Real Estate Weekly: Politicians call for tax on private equity loans

A Manhattan Assembly member is proposing taxing private equity loans in an effort to increase transparency in residential sales and to raise money for public housing.

Harvey Epstein, who introduced the tax bill last week in Albany with State Senator Julia Salazar, said that debt that’s not a traditional mortgage should still be recorded and taxed at the same rate as the state’s mortgage recording tax. (For a $200,000 mortgage, New Yorkers buying a home in the state would pay at least $1,000.)

While Epstein said it’s hard to guess exactly how much of shadowy debt is out there, he thinks that the tax could possibly raise as much as $4 billion.

He gave an example of Blackstone’s 2015 purchase of Stuyvesant Town-Peter Cooper Village, a deal that involved at least $2.7 billion of financing not currently subject to the mortgage recording tax. Had it been included, the state would have pocketed $65,475,000.

Any and all money the tax brings in would go directly towards public housing in the city and affordable housing upstate.

Along with contributing to NYCHA, which is facing a $40 billion capital needs deficit, Epstein said the bill is also about bringing some transparency to sales that are financed by murky debt structures often used by institutional investors. This kind of financing has been getting more common for purchases of individual one and two-family homes in the $250,000-$1 million range, he said.

“You used to see it in the multifamily market in the last 15 years,” said Epstein. “In the last five years or more it’s individual homes. You see all cash offers from private equity. It makes it harder for home owners to compete against the private equity market.”

“Someone who wants to buy a house has to go to the bank for financing if you don’t have the cash on hand. The person who’s selling the home is going to sell to the person who pays upfront cash, even though they’re borrowing it just as you’re borrowing it. So the private equity companies have an advantage.”

As for what the homes scooped up using this kind of debt are being purchased for, flipping or rental income, it just depends on the investor (sometimes publicly recorded, sometimes buying through an LLC).

Epstein has begun reaching out to stakeholders, including real estate professionals for feedback on the bill, but said so far he hasn’t gotten any pushback from the industry.

“We think this is a very important oversight mechanism,” said Epstein. “Transparency is so important for the next generation of people who want to buy homes.”

A spokesperson for the Real Estate Board of New York did not respond to a request for comment by Real Estate Weekly’s deadline, but the bill has already been cheered by tenant advocacy group Housing Justice for All.

“While public housing suffers from decades of divestment, private equity landlords like Blackstone and Brookfield are making billions overleveraging private rental housing,” said Cea Weaver, campaign coordinator, Housing Justice for All.

“This bill takes aim at speculative real estate investment that drives tenant harassment, unsafe living conditions, and evictions – while returning millions of much-needed dollars to public housing authorities across the state.”