Are Skyrocketing Taxes Running Dealers Out of Chelsea?

The site of Casey Kaplan's new space, which is scheduled to open in February 2015.

The site of Casey Kaplan’s new space, which is scheduled to open in March 2015.

When Betty Cuningham first moved into her space at 541 West 25th Street 10 years ago, the building was family-owned, and it was valued, she said, at around $9 million. In 2012, the property, in distress during the recession, was sold to Related Companies for about $90 million. Then, this spring it made headlines when it was sold again, this time for $160 million, to private real estate company L&L Holding and insurance giant Prudential. (Target and Victoria Beckham are current tenants.) And while Cuningham, whose lease was up in April, was told her rent would roughly double should she stay in her 5,000-square-foot space, it wasn’t just the rent that was alarming. It was the taxes on the property that were making the gallery not viable.

“I paid nothing in taxes the first year, and $1,500 the second year,” said Cuningham. “In my 10th year, there was a dramatic change and I paid $42,000.” Cuningham said that every time the group of buildings in which her gallery was housed (511-541 West 25th Street) were sold, the property got reassessed by the city and her share of taxes went up. As a result Cuningham started scouting properties on the Lower East Side and in the month her lease was due, happened upon the space formerly home to Dodge Gallery, which also recently departed for financial reasons. “We saw it in April and took it in April,” said Cuningham. “That’s how tight it was for me.”

Cuningham had packed up the exhibition that was on view—a show of nudes by Phillip Pearlstein—and continued the presentation in the new space. “Art can be about politics and personal things, or about paint,” said Cuningham, noting how frustrating the commercial atmosphere of the High Line promenade was. “But once it’s about money, it’s all about money.”

Casey Kaplan, also a longtime Chelsea art dealer, recently announced he was striking out on his own and moving his gallery to the Flower District. While his move was motivated by a desire to “reassess things,” and to “think about where [he is] as a gallery and the artists that [he] works with” at the time of his 20-year anniversary (which falls in March), he couldn’t deny that there was a financial imperative to moving from the area.

“Chelsea is getting extremely expensive,” said Casey Kaplan, whose lease is up in January. Had he renewed his lease on the space he’s currently renting on 21st between Tenth and Eleventh Avenues, he would have had to sign what’s called a triple net lease, by which tenants are responsible for their pro rata share of the taxes on the property. As one broker explained it, if you lease 5,000 square feet in a 1o,000 square foot building, you have to pay taxes and insurance on 5,000 square feet. Whereas under his current lease at 525 West 21st Street, Kaplan was not responsible for his full share of the property taxes.

“I don’t think [the triple net lease] was very common when Chelsea was initially colonized,” said Kaplan. “It was not part of my initial lease here. It’s a newer development with the high stakes real estate. On my block alone, there’s two major building projects and there will be two more.”

Triple net leases usually apply to properties leased to national tenants like McDonalds and Walgreens. Triple net properties are appealing to investors because they offer income with little management responsibility since expenses are passed through to the tenants. And that type of lease is more common in retail today than it was even a year ago.

“It used to be modified growth leases,” said Steven Gomez, president of Business Advisory Partners (an independent contractor for Douglas Elliman Real Estate Brokerage), “where the tenants would pay just the rent plus utilities. Some tenants would have to pay a pro rata share of increases in taxes but never the whole tax bill for their portion of the space.”

Gomez says that the triple net lease is a method whereby landlords try to disguise skyrocketing rent increases and prevent sticker shock. “It’s easier to say it’s still $120 per square foot, but now it’s triple net,” said Gomez. “It’s a less objectionable rent figure. But when you really do the math, the net cost is much higher.”

Gomez said that ground floor retail space south of Houston has gone up 37 percent in the last year, an unprecedented number that reflects a rise in rents everywhere in Manhattan. But there are still areas that have not experienced significant price jumps, among them East Harlem, the Lower East Side, and the Flower District.

Some attribute the spiking in retail rental value to shifting policy. “We had a freeze for several years under Bloomberg,” said Faith Hope Consolo, chairman of Douglas Elliman’s retail group. “For several years, real estate taxes didn’t go up. It’s only the last year or so that property taxes are rising. So anybody getting a reassessment is getting hit with a really large number.”

According to Consolo, the side streets of Chelsea used to be in the $20-$30 per square foot range as little as three years ago. Whereas now spaces are commanding $100 to over $200 per square foot.

Though he wouldn’t name names, Kaplan noted that four different galleries, looking to relocate from Chelsea because their leases are either up for renewal or are not being renewed, have asked him for his broker’s information. Two of the galleries are “established and older,” while one gallery is of his “generation” and mid-sized, and one is younger and smaller. Cuningham also said that she had gotten calls from dealers whose leases were up and who were interested in moving from Chelsea.

Changes in the area are affecting more than just the rental rates for galleries. Developers are also picking up land at record prices. The building that houses Anton Kern Gallery has been put on the market for $982 per square foot by luxury real estate developer Alf Naman, according to The Real Deal.

And while many galleries are moving out others are choosing to stay. Lisson Gallery recently signed a 15-year lease on 8,500 square feet of space. And Gallery 303, which temporarily moved out of its 21st Street space to make way for the snazzy Norman Foster–designed building, will return to its newly refurbished digs when that development is completed in 2015. As for gallerists who own their spaces (like Metro Pictures, whose owners purchased its building with Matthew Marks and Barbara Gladstone in the 1990s) are in the clear and staying put.

Though Kaplan is the first of the Chelsea crew to make the leap to the Flower District, he doesn’t necessarily believe he’s at the fore of a new migration. He said, “I think that New York is ready for some kind of post-colonization or ghetto of galleries.”