New York’s Pied-à-Terre Tax Is Bad Policy. But It Shouldn’t Stop Development Land Sales.

The recently enacted pied-à-terre tax may ultimately prove to be one of the most disruptive pieces of real estate legislation New York state has passed in years. Whether one agrees with the objective or not, the manner in which it was enacted and the uncertainty it introduces into the marketplace are likely to create consequences far beyond the revenue the tax is expected to generate.

At a high level, the law imposes a new tax on certain New York City residential properties that are not used as the owner’s primary residence. During the initial phase of the legislation, condominiums and cooperative apartments valued at more than $1 million may be subject to significant annual taxes, while single-family homes become subject to the tax beginning at a $5 million valuation threshold. 

The legislation then contemplates a second phase beginning in 2028 that would utilize a different valuation methodology and substantially reduce the effective tax burden on many affected properties. Whether that second phase is actually implemented as written remains an open question.

What is not an open question is that uncertainty has now been injected into the market.

As I have said for 17 years in this column, markets dislike uncertainty. Buyers dislike uncertainty. Lenders dislike uncertainty. Developers dislike uncertainty. Investors dislike uncertainty. Whenever participants in a market become uncertain about future costs, future regulations, future tax obligations or future values, many simply postpone decisions until they gain greater clarity. That hesitation alone can slow transaction activity.

I believe that is exactly what we are about to see in the luxury condominium and cooperative market.

The legislation creates questions about valuation methodologies, ownership structures, trusts, LLCs, enforcement procedures, appeals processes, cooperative board responsibilities and constitutional challenges. Litigation appears almost inevitable. Buyers considering a purchase today may understandably decide to wait until they have a better understanding of how the law will be interpreted, challenged, enforced and potentially modified. Sellers may find buyers becoming more cautious. Transaction velocity may slow. Values may come under pressure. 

None of that should be surprising.

What is interesting, however, is that I do not believe the same conclusion necessarily applies to development land.

At first glance, one might assume that a tax designed to impact luxury residential ownership would immediately damage development site values. I am not sure that is the case. The reason is timing.

Developers who are bringing condominium projects to market over the next two years have already made their investment decisions. In many cases, they purchased their land two, three, four or even five years ago. They underwrote those acquisitions without anticipating this legislation. They have already committed their capital, secured financing, navigated approvals, and undertaken construction. They are now preparing to sell units into a market that suddenly faces a new tax regime and substantial uncertainty.

Those developers may very well be the biggest casualties of this legislation. The developer purchasing land today, however, is in an entirely different position.

A land buyer closing on a development site in 2026 is typically underwriting a project that will not be completed until 2029, 2030 or beyond. By the time those units reach the market, the current phase of the pied-à-terre tax will have ended. The law itself contemplates a transition to a significantly different framework beginning in 2028. There will almost certainly be legal challenges. There may be amendments. There may be political changes. There may be implementation delays. There may even be a complete restructuring of the legislation.

In other words, today’s land buyer is not underwriting today’s residential market. They are underwriting the residential market that will exist several years from now. That distinction is critically important.

If the law unfolds as currently written, many of the concerns affecting condominium sales over the next 18 months may no longer exist by the time projects being acquired today are delivered. While existing condominium inventory may experience near-term headwinds, development land values should be influenced far more by future conditions than current conditions.

There is, however, one very important caveat.

If the state legislature ultimately extends the current high tax rates beyond 2028, delays the transition to the second phase, or otherwise converts what appears to be a temporary burden into a permanent one, the equation changes dramatically. At that point, developers would have to underwrite future residential values using a very different set of assumptions. If future condominium values are permanently impaired, development land values will eventually be affected as well.

But that is not the world we are operating in today.

Today, the market appears to be confronting a two-year period of uncertainty. That uncertainty may hurt luxury condominium sales. It may hurt cooperative sales. It may create litigation. It may create confusion. It may reduce transaction volume. It may frustrate owners and buyers alike. Just like the state capital gains tax in the 1990s ended up producing less revenue than before the tax was implemented, this tax may turn out to have the same impact. 

What it should not do, at least for now, is materially alter the value of development land being acquired today.

Ironically, the developers most likely to be hurt by this legislation are not the ones making acquisitions now. They are the ones who made acquisitions years ago. They have already placed their bets and are now approaching the finish line just as the rules of the game are changing.

That is rarely good public policy. Then again, when does common sense impact public policy?

Robert Knakal is founder, chairman and CEO of BK Real Estate Advisors.