These Secret Homes Bring New Meaning To The Term “Tax Shelters”

by Gus Donohoo

COLUMN-SECRET-HOMES-RAW-v2.jpg

Hide your keys in the couch and your home in your shell company

Historically, “secret homes” have attached to a certain exotic provenance—abodes for adulterous lovers, celebrity retreats, off-grid escapes—hideaways for the decadent, the overly-popular, and the paranoid, but the economics of the 21st century have seen a new breed of secret home come to mysterious prominence: the secret home of the secret owner.

 

In the past year, the New York Times published several articles investigating the secret ownership that dominates the New York luxury real estate market, and which has become widespread across the country. Nationwide, from 2000-2012, 44% of properties that sold for over $5 million were sold to shell companies. A shell company is a corporation without active business operations or significant assets. Generally they are used for some sort of financial maneuver—such as shifting capital into a more tax-favorable environment, concealing profits, reducing legal exposure, or for purchasing assets completely anonymously (a representative or lawyer can be listed on the title). They are not illegal, and while a variety of the traditional motives for a secret home remain, the transfer of dubiously acquired foreign wealth is one of interest.

Narrowing their investigation to a single building—the luxury Time Warner Center in Manhattan (with 64% ownership by shell companies)—the Times found that at least 16 secret foreign owners were the subjects of government enquiries. Many are current or former state officials, or have very close ties to a laundry-list of nations not known for their upstanding governance: China, Colombia, Kazakhstan, Malaysia, Mexico, and Russia.

In New York City alone, $8 billion is spent annually on these $5 million plus residencies—triple the amount spent 10 years ago—and 55% are bought using shell companies. Yet while the pinnacle of the market inflates at a prodigious (albeit secretive) rate, the remainder has collapsed. In 2015, home ownership in America continued its fall to 63.4%—the lowest since 1967, and while in the ’80s people owned about 80% of their home on average, today they own a little over 50%, with the rest tied up in a mortgage. Mortgage debt nationwide stands at roughly $25,000 per man, woman, and child. It’s perhaps unsurprising then, that since 2008 some 16 million Americans—or about 82% of the population of New York State—have been pushed into renting.

London, Sydney, New York, Los Angeles—right across the globe, the most desirable cities are experiencing similar social pressures, where home ownership drifts beyond the horizon of possibility for traditional residents, as massive wealth floods in from foreign countries with questionable legal and political systems. Yet foreign ownership is only a part of the story, and the bulk of secret property purchases appear to come from domestic sources. From 2008, the Federal Reserve offered $9 trillion in secret low-interest loans to foreign and domestic banking institutions. Big questions remain as to the impact of this easy capital on a deflated property market that had seen a systematic collapse in low and middle-income ownership.

So what are the quantifiable causes transforming the great global cities into secretly owned property investment portfolios? The roots seem to be buried in capital disparity and an asymmetric legal system that offers access to tax-avoiding tools like shell companies. Transforming these deeply entrenched structures would require major economic and political change. In the middle of February this year, the acclaimed economist Thomas Pikkety described the political upheaval evident in the Presidential election, writing in Le Monde that: “we are witnessing the end of the politico-ideological cycle opened by the victory of Ronald Reagan at the 1980 elections.” A bold claim—the era of Reaganomics ushered in dramatic economic and social change, well explained by a few simple statistics from his term: a plummet in the top rate of income tax from 70% to 28%, a 0% rise in the minimum wage, and GDP growth of 3% (versus 2% for both his predecessor Carter, and his successor Bush). Pikkety argues that it is these policies and their offshoots that have seen the unprecedented concentration of wealth into the hands of the so-called “mega rich”—or as Flaunt calls them Cousin Terry, and Aunt Jill—and it is indeed the mega rich who are probably/possibly/perhaps the proprietors of these secretly owned abodes.

The future of secret home ownership is difficult to predict. While the rise of presidential candidates like Donald Trump and Bernie Sanders both point towards mass dissatisfaction with the system, the capacity for change and its direction and speed are impossible to foresee. Federal rules ostensibly aimed at preventing money laundering were recently introduced in Manhattan and Miami-Dade, requiring title insurance companies to identify the secret owners of luxury properties bought in cash using shell companies. Prior to this in Miami in November 2015, an astonishing 50% of property sales were paid entirely in cash. While these rules may do something to curb the injection of mysterious capital—given cash payments are very difficult to trace—it does little to address the secrecy of ownership more broadly. In a level playing field, secrecy is not of itself an evil, yet in a world where cloaks are the new daggers, and New York is the new Monaco, it might be worth sleeping with some lights on.

Written by Gus Donohoo