There’s a funny footnote to Stephen Ross’ decision to put his Time Warner Center penthouse on the market this week for $75 million. The Related Companies founder and chairman didn’t pay a dollar for it — at least not in the traditional sense.
Sources said the penthouse was a “distribution” from the project’s development team — a partnership between Related and AREA Property Partners, which was founded by the Mack family and Apollo Global Management.
The penthouse at 25 Columbus Circle (Credit: Corcoran)
By taking a distribution instead of pocketing his share of the cash profits from the project, Ross likely avoided a hefty income tax bill.
“If you take cash profit out of the deal, you have to pay income tax on it,” said one developer, who spoke on the condition of anonymity. “If you take a unit as distribution, it’s a non-taxable event. You don’t have to pay taxes until you sell it.”
It’s a not-uncommon practice among New York City developers, and the savings can be substantial.
The top income tax rate for 2018 is 37 percent, said Pamela Capps, a tax lawyer and partner at Kramer Levin, compared to the top capital-gains rate of 24 percent. “It’s also possible that down the road they could defer the gain further by doing a 1031 exchange,” Capps said. (Ross has said he intends to purchase a condo at Related’s 35 Hudson Yards, the megaproject where Related is also moving its offices.)
At the Time Warner Center, property records show Ross, whose net worth Forbes estimates at $7.7 billion, closed on the condo in December 2006 for $0. A decade later, he transferred ownership of the unit to a corporate entity, 25PH Columbus Circle LLC. No money changed hands then either, records show, but in 2010, Ross obtained a $21 million mortgage from Deutsche Bank.
“My understanding is it is his plan to buy it,” Bruce Warwick, Related’s vice chairman, told the Observer in 2007. At the time, he said he believed Ross would pay $30 million for the pad — the price listed in the condo offering plan. There’s no paper trail for such a transaction, however, and the 2006 deed has “Box I” checked off, indicating there were “Other Unusual Factors Affecting Sale Price.”
There’s a long list of developers who live in their own buildings, including Larry Silverstein at 30 Park Place, Harry Macklowe at 432 Park Avenue, Ziel Feldman at the Marquand and Ian Schrager at 160 Leroy. Financial arrangements vary widely — and it’s not always clear whether a distribution is taken. For some developers who bought in their own buildings at the project’s inception, the profits have been handsome.
The median sales price in Manhattan rose 25 percent between the fourth quarter of 2006 and 2018, according to data from appraisal firm Miller Samuel. In the luxury market, the median sales price rose 88 percent during the same time. For what it’s worth, Ross, who is asking a whopping $9,064 a foot, is seeking a premium of 150 percent from the original $30 million listing price. The 8,274-square-foot pad has five bedrooms, a 42-foot living room and custom wood and marble flooring.
To take a unit as distribution, developers need approval from their limited partners. It’s not always possible to do and if they’re not taking a distribution, developers typically pay a “minimum release price,” which correlates to the value the lender has assigned to each unit, sources said. A handful of insiders may also buy the unit at cost.
Distributions happen more often with units that are most likely to grow significantly in value over several years. “It’s an investment vehicle,” said Ed Mermelstein, an attorney and founder of One and Only Holdings LLC, a real estate advisory firm.
Steve Witkoff, for example, shelled out $48 million in 2016 to buy five sponsor units at his 150 Charles Street, including a penthouse, four-bedroom, three-bedroom, two-bedroom and a studio, according to records. He sold one recently for $33 million.
Larry Silverstein paid $32.6 million for an 80th-floor penthouse at Silverstein Properties’ 30 Park Place in April 2018, records show. And in 2014, JDS Development Group’s Michael Stern paid $16 million for his condo at Walker Tower, which his firm developed with Property Markets Group. In June, Stern listed the pad for $28 million.