LOIS WEISS: NY's Lower Commercial Rent Tax A Drop In The Bucket Against Deluge Of Business Tax Headwinds
The new changes to the Commercial Rent Tax are supposed to exempt more businesses from paying this small tax. But a brand new income test means some high earners who hoped they would become exempt may now have to pay up.
A spokesman for the bill's sponsor, City Councilman Dan Garodnick, said these changes will affect businesses earning over $5M and up to $10M.
The measure that passed the council at the end of November doesn’t slice the CRT hard enough.
The entire CRT, a tax on the payment of rent, will bring in $820M this year alone, yet the new law drops a mere $36.8M from the FY 2019 collections. The tax carves out 2,700 businesses with 1,800 now exempt and 900 paying less.
To put this in perspective, there are 230,000 “vibrant small businesses,” according to Gregg Bishop, commissioner of the NYC Department of Small Business Services. You can do the math, but this bill provides relief for less than one-half of one percent of those small businesses.
Sure, it raises the amount of rent that is exempt to $500K and creates a sliding scale to $550K, but the income test is just another indication that you can’t make money in New York without someone’s hand in your pocket.
If your rent is no more than $500K and your business's income is no more than $5M, you get to heave a sigh of relief and are exempt from the tax. Those with a rent up to $550K and income up to $10M will get a credit on a sliding scale.
But make over $10M, unless your rent is $250K or less, you are out of luck.
Those companies that have previously escaped this burden — so long as their rent is no more than $250K, even if the business is in a high-margin industry and has a high income, like a jeweler — are going to keep this exemption, Garodnick's spokesman explained.
Think of this carve-out as being akin to the quirky residential rent stabilization rules wherein a tenant with a high income that is paying a low rent gets to remain rent stabilized.
The only businesses who pay the commercial rent tax are in an area in Manhattan from the north side of Murray Street up to those on the south side of 96th Street.
City politicians complaining about losing stores and businesses are now applauding themselves for making insignificant changes to a tax that shouldn’t exist at all.
“Eventually — not overnight, but eventually — we need to find a way to repeal the whole commercial rent tax,” Manhattan Borough President Gale Brewer said. “It is regressive, it’s bad policy, it’s been repealed everywhere else in the city already, and no one in the entire United States does it except us and Florida.”
While it isn’t in the description, the CRT is a way for the city to glom more funds from people it deems "wealthy.” If you are paying hundreds of thousands of dollars in rent to that wealthy building owner, you must be wealthy, too. Right? Not so fast.
Remember, companies also must pay other whack-a-business items like unincorporated business taxes and income taxes, depending on the structure of their organizations. They also pay property taxes that are usually collected by the building owner.
The CRT has been 6% on a rent of $250K or more. But in 2001, then-Mayor Rudy Giuliani changed it so that there is a 35% credit on the “base rent” that brings the number down to 3.9%. The credit has also been allowed on rents up to $300K.
The businesses pay the CRT on a quarterly basis and file an annual return. But if your rent was $200K, you still had to file the tax return, even if you owed no tax. This puts you on the Department of Finance's radar to ensure that, when your rent rises and the tax is due, their hand is there to grab it.
Finance will be creating a new form next spring that will reflect the new rents and income requirements.
A startup with 2,000 SF paying $50/SF already has a base rent at $1.2M per year before salaries, property taxes, electricity and web services, and there is no way they will qualify for exemption without moving out of the CRT area.
To be paying a mere $500K in rent, a company can’t be renting more than 834 SF at a rent of $50/SF or renting 1,042 SF at $40/SF. That’s not a lot of space, and rents are generally well above this for offices, and at least double that for a neighborhood storefront.
The new law also does nothing to help small businesses, garages, offices, larger stores or the supermarkets that are near and dear to every stomach in the city, and particularly to Brewer.
Another bill sponsored by Brewer and co-sponsored by Garodnick and others is in play, but it is unclear if it will pass before the new year. At last count, there were 132 supermarkets in the CRT area, but already one has closed on the Upper West Side.
Steve Sloan doesn’t want to be another statistic. He is co-owner of Morton Williams, a privately owned chain that will soon have 16 city locations — 11 in the CRT district — and over 1,100 unionized employees.
His stores pay upwards of $2.8M per year each in rent, so the new CRT does nothing to help him. The sooner a new law to carve them out the better, Sloan told me.
“We are being attacked and put under so much pressure,” Sloan said, ticking off rising property taxes, rising rents and the minimum wage going from $9 to $15 per hour in less than three years. “This is a 66% increase for our company and costing us $7M a year, which decimates our profits.”
Another sucker punch is coming from online delivery services like Pea Pod, Fresh Direct and others.
“Amazon can be a warehouse in New Jersey and not be subject to these laws,” Sloan added. “They bought Whole Foods and are lowering their prices.”
Dropping the tax on supermarkets also doesn’t help other businesses or larger or well-located restaurants, which are also struggling with the rise in the minimum wage, nor does it help small tech companies or offices.
High taxes and a city government that acts as if it resents those who pay the taxes are surely another reason more people are moving out or balk at opening a business in New York.
The risk of having it all taken either by the government — as Mayor Bill de Blasio is saying he wants to do about buildings for the homeless — may soon outweigh the potential rewards of living and having a business in New York.
CORRECTION, DEC. 21, 1:51 P.M. ET: An earlier version of this story misrepresented the changes for businesses that pay less than $250K in rent.
Lois Weiss is a Bisnow featured columnist as well as a real estate reporter for the New York Post. She has covered New York City real estate for more than two decades and is a past president of the National Association of Real Estate Editors.