To reduce Manhattan storefront vacancies, fix commercial rent tax

Manhattan’s Canal Street is suffering at the hands of the very people who depend on its health: “In one four-block stretch between Broadway and West Broadway, there are no less than 31 empty storefronts,” the real estate website Curbed reports. “A handful of landlords wait for retailers willing to pay their exorbitant rents… The results have brought this once-bustling corridor to its knees, with dozens of small businesses driven out and dozens of shuttered storefronts, leaving behind an atrophied landscape.”

This phenomenon – one might call it “black card blight” – was covered in The New York Times last year: Bleecker Street storefronts that had once housed bodegas, antique stores, record stores, book shops and other small businesses in the 1980s and 1990s became high-end, luxury storefronts for global fashion brands in the 2000s. Commercial rents shot up to $35,000 per month or more, causing longtime local merchants to close rather than sign a lease they couldn’t afford. Then, by the 2010s, the Marc Jacobs and Ralph Lauren types realized that the rents they had induced by making Bleecker a corporate vanity address were too high to make a profit. They pulled up stakes, leaving behind a ghost town, as landlords prefer to hold out for the next luxury brand to come along, instead of reducing their rents. Black card blight – named for the prestigious credit cards offered to the most affluent consumers – isn’t a function of poverty. But vacant retail space may lead to graffitti, dirty sidewalks and gutters, and other elements of urban blight that we see in declining neighborhoods. If nothing else, it sucks the soul from a walkable neighborhood as it becomes abandoned, lacking the businesses local residents depend on.

At the end of last year, even with lower asking rents, retail vacancies in Manhattan’s leading shopping corridors were running from around 10 percent to more than 34 percent, according to a report by Cushman & Wakefield.

This mismatch between the retail rents desired by Manhattan landlords and the rent commercial tenants are willing to pay is a market failure, a phenomenon known as “sticky prices,” that sometimes requires a policy intervention to correct. One potential mechanism to correct the mismatch is to revise the city’s commercial rent tax to incentivize lower commercial rents.

The commercial rent tax, a legacy of what had once been a citywide tax that was largely repealed under then-Mayor Rudy Giuliani, is unique to Manhattan south of 96th Street.

The tax is imposed on the tenants of commercial property at an effective rate of 3.9 percent on rents that exceed $250,000 per year, or $500,000 per year starting in July after a law adopted last year. The tenant is responsible for 100 percent of the tax as well as the burden of compliance.

When a tenant vacates a location, however, there is no rent paid and thus no tax collected. It’s in these instances where the city has an opportunity to incentivize property owners to lower rents to levels that are more in line with what prospective tenants are willing to pay.

The burden to pay the tax on retail storefronts should shift to the landlord instead of the tenant, and the tax should be imposed at the last agreed upon rent, regardless of whether the property is being rented. This would help induce a landlord to offer lower rent until the storefront is rented because reducing the rent would ameliorate the cost of the commercial rent tax they would be paying on an empty storefront. The sooner a new lease is signed, the sooner the landlord is relieved of their tax burden.

For tenants, such a change would not affect their net costs, because the costs they now pay as the commercial rent tax would simply be added to their rent by the landlord. It should make no difference to retailers whether they pay the cost of the tax on their own or as an addition to their rent expense.

Under a revised tax, retail tenants would be freed of the hassle of complying with the tax law, since it would be applied to the landlords, who often have scores of small retail leases and would become accustomed to these new filings.
For the city, revenues from the commercial rent tax would become more predictable and help alleviate the costs of police, fire and other costs incurred by the city to protect vacant retail space.

The sticky prices we see in Manhattan retail rents aren’t unusual. It’s human nature to expect at least as much compensation as one previously received. (Think of your own paycheck.) But expectations and projections often fall short of actual market conditions. If they did not, there would be no such things as clearance sales. For Manhattan landlords holding vacant commercial space, it sometimes takes far too long to recognize that their rent expectations are unrealistic for the market. Whole neighborhoods can suffer in the meantime. Nudging landlords to lower their rent expectations through the commercial rent tax can help ameliorate Manhattan’s surplus retail space and reduce the blight that occurs around vacant properties.