing process, the Astors are now investing in land to the East of Park Avenue in the 50s, while the Goelet heirs have acquired a large plot directly facing the Lincoln Square project...
...Today high pressure cleaning contractors employ crews of women who are forced to cover between 2200 and 2500 square feet an hour...
...Yes, you are astonished," Astor was reported to have said...
...But buses and the railroads, which the municipal and state governments refuse to subsidize for the public good, have become so expensive, that cars—on an average carrying less than two persons apiece—are used more and more...
...The syndicates have been offering between 10-12% annual profit, part of this tax-free, and the better they do the more money pours into their portfolios...
...And this is before figuring his actual profit from renting...
...This device is usually employed when the builder has relatives he must put on the payroll...
...As long as the laws deliberately subsidize the rich and rapacious, a frenzy of building and speculation will be a permanent aspect of American life, a frenzy which has robbed America of internal equilibrium and a sane view of the changing world...
...Since each corporation is only taxed 30% up to the first $25,000 profit, every new building job is organized under a separate corporate entity in order to avoid the full 52°%o tax at the lowest step...
...Another case of the ruthlessness pervading this struggle for money is one involving a principal corner in downtown Manhattan...
...This was reasonable because the building tossed off about $1 million which, even with the very heavy carrying charges of $600,000 on the new lease mortgage, meant that the investors received about $400,000 annually or an 8% return...
...He perfected and even elaborated this technique in the subsequent purchases of the Graybar and Chrysler Buildings, as well as the Equitable Building at 120 Broadway...
...The factors that stand behind this favoritism can be simply enumerated: land appreciation, the leasehold device, tax-free accelerated depreciation, new complex methods of financing, the development of the syndicate, juggling of space measurement, "escalation" clauses and maintenance charges, and the use of capital gains...
...The landlord needs soap, toilet paper, hand-tailored suits as well...
...But the tricks are not limited to space measurement...
...It has been calculated by those in the know that the really shrewd operators, who combine all of these methods, receive a bonus amounting close to 20% over traditional measurements...
...The Tishmans at 666 Fifth Avenue and the Minskoffs at 575 Lexington Avenue—second generation builders both, whose families have been identified with midtown construction for 50 years—were staggering under the load of the tremendous equities involved...
...A last aspect of holding real estate bears notice...
...The maintenance companies also specialize in "extras," floor waxing, venetian blind cleaning, polishing furniture and desks, replacing fluorescent tubes and ballasts...
...These skin treatments are "modern" too: and also cost less than the traditional brick and limestone...
...have a style: colored bakelite disks behind aluminum fins...
...The so-called Babylonian or ziggurat effect is merely an extension of this maximum land use on the vertical level, whereby the builder conforms to the city code by the use of setbacks every three stories...
...The result is that the Tishmans and Minskoffs make large sums operating the buildings which belong, however, to the Prudential Insurance Company...
...He thus escapes double taxation, first on the normal profit and then on dividends...
...The Aramco Building, constructed by the Uris Brothers as the first large postwar building, was erected on Astor land...
...Costs have been pushed so high the builder reacts in natural fashion because of the competition...
...But the individuals who take advantage of these legal devices are also the individuals who make the laws...
...The land acquisition is only a minor part of the total cost picture, yet due to the peculiarities of the city code, one can build proportionately more space the bigger the plot...
...The large elevator companies charge about $2,500 per cab annually...
...One amusing aspect of the expense account is the expansion of New York realty interests in Florida...
...The terms of this type of financing stagger the imagination and are even difficult for experienced realty people to follow...
...This simple equation has transformed New York real estate...
...Leonardo da Vinci observed centuries ago that a building should rise in height only one-half the distance of the free span of space before it, but Municipal Code is based on the exact reverse...
...Twenty-three-foot Cadillacs with television and telephones, including ship-to-shore yacht connections, are owned by certain well-known titans of realty...
...In effect, the builder thus receives an annual tax-free return of up to 30...
...The leasehold is fantastically profitable, but there is still another method to increase the return over and above both depreciation allowance and rent income...
...He has watched its legitimate start, when the city woke from a depression lethargy and war immobility, to erect new housing for the generation of war brides and new offices equipped with air-conditioning, acoustical ceilings and fluorescent lighting...
...Zeckendorf is at present engaged in a project which will make even this earlier financing seem childish...
...LEASING—While the old estates specialize in buying land and leasing it after an appreciation in value, it is the "new money" which concentrates on the acquisition of these leases...
...In our time, however, the big money in real estate rarely enters land speculation...
...Old trees and young buildings enter the same insatiable maw...
...If an occasional tenant protests the high prices, the landlord points out "there is nothing he can do" and furthermore shows the tenant that competitive prices are the same—which they are, since the various cleaning contractors have their own private agreements not to raid each other...
...He has seen the maturity of the boom, as shifts in racial population have altered the residential character of whole boroughs and the needs of expanding business have integrated many out-of-town companies into the financial web of the metropolis...
...Certain very smart individuals thereupon proceeded to buy up the defunct bonds at a few cents on the dollar, until they obtained control of the properties against which the bonds had been issued...
...The consequence is that values of New York real estate have soared so high, the market has been picked as clean of purchases as the dead carcass of a cow by ants...
...As a result, investment in land for the sake of future appreciation is limited either to very small endeavors or to the extremely powerful who think in terms of generations rather than of their annual tax return...
...But conservative men with many years of background shudder to think what will happen to buildings laden with top-heavy mortgages and demanding leases if ever there is a downward dip in our booming economy...
...The practice was at first a reasonable reaction by realty owners to the elimination of electrical submetering in New York City...
...By rule of the inverse ghetto, the East Side is becoming the haven for the last-remaining rich...
...When the Uris Bros.—the largest single builders of office space in the city today—add another of their hulking masses to this vacant lot, the mighty tableau will be drowned in the total effect.* But the practical results of the present boom provoke more than merely esthetic objections...
...One month later a tremendous development was announced for the entire area, which required the acquisition of the part of the plot in question...
...This building, when fully rented, will net close to $400,000 per year in profit...
...with older commercial space renting at an average of about $3 per square foot while the newer office buildings demand almost double—what is behind this boom...
...Then, with only a 20% investment of his money, he sought and received double depreciation on the completed structure, in this particular case running even higher since he broke the building down by what is called the "components" method and depreciated the elevators, roof, air conditioning, etc., at a still faster rate...
...Erwin Wolfson, for example, leased land from Columbia University on a short term lease and constructed 100 Church Street...
...The government has taken the position that since buildings age, a certain part of their cost may be allowed as a tax-free deduction each year...
...This has an obvious background...
...The upshot was that Chase Manhattan rented enough space in 80 Pine Street to enable Mr...
...John Jacob Astor offered to sell a Wall Street lot for $8,000 in 1810...
...Two stairways as fire exits and one fire tower air shaft are needed in a small building as well as a large...
...his architect and engineer supported the inflated estimate, for otherwise they would not get his next job...
...But there are other examples in which more than blind chance is involved...
...A possibly apocryphal story illustrates the technique...
...And then it may be too late, since we shall all, the innocent as well as the guilty, be buried in the falling debris...
...The basis is a continuing market, one which will get better and better...
...As far as the objective observer can see, only when the whole inflated structure collapses of its own weight—as it must—will reforms such as those touched on above be effected...
...this specious tax dodge resting on the fiction that capital held over six months is a long-term investment as distinguished from capital invested for less than six months, and hence subject to a maximum 25% tax on profits...
...The net effect is to increase the rent or landlord profit...
...It is the perfect medium for the huckster mentality because the cheaper the product the higher the return...
...the building itself...
...It took, however, that amazing manipulator of modern times, William Zeckendorf, to improve to its highest degree the procedure of squeezing money from buildings...
...Very often the builders end up working for the mortgagees...
...People seem less fascinated by such statistics...
...Suppose an apartment builder in Manhattan wants to spend his vacation at Miami Beach, Boca Raton or the Keys...
...social virtues, this state of affairs will continue...
...THESE DISTORTIONS can be resolved simply...
...THE RISING COST of land has led to a type of economic ghettoization which is the antithesis of democracy...
...Up to that date, tenants did not pay for corridors, toilets, air conditioning fan rooms located outside the premises, slop sink closets and electric and telephone rooms...
...Although the average tenant uses between $.16 and $.20 worth of electricity per square foot, many owners charged a flat fee of $.25, pocketing the difference...
...in effect, it means that the government is paying their salaries for the most part...
...The values must go up...
...But the insurance company refused to sell, offering to lease instead...
...Building is a favored industry, comparable in some respects to oil drilling from the point of view of accelerated depreciation, and stock market speculation in so far as capital gains are concerned...
...And, most important of all, capital gains should be eliminated...
...But he was unable to get financing, because the area was somewhat east of the financial district and the mortgagees had doubts as to its success...
...The main problem even for these worthy structures is their setting...
...How can they do business without being able to contact their colleagues at a moment's notice...
...Only the very rich, mindful neither of temporary losses nor income taxes, can afford this outlook...
...And, most of all, where do the tenants come from to fill the wave on wave of new apartments and office buildings...
...A defective air-conditioning system is eminently suited to the purposes of present-day builders because it is something the prospective tenant will not see...
...The deal was arranged but problems arose because of the difficulty of mortgaging a combined fee simple and leasehold...
...On the other hand, if the corporation invests the money in the stock market and collects dividends at 5%, or $5,000 on the $100,000, it then pays approximately 8% of this $5,000 as taxes, leaving it over $4,500 after taxes...
...ALLIED with the continued cheapening of mechanical equipment is the new popular theory of large office areas...
...The man who had stepped in for $400,000 insisted on and received a price of $1,400,0001 Even the most charitable spirit has doubts as to the background of this transaction...
...since 10% is tax-free and the equity or actual cash investment of the builder is only one-third, the total tax-free amount is enlarged three times...
...The latter, getting deeper and deeper, without money and unable to arrange temporary relief because of the unsigned leasehold, was eventually forced to sell out at a loss to the insurance company, which then used the same plans and proceeded to erect the structure...
...Most of these enclosures stick almost two feet into the premises...
...But who can catch the landlord in a lease violation...
...The result has standardized building to the point that one can identify speculative structures merely at a glance...
...the operating value due from rent income...
...The Protestant whites have left New York City and the Jews are following...
...If he builds or buys a hotel or apartment house in the city of his choice, it is inhuman of the government to expect him to have all the rooms fully rented for the entire season...
...Zeckendorf will have a six months' option to buy back the entire enlarged property for $8%2 million over any mortgagesthen outstanding...
...A building formerly worth $5 million might be close to the end of its depreciation deduction...
...A speculator bought one part of the plot for $600,000...
...It is only logical that he fly down several times during the winter in order to check his affairs...
...He thus received a total of $14 mil lion for a property that was estimated as worth less than $10 million— and still held the fee, on which he turned down an additional offer of another million dollarsl In effect, what Zeckendorf did was to wring fifty per cent more money out of the building by dividing it into parts—fee, operating lease and separate fee mortgages...
...Furthermore, since the First National City Bank and the Hanover Bank had announced plans to move a major part of their operations to the midtown area, the Rockefellers wanted 80 Pine Street to reinforce their tremendous investment in the Chase Manhattan Plaza, only two blocks away...
...Anxious to enlarge the facilities of his Drake Hotel, he is now closing the following proposition...
...Thus, he reasoned, an improved property is a unit consisting of many parts: it is land on which a building has been erected...
...When more sophisticated tenants call in engineers to review the design of the air conditioning, the builder usually adapts or improves the system for the executive area, still ending up with a large saving on the unimproved clerical areas...
...Why are stately edifices barely thirty years old uprooted for squat ribbon-windowed office structures...
...In essence, the government allows a builder to liquidate his corporation after holding a piece of property for three years and a day, and then taxes him only 25% on his capital gains...
...The fact that the thinly veneered facades leak like a sieve is irrelevant since the tenants will have already moved in on long-term leases by the time this is apparent...
...Accelerated depreciation, capital gains, the single tax on syndicate ownership: the entire structure, emphasizing cheap building and rapid sale, is a mechanical milker that pumps out a continual stream of cream from the public cow...
...Assuming a 5% accelerated depreciation factor (very conservative under the circumstances) on a $10 million construction job, Mr...
...When the tenant occupies the space on a 20-year lease, there is little he can do...
...This study will concern itself primarily with private enterprise and not public housing nor the very genuine efforts of organizations like the United Housing Corporation, the non-profit group run by Abraham Kazan, whose efforts have accomplished more in building decent apartments for the middle class in New York City than all the speculative builders put together...
...He spent a large sum for the land...
...There is as much skullduggery behind many of these deals as in the most sinister novels...
...As long as predatory cunning and acquisitive lust are the highest * Since the Rockefellers have become partners in this project, the Uris architectural style has been vastly upgraded...
...Where the speculator recoups is in the mechanical equipment and, in particular, air conditioning...
...Depreciation is allowed against the entire building cost whereas the builder invests at the maximum about one-third of the total cost, the rest being covered by a mortgage or mortgages...
...Several of the new buildings, created as home offices for billion-dollar concerns, escape this general pall...
...The rich and poor used to live close together, but this is much less true today...
...The remaining 15% is then taxed at the regular 52% rate, which means in effect that if a realty corporation goes into the stock market with its undistributed profits, it pays a total tax of less than 8% (that is, 52% of 15%) on what it then makes...
...That Wall Street lot, it is true, will be worth twelve thousand dollars in a few years...
...The terms were that the new party would lend $3 million for a short period of time, until a package deal of financing could be arranged, and in return receive 50% interest in the mammoth job...
...The Real Estate Board of New York, a non-governmental association dominated by the larger realty interests, changed its method of computing square footage in 1953...
...The great hive of advertising, design, speculation, publicity, news, tele vision, periodical literature and insurance buzzes with frantic energy of which the building boom is merely the outer form: buzzing for wild profits and quick turnover, not the production of capital goods or values adding grace to human existence...
...The difference between Levittown and Rothville is only size...
...The bigger the floors, the less toilets per square foot are installed and the less sun load is confronted by air conditioning...
...Without doubt, real estate—and its sister, the stock market—are the two provinces where money can be made most quickly in our society...
...He held on for almost a decade and then, in disgust, sold at a loss of $200,000 to another speculator who suddenly appeared...
...While no depreciation is allowed on land, both the leasehold rent for the land and the depreciation on the building itself are tax deductible when a building is constructed on a leasehold...
...Thereupon he hires the company and charges the entire amount to the tenant...
...SYNDICATES—What has made this rickety structure of building and expanison possible is the syndicate.* The syndicate is merely a group of people who get together and form a partnership, participating in the profits according to their proportionate interest in the total deal...
...It is so obvious that builders cover every inch of land with construction that when rare exceptions occur, like the Lever Building between 53rd and 54th Streets on Park Avenue, and the Seagram Building a block to the south, the news hits the front pages of the newspapers...
...The lobby, facade and elevators are the center of glamor application...
...He can operate the building directly, hire a management company or set up his own separate management...
...This itself is legitimate in our economy, but when the ultimate desire is only the profit as divorced from architectural value and the municipal interest, we have gone a step in monetary perversion beyond all known previous civilizations...
...Speculators, obsessed by the gold lodestar, tend to "mortgage out" or reduce the money stuck in a job to the minimum, and then add structure on structure in a dizzy pyramid until the slightest breeze of vacancy may blow it over...
...To sum up, the new partner thus obtained a 50% interest in one of the largest apartment building projects in the history of New York for what amounted to 6% interest on $3 million for several months and 6% interest on $1 million for three years (his real equity money...
...The new participant thereupon approached his banks and borrowed $3 million at 6% interest...
...Some of the "older money" in real estate came about through this technique which, of course, was thoroughly legitimate according to the laws...
...Sam Rudin...
...The next week a very important man, of the same social background as the president of the financial institution, arranged a meeting through which the realty syndicate got the job...
...If a syndicate considers buying a property in Venezuela, a trip to that country is only in the line of business, with all sundry expenses allowed...
...The syndicates then take this depreciation in one of the accelerated forms: presuming, in the above example, that $4 million is additional new depreciation at 4%, or $160,000 tax-free money, they take the 150% declining balance method (or 1½ times) and pull out $240,000 instead, all of which goes tax-free into the pockets of the participants...
...Such tax discrimination is neither logical nor does it serve a useful social function...
...1I LAND—It is undoubtedly true that many of the old American fortunes originated in land speculation...
...The total inter est will amount to some $200,000 and for this money he has obtained a permanent position in a magnificent project which should return his $1 million equity in short years and then show one-third of a million dollars annual return thereafter...
...The typical speculator builds a fancy lobby, usually including an abstract mobile or ceramic design as a sop to "modern architecture"—Noguchi is the favorite for this today...
...Zeckendorf reasoned that realty could be regarded much like other forms of modern corporate ownership, that is merchandised in separate units comparable to common stock, preferred stock and debentures...
...Similar tie-ins exist between the large realty management companies and the superintendents...
...The curtain wall facade is made of precast stainless steel cubes or hexagonals, cream plastic plates or aluminum members anodized in silver or gold...
...But see what I intend to do with the eight thousand dollars...
...A piece of property is bought or leased and a building is constructed subject to a normal mortgage...
...Just recently he sold the apartment at a high profit to a syndicate, liquidating his corporation in order to pay a single capital gains tax...
...One cannot tell the difference between good and bad air flow merely by looking at plans...
...As buildings get older their depreciation runs out and the owners are forced to sell...
...At the end of ten years Mr...
...INTRICATE FINANCING—The above deals are comparatively simple...
...Wolfson had a legitimate tax-free deduction averaging somewhat less than one-half million dollars annually to apply against his personal income tax for the next few years...
...He reasoned that by combining his plot with the other, he would create a better structure and satisfy the growing needs of the insurance company as well...
...The owners then made private deals with so-called "independent consultants" on a percentage basis, kicking back a portion of what they received in return for how high the consultant could push the charge...
...He will simultaneously lease back the hotel for a long term and also agree to use the money received to build the addition...
...It should have air diffusers sufficient to handle each specific area, yet capable of throttling or "balancing...
...Today, the tenant is required to pay for everything on a single-occupancy floor except the stairs, fire tower shaft and space occupied by the elevators...
...The syndicate likewise will agree to lend him another $1 million so that he can proceed with construction, as well as permit him to increase the mortgage by an additional $2 million in order to assure him all the money required for the job...
...He was the first person properly to understand that the land could be sold to one party, the building to another, the operating lease to a third, and that even another mortgage position could be hewed from the rent income separate from the operating lease...
...The side possibilities are almost too obvious to mention...
...Finally this builder turned in despair to that private market of vultures that always wheel in the financial air, looking for dying victims...
...The government further allowed accelerated depreciation, meaning that the largest part of the cost could be written off in the early years...
...With the arrival of the depression, most of these bond issues collapsed in value...
...The only widely known exception to this rule was the bond issuances that took place during the construction frenzy of the late 1920s...
...and some of these presents, like homing pigeons, have a remarkable talent for returning home...
...Since a like investment of this money in realty over again would be taxed the full 52%, the result is that dividends from the stock market are only hit by the Internal Revenue Department at one-sixth the same rate, or less than 8% instead of 52%1 Let us take an example...
...New York City is strangling itself...
...At that time it was common practice to issue bonds instead of mortgages, because more money could be obtained through this method...
...And each obscure voter, who votes for them, dreams of participating in the great rat race of amassing income as a symbol rather than for use...
...The fact that crowding massive structures over narrow streets ruins the esthetic effect of architecture is of no importance, because the builders are concerned not with esthetics but with the rent received per square foot...
...the lease, usually 21 years...
...This is to a degree compensated for by the fact that mortgages tend to give more money to fee builders than leasehold builders, feeling their investment to be more secure with the former...
...Instead of being "frozen in" with their money, as the trade terms corporate realty holdings, investment can be made at minimum taxes both on dividend income and sale profits...
...The leisurely approach, waiting five to ten years for land appreciation, does not fit the tempo of modern life...
...Since few buildings are constructed on exact right angles and straight lines, the architect usually works hand in hand with the builder, giving him "the benefit of the doubt" on angles when the structure is not built flush with the lot line: for example, on a 8" skew over 200 lineal feet, the landlord would pick up almost 70 square feet (averaging the skew is 4" or one-third foot times 200 feet) . Assuming two walls skewed in a thirty story building, the landlord would then pick up over 4,000 square feet...
...In a short time the rents went up, serving as additional security against the property, and Zeckendorf borrowed in the form of a second mortgage an additional $2,250,000...
...Its disadvantage is that the builder has money invested in the land as well, a non-depreciable item...
...and the additional mortgage value of the rents isolated from the building...
...The elevators are the newest gimmick, playing soft semi-classical music with their operatorless controls that save the builder up to $.25 per square foot in labor cost...
...Under the 200% declining balance method, for example, the depreciation allowance can be doubled (hence 200%) . If a leasehold runs for 21 years, the annual depreciation allowance is thus almost 5%—that is to say, the period of years of the leasehold divided into one hundred per cent—which when doubled, means that the builder receives close to 10% of his money tax-free each year in the early years...
...This wizard decided in the early 1950s that the typical financial operations of real estate men were amateurish...
...A building valued at $5 million to a corporation is now worth $10 million to a syndicate...
...A broker three years ago offered the author a large vacant plot on the East Side at $70 a foot...
...and far more, is at stake...
...The Tishmans have a style: microscopic enlargement of a fly's eye, pasted on concrete blocks...
...If one wants to check realty in southern California during the cold part of the winter, and the approach is carefully documented with letters to brokers, etc., this is a legitimate tax deduction...
...Why are new massive apartment houses crowded jowl to jowl, blocking out air and light, when even the atrophied organs of the city dweller still feel joy at a shaft of sunshine...
...In truth, speculative builders with a high sense of product can rarely survive, as the history of Fred F. French at Tudor City well documents...
...The Internal Revenue Department has decided, however, that after a realty corporation has paid a tax on regular business profits, it is entitled to a tax credit of 85% on additional profits if this money is invested else where...
...The escalation clause has been extended to include everything from uniforms and broken windows to toilet paper and soap...
...and let the devil take the hindmost...
...But I shall take the eight thousand dollars and buy eighty lots above Canal Street and by the time your one lot is worth twelve thousand dollars, my eighty lots will be worth eighty thousand dollars...
...Certain common cost items are delayed during the first or base year and then applied later so that they fall into escalated items...
...When the syndicator offers almost double money for what the owner thought the property was worth, the urge to liquidate becomes irresistible...
...The tie-in between the cleaning contractors and the unions is an old story in this industry...
...The tax structure is deliberately keyed to subsidize the rich and acquisitive, who then find themselves compelled by the very logic of this favoritism to expand and expand again without reference to the market needs...
...The East Side is the only place where white people want to live today...
...This leads to a frantic chase for the cheapest methods, which is evidenced by the mechanical repetition of building patterns...
...Assuming a building of 20,000 square feet on a floor or 200' by 100', there are 600 lineal feet of exterior walls...
...By arrangement, the owner of the building "participates" in these extras, creating a handy side income...
...The money market soon loosened up and financing was arranged...
...These are the very rich men who for a price save propositions by investing a certain sum of money, taking back a large interest...
...It can readily be understood why New York City is rebuilding at such a frantic rate...
...But an individual or a partnership is subject only to one tax, the return received directly by the participant...
...This hallucination is fostered by the Madison Avenue publicists who have been hired by almost all the top-notch speculative builders...
...The overwhelming advantage of the leasehold (until 1958*) was that the person leasing could depreciate or write off the entire building cost during the first term of • The law has been changed on this point, but the problem can be solved, in the majority of cases, by other methods too complicated to describe here...
...The primary step was to sell an operating lease on the entire property for $5 million, composed of $1.5 million cash and $3.5 million lease mortgage...
...For example, a very expensive matter in modern buildings is elevator maintenance...
...With rents frozen at approximately $20-30 in the older houses, while the new apartments charge an average closer to $60 per room for lower ceilings and cheap partitions...
...Certainly, the Rome of this Trinity is New York City and its leading churches the home offices of these industries...
...One reads that gunmen can be hired to murder individuals for a few thousand dollars...
...to the contrary, it favors one class of investors against another and is thoroughly "un-American" in the most abused sense of the word...
...In essence, it meant that the owner, through the use of an independent consultant, would establish the cost of electricity and add it to the bill of the tenant...
...This vicious practice often leads to a net additional rent of between $.05 and $.10 per square foot which, even after the booty is divided between the consultant and landlord, throws thousands of dollars extra income into the profit column...
...When bought for $10 million, the entire difference (minus land value, which is non-depreciable) is credited as additional depreciation...
...With the last method, he can then charge the ownership corporation a commission for operating the property and deliberately juggle the rent, salaries and benefits to fall into the most favorable tax position...
...To understand why the builders have had such a field day in New York City and continue to build without reference to actual space needs, skyrocketing land values and ever higher construction costs, the economic background must be examined...
...Home owners even in this country do not get allowances for depreciation and there is no reason why business should be given advantages denied to the home owner...

Vol. 8 • July 1961 • No. 3


 
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