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The EACC, in partnership with the International Property Tax Institute (IPTI), wants to keep its members up to date with the latest developments in property taxes in the USA and Europe. IPTI has put together below a selection of articles from IPTI Xtracts; more articles can be found on its website (www.ipti.org).
UNITED STATES
New York: NYC Faces ‘Doom Loop’ as Work from Home and Empty Offices Increase
The COVID-19 pandemic has had a profound impact on the way we work, with many employees opting to work from home instead of returning to the office. While this may have seemed like a temporary solution, it has had long-term consequences for commercial real estate markets in major cities like New York. A recent study by economists from NYU Stern Business School, Columbia Business School, and the National Bureau of Economic Research has found that empty office buildings are setting New York on an “urban doom loop” that will destroy the quality of life in the city and drive residents out.
The study found that in 2020, office occupancy in New York fell from nearly 90% to 10%. While it has since bounced back to 48.4%, this is still significantly lower than pre-pandemic levels. As a result, fewer companies are renewing their leases, which is lowering the value of office buildings. The number of newly signed leases has also fallen dramatically, from 285.4 million feet per year before the pandemic to only 62.4 million feet per year in the same period after.
The researchers developed a valuation model that predicts how much these properties will be worth in six years’ time. The results are alarming – even if things gradually return to normal and people come back to the office, the valuations of New York City office buildings will fall 43.9% by 2029. If work-from-home becomes a permanent feature of life, the decline in office values could be as much as 51.6%.
The impact of this decline in property values will be felt across the city. Lower values mean less tax revenue, and the paper predicts a 6.5% drop in tax revenue by 2029. To plug the hole, cities will raise taxes and fees in other ways – making the city less attractive to live in, which means even less revenue. The authors argue that this has already begun, and that New York is in the grips of a “death cycle.”
The situation is not unique to New York – vacancy rates are at 30-year highs in many American cities, and rents are almost certain to fall even further than they already have. The economists find that properties in the highest rental tier fare better than those lower down the pile, as employers can only persuade their employees to come to work if the digs are nice. If you can’t afford the best of the best, it is more likely your employees would prefer to work in their spare room.
The impact of this decline in property values will also be felt by banks, which hold just over 60% of commercial real-estate debt. If this debt goes underwater, the banks may be dragged down with it. The authors of the paper highlight that a real-estate apocalypse is coming, and there is now no stopping it.
The consequences of this “doom loop” are dire. Cities rely on property-tax revenues for much of their budget, and New York City’s budget is currently around $107 billion, with around $35 billion of that coming from property. The researchers estimate that a decline in property values would reduce tax revenues by around 6.5% in New York City. Services will be cut, taxes across the board will go up, and more people will flee as the city becomes even more uninviting.
The impact of this decline in property values will be felt across the country, with the authors calculating that nationwide the United States will see a $506.3 billion decline in commercial property values. Urban America looks like it is going deeply in the red, with losses at just over half a trillion dollars.
In conclusion, the COVID-19 pandemic has had a profound impact on commercial real estate markets in major cities like New York. Empty office buildings have set New York on an “urban doom loop” that will destroy the quality of life in the city and drive residents out. The decline in property values will be felt across the city, with lower values meaning less tax revenue and cities raising taxes and fees in other ways. The impact of this decline in property values will also be felt by banks, which hold just over 60% of commercial real-estate debt. A real-estate apocalypse is coming, and there is now no stopping it.
New York: The Stalled Return To The Office: A Tale Of New York
New York City, a metropolis known for its bustling streets and skyscrapers, stands as a prime example of the lagging return to office culture. Peaking in the third quarter of last year, the city’s office visitation rates have since come down and remain way below pre-pandemic levels. This phenomenon serves as a cautionary tale for businesses still grappling with the challenges of hybrid and remote work.
The Rise and Fall of Office Visitation Rates
In Q1 2023, Real Estate Board of New York (REBNY) reported a visitation rate of 61% of pre-pandemic baselines across 250 office buildings in Manhattan. While this marks a ten-point increase from Q1 2022, it falls short of the 65% peak witnessed in the third quarter of last year. Similarly, the Kastle barometer for office card swipes went above 50% compared to pre-pandemic levels in Q1 2023, but went below 50% by Q2 2023. This stagnation hints at a broader trend: the office market’s struggle to bounce back as other sectors of New York City’s economy flourish in the post-emergency phase of the pandemic.
Imagine a marathon, where the office market is the runner who started strong but suddenly hit a wall, unable to regain their momentum as other sectors, such as tourism and hospitality, continue to sprint ahead. The office market has become that runner, gasping for breath and desperately seeking a second wind to regain its stride.
The Domino Effect on the City’s Finances
The waning return to the office in New York City doesn’t just affect the commercial real estate market; it also takes a significant toll on the city’s tax revenue. With property taxes on office buildings accounting for 20% of the city’s overall property tax collections, the lagging office market recovery threatens the city’s financial well-being. It’s as if the office market is a clogged artery, restricting the flow of vital resources to the heart of the city.
While tourists and residents flood the streets, the lingering 40% gap in office visitation rates compared to 2019 levels leaves a gaping hole in the city’s economic fabric. As Keith DeCoster, director of market data and policy for REBNY, aptly puts it, “But in terms of return to office, it’s still roughly 40% below where it was, this time in 2019.”
A Wake-Up Call for the Hybrid and Remote Work Revolution
This stalled return to the office serves as a wake-up call for organizations to re-evaluate their approach to hybrid and remote work. Businesses must come to terms with the reality that employees have grown accustomed to the flexibility and autonomy of remote work, and a full return to the office may never materialize. Like trying to fit a square peg into a round hole, forcing a complete return to the office could create friction and discontent among the workforce.
To adapt to this new normal, organizations should invest in innovative tools and strategies that enable seamless communication, collaboration, and productivity in a hybrid work environment. Furthermore, companies must strike a balance between in-person and remote work to meet the diverse needs and preferences of their employees. In this way, businesses can harness the best of both worlds, like a well-orchestrated symphony harmoniously blending remote and in-office work.
Prioritizing Employee Wellness and Work-Life Balance
A key takeaway from the city’s experience is the importance of prioritizing employee wellness and work-life balance. The pandemic has heightened awareness of mental health and well-being, and employees are increasingly seeking a supportive work environment that acknowledges their needs. It’s like watering a garden – when employees receive proper care and attention, they will grow, thrive, and contribute to the company’s overall success.
Organizations should consider implementing mental health initiatives, offering flexible work arrangements, and fostering a culture that encourages employees to maintain a healthy work-life balance. By doing so, businesses can not only retain top talent but also attract new, skilled employees in the competitive post-pandemic job market.
Embracing the Power of Technology
The shift to remote and hybrid work has underscored the importance of technology in connecting employees, streamlining workflows, and driving productivity. As organizations adjust to this new reality, they must embrace technological solutions that enable them to work efficiently and effectively in a distributed environment. Think of technology as the glue that binds remote and in-office employees together, creating a cohesive and collaborative team.
By investing in cutting-edge tools and platforms, businesses can foster seamless communication, enable real-time collaboration, and empower employees to work from anywhere, anytime. In doing so, they can unlock the full potential of their workforce and stay ahead of the curve in an ever-evolving business landscape.
Cultivating a Resilient and Adaptable Workforce
Lastly, the current challenges faced by New York City’s office market highlight the need for organizations to cultivate a resilient and adaptable workforce. In an uncertain world, businesses must be prepared to pivot and evolve in response to changing circumstances. It’s akin to building a house on a solid foundation – a workforce that can withstand the winds of change is vital for an organization’s long-term success.
To achieve this, organizations should invest in employee development, provide opportunities for upskilling and reskilling, and create an environment that encourages innovation and adaptability. By fostering a culture of continuous learning and growth, businesses can ensure that their workforce remains agile, resilient, and ready to face the challenges of the future.
Conclusion
The stalled return to the office in New York City offers valuable lessons for businesses worldwide. By prioritizing employee wellness, embracing technology, and cultivating a resilient workforce, organizations can navigate the complexities of the post-pandemic workplace and emerge stronger than ever before – without a top-down, return-to-office mandate.
Connecticut: Shifting property tax burdens provide businesses, commercial landlords some relief, leave homeowners to pay more
East Hartford Mayor Michael Walsh heard many concerns from businesses and residents during his town’s state-mandated property tax revaluation in 2021. East Hartford’s residential properties increased in value far more than commercial and industrial buildings.
As a result, the town’s $136.1 million tax levy — which funds a majority of East Hartford’s $211.1 million budget — shifted proportionately away from commercial and industrial owners to residential property holders, who already comprise a greater percentage of the grand list.
It meant owners of an East Hartford house valued at $198,000 would see a $416 increase in taxes during fiscal 2023. Conversely, one car dealership saw its property tax bill drop $104,000 this year, Walsh noted in a recent interview. Businesses, Walsh said, aren’t calling anymore to complain about their property tax bills.
“I received none from businesses and received quite a few from angered people saying spending was out of control and, even though I dropped the mill rate, I should drop it more,” Walsh said.
Municipalities are required by state law to perform property revaluations at least once every five years, and do so on a staggered schedule. Across Connecticut, 37 municipalities performed tax revals in 2021, and another 39 in 2022. Many, if not all, saw residential values increase far more than commercial and industrial properties, due to the state’s red-hot residential housing market in recent years and the pandemic’s negative impacts on office and other commercial buildings.
That’s forcing residential homeowners, in many cases, to shoulder a greater tax burden. It’s also providing some relief to businesses, which have long complained about Connecticut’s high property taxes — the primary revenue source for municipal budgets. Property taxes make up 43.2% of the total tax burden for Connecticut residents, according to a December 2022 report published by the Property Tax Working Group, which has been pushing for property tax reforms.
The situation has put pressure on local municipal leaders stuck between two constituent groups. On one hand, lower commercial property taxes could stimulate economic development opportunities. On the other, upset homeowners have more power at the ballot box. Mayors and town managers are weighing their options: apply the new values in the next fiscal year, which could lead to hefty property tax hikes for some homeowners; phase in the new values over a series of years to lessen some of the initial sticker shock; or petition the General Assembly to delay revaluation.
At least three communities — Wethersfield, Middletown and Stamford — are currently seeking state approval to delay their revaluations by one year to October 2024. The city of Hartford’s 2021 revaluation saw the overall value of single-family homes soar 30%, while the value of most large office buildings, hotels and some restaurant-dependent retail properties declined. Hartford homeowners are seeing higher property tax bills, but the overall increase in the city’s grand list allowed Mayor Luke Bronin last year to lower the property tax rate by 7.2%, from 74.29 mills to 68.95 mills, the largest tax reduction in decades.
That was cheered by the city’s business community, which has long shouldered one of the highest property tax rates in Connecticut. (A mill represents $1 in taxes for every $1,000 in assessed property value.)
Waterbury recently opted for a phase-in approach, meant to blunt the impact of shifting values that otherwise would have increased the average single-family homeowner’s tax bill by about $750 for the fiscal year beginning July 1.
Waterbury’s 2022 reval saw home values rise by 75% or more, while commercial properties rose an average of 40%. Due to the phase-in, the average single-family homeowner’s tax bill will rise by just about $250 for the coming fiscal year, under Mayor Neil O’Leary’s proposed budget.
Under that scenario, the tax rate will slide from 60.21 mills now to 55.5 mills in the coming fiscal year. If Waterbury had ripped off the Band-Aid, the city would have been able to reduce its mill rate to 40.
O’Leary said an “all-at-once” application of new property values would have increased taxes on his 2,489-square-foot, cape-style house by about $1,600. “I’d be happy to pay that to see the mill rate down to 40, but most people in the city aren’t able to keep that pace,” O’Leary said.
Economic development opportunities
In East Hartford, Walsh said he decided to institute the new property values without delay, which allowed the town last year to lower its mill rate from 49.35 to 41. He said the new state cap on motor vehicle taxes and a $200 increase in the town’s senior citizen tax credit helped blunt some of the shifting tax burden on homeowners.
“We felt pretty good we could roll it out in one swoop and make it fair and equitable, while at the same time enjoying a much lower mill rate to make the town more business friendly,” Walsh said.
East Hartford’s mill rate reduction last year came amid a renaissance in development interest in the blue-collar town on the eastern bank of the Connecticut River. Developers hope to break ground this fall on a 300-plus unit apartment development off Silver Lane. Massachusetts-based National Development earlier this year began construction on 2.5 million square feet of logistics space at Rentschler Field.
Other developers are looking to add hundreds of additional apartments, along with new retail and office space on sites near the Connecticut River. “The reduction in the mill rate certainly wasn’t the only reason those things happened, but it certainly made the discussions (with developers and investors) a little bit easier,” Walsh said.
The shift in property values reflects growing housing demand and declining interest in commercial space, both spurred by the pandemic, said Chris DiPentima, president and CEO of the Connecticut Business & Industry Association.
“Residential properties in suburban areas inflated in price because people were trying to get out of the bigger cities,” DiPentima said of the pandemic’s impact. “Fortunately, some of that migration was from New York to Connecticut suburbs, which gave the state economy much-needed population growth that has been otherwise stagnant since 2008.”
Unfortunately, businesses aren’t flocking to Connecticut in similar proportion, DiPentima said, and a post-COVID shift to hybrid work has depressed demand for commercial office space. Michael Goman, co-founder and principal of East Hartford-based real estate consulting firm Goman+York Property Advisors, warned some communities could face a “tsunami” of shrinking commercial property values due to shifts in post-pandemic work and shopping habits, especially for towns with big malls.
Urban areas that have seen an exodus of office workers due to remote and hybrid work trends are most at risk, he said. Conversely, some suburban retail outlets could see higher values as people spend more time at, and shop closer to, home.
“We are seeing that in suburban retail properties with good anchors,” Goman said. “Now they are seeing traffic they didn’t see before.”
New Britain also conducted its re-evaluation in 2022, which caused single- to four-family residential properties, including condos, to climb in value by 53.6%, according to City Assessor Michael Konik. Commercial values rose 30.3%, while industrial property values climbed 26.2%, he said.
Under Mayor Erin Stewart’s proposed fiscal year 2024 budget, the city’s tax rate will tumble from 49.5 mills to 38.28 mills. Even so, faster-rising residential values will cause taxes on an average single-family home to climb by $764, Konik said.
Stewart said she’s focused on economic development to help grow the grand list and relieve individual tax burdens. The city has hired Goman+York to ensure it’s offering the right mix of incentives to spur new development.
Stewart said New Britain saw a similar shift in property values in 2007, as residential values soared ahead of the subprime mortgage crisis and Great Recession. “This is a shift we have seen before,” Stewart said. “It is a shift that is tough for many to accept right now because of the sticker shock, but I think in the long run, we will be a better community for it, a community poised for a better quality of life.”
Median Greater Hartford home sales price rose $100K during pandemic
The median sales price of a Greater Hartford single-family home sold in April 2023 was $331,625, according to the Greater Hartford Association of Realtors. In February 2020, a month before the pandemic led to nationwide economic shutdowns, the median sales price in Greater Hartford was $231,500. That means regional home prices increased 43% over the last approximately three years, according to GHAR data.
Over the previous three-year period — from February 2017 to February 2020 — Greater Hartford’s median home sales price rose only about 3%, from $225,000 to $231,500, GHAR data shows.
California: Vacant skyscrapers, empty trains: can San Francisco once again reinvent itself?
The economic challenges of the city’s downtown have sparked speculation of a so-called ‘doom loop’. But some say its emptiness may be part of the solution. The operator of the gondola that services Salesforce Park, an oasis among the skyscrapers in downtown San Francisco, will tell you all about how the 5-acre (2-hectare) rooftop space you’re about to enter contains 1,600 plants, 600 trees and more than a dozen ecosystems.
From this far up the fortress walls, the city looks like a futuristic utopia, with office workers milling about in the sun and free yoga on Fridays. But the transit center underneath – the newly built hub that was announced before the pandemic with great fanfare and was supposed to ferry in workers from all over the region to downtown – is quiet, save for the metaphorical tumbleweeds. The city’s main public transport systems are collapsing under the weight of their own emptiness. The number of riders on the Bart system is around 40% of what it was before the pandemic, and only 30% for riders who exit in downtown San Francisco. Without a $5bn bailout, service cuts to some of the city’s transit lines could start as soon as this summer.
Once home to some of the most expensive and sought-after office space in the world, San Francisco today is suffering from one of the most hollowed-out downtowns in North America. Along Market Street, the main thoroughfare, “office space available” and “for sale or lease” signs solicit new businesses. Office vacancy in the first quarter of 2023 ranged between 26.4% and 29.4%, depending on the tally. It’s a steep increase from the historic low vacancy rate of 4% in early 2020. Pinterest, Meta, Reddit, Salesforce, Slack, Uber and Twitter have all vacated or reduced their office space as remote or hybrid work has prevailed.
The emptiness has made some of the city’s other problems – an enduring homelessness emergency, open-air drug use in some neighborhoods and high rates of property crime – seem more visible. And it has sparked speculation that the city is at the verge of a so-called “doom loop”, a spiral down into debt that will force it to cut social and transportation services, which will in turn perpetuate more disinvestment.
San Francisco’s chief economist, Ted Egan, thinks that label is probably premature. “To me, a doom loop is Detroit in the 1970s. There’s nothing you can do to bring auto plants back – every auto plant that closes makes the next one want to close, and a cycle of disinvestment makes people want to disinvest more.”
Despite layoffs in past months, the tech economy of the Bay Area is strong, argued Egan, with more tech jobs in the city now than at the start of the pandemic. Unemployment in the city is the second lowest in the state, he said. But he admitted the city faces significant challenges. “It’s everything but tech that hasn’t recovered,” he said – and without businesses downtown, why would anyone go there?
Tech workers in the Bay Area built the tools for working remotely and then embraced remote work more than any other region in the US, according to the US Census Bureau. For the restaurants, cafes and bars that serviced those workers, and the small businesses and retail that depended on workers’ foot traffic, the consequences were stark.
A study out of the University of California, Berkeley, and the University of Toronto comparing mobile phone data across 62 downtowns in North America found that San Francisco’s recovery is dead last, with only 31% of the activity it had pre-pandemic. “Before [the pandemic] it was always very busy, but now it’s very slow,” said Lydia Wong, who has been serving to-go comfort food at Yo-Yo’s, a Japanese mom-and-pop lunch shop in the financial district, since 1988. “We can watch Netflix now,” her husband, Joseph Lee, joked.
The Old Ship Saloon, a bar that serves craft beer and pub grub and has been open since 1851, is lucky to still be around. “A lot of bars and restaurants have gone out of business,” said Eric Rogers, a bartender who was working solo through a mini lunch rush.
The Old Ship Saloon was originally converted from a 19th-century sailing ship, the Arkansas, which is still buried in the bar’s foundations. Since the pandemic, the bar’s owners have had to pare down staff in order to make any money. “We just count ourselves lucky that we’re still able to be open. You have to work harder,” said Rogers while pouring drinks, taking orders, serving food and working the cash register.
At the moment, it’s mostly businesses downtown that are feeling the squeeze. But that slowdown is affecting city coffers, which in turn could spark cuts that will affect the entire city. More than 75% of the city’s total GDP is generated downtown, and the businesses there account for nearly half the city’s sales tax revenue and 95% of its business tax revenue. The city is staring down a $780m budget deficit over the coming two years due to rising costs and plummeting business, sales and transfer tax revenues, jeopardizing funding for essential services from public safety and cleaning to transportation.
“San Francisco really placed a bet on huge commercial office development, more than anywhere else maybe in the world,” said California assembly member Matt Haney. “They placed the biggest possible bet on something that went bottom-up. They lost. So now we have to adapt and adapt quickly.”
According to Haney, part of the solution lies in downtown’s emptiness. With high-rises full of empty office space, many artists and low- and middle-income residents priced out, and the most disadvantaged residents of the city housing themselves on its sidewalks, could this vacancy crisis be an opportunity to tackle this emergency in housing and homelessness?
Haney is proposing a state bill that would circumvent some of the notorious red tape that hinders the construction of new housing by fast-tracking the permitting process to convert offices into housing in empty downtowns.
“If we’ve already approved an office building, we shouldn’t treat it as though it’s a new housing development and force it to go from square one with all the hearings, appeals and fees,” said Haney. “It’s in the public interest to get housing in a building that would otherwise be an empty office, and so we’re going to essentially waive everything to make that happen.”
Dean Baker, co-director of the Center for Economic and Policy Research and one of the first economists to sound the alarm on the housing bubble that exploded into the 2008 financial crisis, thinks the move makes sense. “The city is set up to serve a large commuting population. That population is gone and not coming back. It will be a doom loop if the city doesn’t make it a top priority to convert commercial to residential,” he said.
Gensler, one of the largest architecture firms in the world, has a metric for assessing buildings’ suitability for conversion, and in a report published earlier this year by the San Francisco Bay Area Planning and Urban Research Association, it found that converting downtown offices in San Francisco could physically accommodate around 11,200 housing units. But these conversions are not financially feasible given the current challenges to building in the city, the firm said.
“I think it would make a lot of conversions more possible,” said Holly Arnold, an architect who leads Gensler’s residential practice in the Bay Area, when asked about the proposed bill. A lot of developers stay away from San Francisco because they “just don’t have the stomach or the tolerance to be able to go through the process”.
Egan, the city’s chief economist, is skeptical that office-to-housing conversions are going to change the dynamics of downtown in time to save any small businesses. “It’s not going to be the horse that pulls the cart. It might be the cart. But I tend to think that the return of office workers, one way or the other, is going to be the thing that does it.”
Owners prop up teetering real estate values
For the city’s property taxes and for property investors, the real crisis will hit in the coming years if office leases start to expire with no one willing to sign on. The office availability rate is currently at 35%. But rents aren’t budging as much as you’d expect in a market with such little demand and so much availability.
“My guess as to why office rents have not fallen more is that the owners are worried about the impact on appraisals for either new loans or sales,” said Dean Baker. “If you cut the rent by 50%, that will quickly be reflected in an appraisal.”
Sitting in Salesforce Park was Chris Carlsson, a local historian and co-director of Shaping San Francisco, which provides walking, biking and bay cruise history tours of the city. He gestured to the soaring towers around. He thinks their value is about to crater. “The people holding that value will lose it. And they will be sad, and they’ll be jumping off buildings, and they’ll be freaking out,” said Carlsson, who sheds no tears for property investors. “That’s fine. That’s capitalism, right?”
“What does a de-worked downtown look like?” Carlsson mused. He thinks converting as many buildings to residences is one answer. But there’s another option. “Deconstruction is a possibility,” he said. “Start taking stuff down. Why have these towers here if there’s no use for them?
“Maybe there will end up being waterslides in there,” he added, only half joking. “Five stories of waterslides and amusement parks. Why not make giant pinball arcades?”
Some 175 years ago, there was a gold rush that brought hundreds of ships from all over the world, down the road from where Salesforce Park is now located. Prospectors dreaming of riches couldn’t wait to anchor in San Francisco Bay before jumping ship, hundreds of which jammed the bay.
Some entrepreneurial folks found ways of staking claim to prime real estate by running ships aground in the shallows of the bay. There are dozens of ships that make up the foundations of downtown San Francisco. Some folks will no doubt find a way to strike gold if and when this city’s commercial office market collapses too.
Everywhere you go in the city, ruins of a former economy and culture now thrive in a completely new incarnation. A navy shipyard is repurposed as studios for hundreds of artists; an armory becomes an adult movie studio and then an event space; a church becomes a space for a roller skating disco party; the old federal penitentiary on Alcatraz island is one of the city’s most popular tourist destinations; a furniture shop becomes Twitter’s HQ.
If the city could convert four blocks of downtown into a surreal rooftop garden, maybe – just maybe – it can transform these downtown offices into something better suited to the future.
EUROPE
Greece: ENFIA dropped 40% for most
There remains plenty of room for improvement in property taxation, considering other states. The tax burden that goes with the acquisition, possession and utilization of real estate in Greece has diminished considerably in the last few years, but it still has plenty of room for reduction, especially compared to some of the neighboring countries, such as Bulgaria.
Industry executives note that a further reduction in tax rates could lead to lower rental costs as it would reduce the burden on landlords, thereby providing the relevant incentive to lower prices. Still, some professionals are more skeptical about the effectiveness of such a move, as it is not certain that a rate reduction would have the desired effect, especially if undeclared income traded in the real estate market is taken into account.
In any case, Greece appears roughly at the European average, in terms of the tax burden on property, after the rationalization in recent years. Although there are still significant issues, such as the structure of the Single Property Tax (ENFIA), which “punishes” those with worth more than 400,000 euros, through the supplementary tax, the picture is much better than some years ago, when Greece taxed significantly the possession as well as the utilization and buying and selling of real estate.
After the recent changes to zone values and tax rates, ENFIA went down by up to 40% for 80% of owners, compared to the previous years. A further tax reduction of 10% is planned if the property is insured against natural disasters.
Greece has now significantly streamlined buying and selling costs, as in the past a transfer tax of 8%-10% of the property’s value was imposed, encouraging tax evasion. Today that has been reduced to 3%, while if it is a first-home purchase there is a tax-free limit of up to €275,000. Therefore, calculating the other costs (e.g. broker’s fee, notary’s fee, registration fee in the cadaster and mortgage registry), the total cost for the purchase and later sale of a property (which is also of interest to foreign investors), is limited to about 8.5% of the property value, compared to 16.45% in Spain, 13% in Germany and 13.6% in Italy. However, in neighboring Bulgaria that rate comes to just 7.7%.
Ireland: What is the Government’s new Land Value Sharing Bill?
The Government recently approved the draft publication of the Land Value Sharing and Urban Development Zones Bill 2022. The idea behind the bill is to clamp down on land speculation, where developers profit off land that is zoned for housing.
What exactly is the bill though and what impact will it have on new housing developments? Here are the answers to some of the questions you might have around it.
What is the aim of the bill?
The Government said the aim of the scheme is for local authorities to secure a proportion of the increase in land values stemming from decisions to zone land for development including housing, or subject to an Urban Development Zone designation.
The bill also allows for the designation of Urban Development Zones which have potential for significant development for housing and other purposes. They said the proposed measures are part of their Housing for All plans, which aim to secure a greater share of community gain from the planning and development process.
How will it work?
Under the bill, the Government plans to levy a 30 per cent tax on the value of land that is rezoned for housing. It would see landowners and developers pay the difference in the value of land before and after residential zoning.
Instead of developers reaping the benefit of an increase in land value it would go back to the State and more specifically local authorities.
What impact would the bill have?
While the idea of the bill is to recoup the costs of development and give it back to the State, some critics say it will actually increase house prices in the long run.
The Irish Institutional Property says firstly it would be inappropriate for the State to impose this measure without phasing it in over a period of several years.
Pat Farrell, chief executive of the Irish Institutional Property, says the measure would “not reduce housing costs”.
“Only when the land can be developed without a funding gap, should any surplus funds be allocated to a wider county budget. Ultimately it will only increase the ‘tax wedge’ in housing costs,” he said.
TDs and Senators were told that to improve housing delivery, more zoned land, infrastructure and planning permissions are required.
The Government’s new Land Sharing legislation could add up to €35,000 to the price of a home.
The Construction Industry Federation called for the legislation to be paused and reviewed at the Oireachtas Committee on Housing on Thursday morning.
The CIF’s director of housing and planning, Conor O’Connell, says the proposals would only add to the cost of building houses. “This will require international investment that require stability and certainty of taxation and cost measures of housing delivery.
“An increase in output cost which the LVS would result in would be another tax on housing output.”
“Some of our members estimate the LVS as currently worded could cost between €8,000 and €35,000 per unit,” he said.
Authors:
- Paul Sanderson, President | psanderson[at]ipti.org
- Jerry Grad, Chief Executive Officer | jgrad[at]ipti.org
Compliments of the International Property Tax Institute (IPTI) – a member of the EACCNY.