Manhattan Retail Properties Face Tax Opportunities and Traps for the Unaware
Manhattan is known for its robust and cosmopolitan real estate market. Recently, there have been a number of critical tax law changes that could have a tremendous impact on Manhattan real estate and its retail sector by affecting the viability of traditional brick and mortar stores and changing the dynamics of lease payments due to landlords.
Regarding the retail sector, NYC has recognized its substantial shopping and retail industry and duly collects its share of revenue via the Commercial Rent Tax (“CRT”). The CRT, first introduced in 1963, is a tax collected by NYC from tenants who occupy or use a property for commercial activity in Manhattan, south of 96th Street and north of Murray Street. As it stands, the CRT applies an effective tax rate of 3.9% to businesses located in the aforementioned zone that pay at least $250,000 in annualized base rent.
In an effort to lessen this tax burden, the NYC City Council recently passed legislation to amend the CRT. This new legislation went into effect on July 1, 2018 and reduces the number of businesses that are impacted by the CRT by extending a full tax credit on the CRT to those businesses that make less than $5,000,000 in total annual income and pay less than $500,000 in annualized base rent. Further, a partial tax credit will be extended on a sliding scale to businesses that make up to $10,000,000 in total annual income and that pay up to $550,000 in annualized base rent. A detailed calculation breakdown of the changes to the CRT may be found here.
For all of Manhattan’s pedigree as one of the premier shopping destinations in the world, it is not immune from the business impact of e-commerce. Changing consumer preferences have led to increasing pressure on Manhattan retail occupancy rates, with a potential impact on retail rents and/or the structure of leases as landlords attempt to fill their inventory.
To this end, the NYC Mayor has announced that with the increased prevalence of empty storefronts, NYC is exploring the institution of a commercial vacancy tax or fee which would be collected from landlords that hold out on filling a retail space for too long in order to command higher rents. While no specific legislation has been made public yet, this potential new tax must be carefully watched as it could significantly impact the retail leasing market and may require existing tenants to review their leases to examine the impact of any taxation reimbursement clause in a commercial lease. As always, existing leases should be periodically reviewed to analyze tax and operating expense clauses to ensure the accuracy of lease payments. Tax changes and possible regulatory changes should be considered in any lease negotiation so that there is not an economic surprise for the client.
On the national level, one should note that the Supreme Court recently held in South Dakota v. Wayfair that states may compel online retailers to collect sales tax even if the retailer does not have a physical presence in said state. The institution of said sales tax would help traditional retailers be relatively more competitive.
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