Monday, February 09, 2015

Michael Bloomberg's Idea Of A Real Estate Godsend Is A Catastrophe And A Nightmare For American Working Families


The L.A. Basin is filled with empty McMansions. I hear there are also lots of big empty homes in Seattle, Vancouver, San Diego and the space-strapped San Francisco Bay Area as well. They're like fields left fallow, although they're not getting more fertile over time. These homes are investments from wealthy foreigners, predominantly from China and Russia, although from anywhere in the world where the wealthy know their riches could be seized in a political upheaval at any time. American real estate has proven a good parking place. The value of the investment has tended to grow, and real estate in these desirable markets has been very liquid. Annually, around $8 billion is spent for New York City residences that cost more than $5 million each, more than triple the amount of a decade ago-- and more than half that money is from shell companies. At the Time Warner Center was built, 26% of the original buyers were foreigners, and more recently that has grown to over 50%. Only about a third of the owners live there at any one time. In 2003, one-third of the units sold in Time Warner were purchased by shell companies. By 2014, that figure was over 80%.

If you watch the BRAVO! real estate shows about Los Angeles, Manhattan and Miami you've probably noticed that many of the million dollar listings are going to foreigners looking to park (invest) their money. Some may also be looking towards an eventual retirement. Some buy their children nice homes while they're studying in the U.S. Over the weekend, Louise Story and Stephanie Saul penned an eye-popping real estate story for the New York Times, Stream of Foreign Wealth Flows To Elite New York Real Estate. Russian banksters connected to organized crime, corrupt Greek businessmen, financial predators from China, crooked politicians from Colombia, Saudi Arabia, Malaysia, Gabon, Mexico and Kazakhstan... if you move into high end luxury buildings in New York those will be your neighbors. "Behind the dark glass towers of the Time Warner Center looming over Central Park," they wrote, "a majority of owners have taken steps to keep their identities hidden, registering condos in trusts, limited liability corporations or other entities that shield their names. By piercing the secrecy of more than 200 shell companies, the New York Times documented a decade of ownership in this iconic Manhattan way station for global money transforming the city’s real estate market... They have been able to make these multimillion-dollar purchases with few questions asked because of United States laws that foster the movement of largely untraceable money through shell companies. Vast sums are flowing unchecked around the world as never before-- whether motivated by corruption, tax avoidance or investment strategy, and enabled by an ever-more-borderless economy and a proliferation of ways to move and hide assets."
The high-end real estate market has become less and less transparent-- and more alluring for those abroad with assets they wish to keep anonymous-- even as the United States pushes other nations to help stanch the flow of American money leaving the country to avoid taxes. Yet for all the concerns of law enforcement officials that shell companies can hide illicit gains, regulatory efforts to require more openness from these companies have failed.

“We like the money,” said Raymond Baker, the president of Global Financial Integrity, a Washington nonprofit that tracks the illicit flow of money. “It’s that simple. We like the money that comes into our accounts, and we are not nearly as judgmental about it as we should be.”

In some ways, officials are clamoring for the foreign wealthy. In New York, tax breaks for condominium developments benefit owners looking for a second, or third, residence in one of Manhattan’s premier buildings. Mayor Michael R. Bloomberg said on his weekly radio program in 2013, shortly before leaving office: “If we could get every billionaire around the world to move here, it would be a godsend.”

...The proliferation of shell companies incorporated in the United States has hurt Washington’s attempt to get other countries to crack down on Americans who move money offshore to avoid taxes.

“We are in a totally inconsistent position,” said Carl Levin, a Michigan Democrat who pushed for transparency in shell companies when he served in the Senate. “We’re way behind in terms of keeping up with what the international standard is, and it weakens our argument when we go to try to crack down the use of these offshore tax havens.”

About a year ago, after the Group of 8 industrialized nations issued goals requiring identification of shell company owners, a British representative met with Justice Department officials to complain about the United States’ failure to comply.

According to two people at the meeting, the British representative, Dominic Martin, delivered a stern message: The lax American laws were being used by other countries as an excuse for inaction.

Such a message resonates with Justice Department officials who have advocated tightening the rules.

“For a long time we’ve taken the view that you have to focus on the people that manage the gateway to the financial system, and those guys are not only the banks,” said Stefan Cassella, a Justice Department lawyer. “Bad guys who are trying to invest money in the financial system-- they use lawyers, they use accountants, they use real estate, they use jewelers and private jets.”

...When Mr. Bloomberg set out the welcome mat for the world’s billionaires, the idea was this: Money they spent would trickle down to the doormen, concierges, cleaners, drivers and construction workers, as well as to the shopkeepers and restaurateurs who sell $5,000 handbags and $450 sushi dinners.

And many of the players at the Time Warner Center are indeed big spenders.

After Maxim Finskiy, a Russian business associate of the Brooklyn Nets owner Mikhail Prokhorov, moved in, he imported his Bentley.

Robert Tsao, who gave up his Taiwanese citizenship after authorities there sued him unsuccessfully for investing in mainland China, owns one of the world’s most renowned private collections of Asian art.

Adam Chen, who graduated from New York University in May, was one of several college students to use the complex as a dormitory. He celebrated his birthday last year at the restaurant Per Se in the Time Warner Center, dining on its famous starter, Oysters and Pearls, all captured in photographs on Instagram.

The precise impact of wealthy foreigners on the city may be more complex, though. As nonresidents, they pay no city income taxes and often receive hefty property tax breaks. A program aimed at new condo development doles out about a half-billion dollars in tax breaks a year, according to the city’s independent budget office. These savings are passed on to owners in the form of lower property taxes. The Time Warner Center was not part of the most lucrative tax break program, but many other buildings around Central Park have benefited.

The city’s first condo costing more than $100 million, which sold in the last few weeks at the new luxury tower One57, had property taxes this past year of $17,268, according to the city’s finance office. Those taxes will go up over time, but for now that is a savings of more than $359,000.

The Fiscal Policy Institute, a nonprofit in New York, recently suggested a downside to the influx of billionaires who are in the city only sporadically.

“In terms of the local economy, you don’t have people who are going to plays, going to restaurants,” James Parrott, the institute’s chief economist, said. “They’re not spending at the dry cleaners, the grocers and all of that, so it deprives New York of all that local multiplier effect.”

What is more, Mr. Parrott said, the skyrocketing prices of the pieds-à-terre are affecting the price of real estate in the city more broadly. “There’s a downside to having such pressure at the top. It pulls up the prices overall. When owners of $10 million condos see that there’s a big market for $95 million condos, they’re more likely to raise their prices,” he said. “Then the person at $2 million raises his prices, then the person at $1 million sees that and there aren’t any prices below $1 million.”

Through a spokesman, Mr. Bloomberg said last month that he had hoped billionaires who moved to New York would not simply be part-timers but would live in the city and pay taxes “so we could use that revenue for government services that, incidentally, disproportionately benefit lower-income New Yorkers.”

Some local politicians have suggested taxing the owners of pieds-à-terre who are not city residents.

“We are spending money to keep them safe and maintaining the infrastructure,” said Brad Lander, a city councilman. “Should there be the equivalent of a commuter tax? An international residents tax?”

A proposal from the Fiscal Policy Institute would impose a graduated tax on pieds-à-terre worth $5 million or more. The group estimates it would generate $665 million a year in revenue for the city, mostly from owners of the approximately 445 apartments valued at more than $25 million.

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