Ballooning Property Taxes Cripple NYC Businesses As Rents Drop

NEW YORK — Natasha Amott used to have three well-known boutiques packed with cooking supplies, from unique cocktail bitters to high-end Japanese knives. Now her Whisk empire is down to a single store.

One closed in April for a familiar reason. Amott’s landlord wanted to raise the monthly rent for her Williamsburg location to $26,500 from $18,450 because of how hot the retail market is on the Bedford Avenue thoroughfare. Amott was unable to afford the higher price and the store joined scores of others around the city shuttered by rent hikes.

But a less familiar factor — one partly in the city’s control — forced Amott to give up on Whisk’s Flatiron location just last month: Rising property taxes.

Amott was on the hook for 30 percent of the annual increase in her landlord’s property tax bill under a common provision in commercial leases. That cost started at about $10,000 in the first year of her lease, which she signed in 2012, but ballooned to more than $54,000 last year — a jump she said no one saw coming.

“If it was just the rent, then we would probably be like, ‘OK, maybe when our lease is up, we’ll look at a different location,’” said Amott, whose remaining Whisk shop is on Atlantic Avenue in Downtown Brooklyn. “But I think it was realizing in 2017, then again in 2018, that the property tax situation was crazy and feeling like it was only going to continue to increase at a dramatic rate that we said, ‘This is not the kind of model that feels very sustainable for us.’”

Amott isn’t alone. While policymakers and advocates have focused intensely and vocally on rising rents, property taxes have quietly become a much larger burden for New York City’s small businesses over the past decade.

Retail rents, on the other hand, have declined in many parts of the city in recent years.

The city’s retail store buildings were billed a collective $1.5 billion in property taxes last year, up about 71.6 percent from just $877 million in 2009, according to data from the city Department of Finance. The average tax bill for a retail parcel jumped more than 68 percent in that time, from about $46,620 to $78,494.

Those figures only capture properties primarily used for retail, but other categories have seen similar trends. Property tax billings for office buildings rose more than 69 percent from 2009 to more than $5.2 billion last year, while large residential rental buildings — which sometimes have ground-floor retail space — saw their total bills jump more than 66 percent to nearly $4.2 billion in that time.

The numbers show “substantial” and “steady” increases in property taxes that hit business owners in their balance sheets, according to Ana Champeny, the director of city studies at the Citizens Budget Commission, a fiscal watchdog and research group.

“This growth is going to put a strain on retail businesses as most leases pass along the property tax escalation, so their annual increase would be not just their increase in base rent but also in their property tax,” Champeny said.

By contrast, rents in 13 of Manhattan’s 17 major retail corridors have been on a downward trend since the spring of 2016, and only five of Brooklyn’s 17 hotspots saw average asking rents increase this past winter, reports from the Real Estate Board of New York show.

Retail rents peaked around 2014 and 2015 after several years of growth but have been sliding since, according to Michael Azarian, a commercial real estate broker with the firm Cushman & Wakefield.

“There are a number of factors that are contributing — not just rising rents, or what were rising rents, because rents now have fallen — to creating vacant spaces,” Azarian said.

“It’s not necessarily the big, bad landlords trying to get big rents,” he added. “Everybody has a hand in this, the city included.”

Many commercial leases saddle tenants with their proportionate share of any annual property tax increase, so a business owner’s bill jumps when the landlord’s does. For example, if a shop occupies 25 percent of the space and the total tax bill rises by $10,000, the tenant would have to fork over $2,500.

Those terms leave business owners with an unpredictable cost in addition to their rents, they say.

Bob Schwartz, the owner of Eneslow Shoes, said his property tax payments for his main store on Park Avenue South have increased more than sixfold, from roughly $14,000 in 2009 to nearly $97,000 this year. That equates to nearly one sixth — or two months — of his annual rent, which he said is about $600,000.

The numbers started to rise sharply after the building was sold in 2007 and could jump even more because it was sold again last year, according to Schwartz. Amott said the property tax payments for her shuttered Flatiron store shot up far faster than her rent, which typically increased about 3 percent each year.

“You’re not going to know it’s coming until it comes. You don’t know how much it’s going to be until it is. You don’t know the forces that are making it happen until they happen. You have no say in the process,” Scwhartz said.

The city’s Advisory Commission on Property Tax Reform is examining ways to relieve commercial tenants as it considers myriad reforms to the real estate tax system, in which state law plays a significant role, city officials say.

The commission has been at that task since Mayor Bill de Blasio and City Council Speaker Corey Johnson empaneled it in May 2018 with a mandate to recommend ways to make the system fairer and simpler without reducing the city’s property tax revenue.

The commission will issue its recommendations this year, a de Blasio spokesperson said. Patch requested to interview the commission’s chair, Marc V. Shaw, but was unable to do so.

The commission is “working hard to examine how to best reform the NYC property tax system but it’s premature to announce anything until our work is complete,” City Council spokesperson Jennifer Fermino said in a statement.

Tax bills have shot up because properties have broadly gotten more valuable — a sign of the economic growth the city has seen since the 2008 recession — while the local tax rate for commercial properties has stayed relatively constant over the past decade, said Michael Hyman, the first deputy commissioner at the Department of Finance.

State law governs how market values are converted into assessed values that are used to calculate bills based on the tax rate, Hyman said. The city sets property values using a widely accepted methodology that incorporates a range of factors, including the owner’s income and expenses attached to the building, he said.

“We’re valuing properties based on economic information,” Hyman said. “So a lot of ways we value are empirically based and if there’s growth, it’s picking up economic growth for New York City business or it can pick up new construction that’s going on.”

Property taxes and rents are interrelated and can influence one another. For instance, a rent hike increases a landlord’s income from the property, which can in turn drive up the tax bill. Property owners can also incorporate taxes into tenants’ monthly rents.

But property taxes are often viewed as an issue for landlords when they are also an extra burden for business owners — one that could break struggling merchants, said Shunan Teng, the owner of Tea Drunk, a high-end tea shop in the East Village.

Teng said her property tax payments have fluctuated over the years, but her last one was $6,164. The total tax bill for the East Seventh Street building that houses Tea Drunk jumped about 25.5 percent from 2013, when the shop opened, to $117,534 in the last fiscal year, city records show.

“We can afford the property tax. However, I can imagine if a business is not doing very well or at the very beginning stage where you’re still trying to break even and then you potentially have to explain to your investors, who probably also are not the big-time investors, why all of a sudden your business is another negative a few thousand for this month,” Teng said. “And that just basically accelerates the closure of the business if they’re already struggling.”

Policymakers and activists have trained their attention on rising commercial rents, which have been blamed for forcing several beloved stores and restaurants to close for good.

Johnson, a Chelsea Democrat, revived the Small Business Jobs Survival Act — a decades-old proposal to establish protections for commercial tenants — last fall, giving it its first hearing in nine years.

The Council passed bills last week to count long-empty stores, examine the state of storefront businesses and provide training and counseling to small businesses. The city also overhauled the commercial rent tax in 2017 to decrease its strain on small merchants.

But business owners say their property tax burdens have lingered largely out of the public eye, in part because changing the system is such a hairy issue.

“The problem really starts at the assessments and the fact that there is a lot of unfairness in the current system,” said Jessica Walker, the president and CEO of the Manhattan Chamber of Commerce. “A person who’s running a business as a property owner — and don’t forget, some of these property owners are small businesses themselves — they can’t just absorb these increases. So the correction really needs to happen.”

While it’s typical for commercial leases to pass on some share of property tax increases to the tenant, the mechanism for doing so may vary by location.

For instance, Amott said her Williamsburg lease only put her on the hook for property taxes if the building’s total bill more than doubled, which it had not when the store closed. Her Downtown Brooklyn lease obligates her to pay half the taxes on that property, but guarantees that the cost to her cannot rise more than 10 percent year to year, she said.

And Schwartz said he does not have to cover property tax increases under the lease for his store in Little Neck, Queens. "Each landlord and each tenant have their thresholds at which they’re willing to make deals," he said.

Regardless of the variations, Amott said city officials need to address how the taxes are weighing businesses down — and the public needs to be more aware of the problem.

“When I talk about this to customers, they’re so understanding, but they also say, ‘Wow, I don’t ever think about small business renters, tenants, paying property taxes,’” Amott said. “... That subject of pass-throughs just doesn’t get the attention it needs to be getting.”