Mark-to-Market

One of the hazards of the "clean sheet of paper" approach is that historical models often have armor against rare-but-critical events that are difficult to anticipate.

For example, I once participated in the introduction of a new model of automobile that used the "clean sheet of paper" approach. One deliverable involved several systems so it was not clear which department was responsible for validating it.

When the vehicle was tested (for being compatible with the three most common forms of tow-trucks), the referee determined that it has sustained $2400 worth of damage. Imagine gentle sliding your vehicle into a ditch only to have the tow-truck inflict over $2k of damage! In retrospect, many of the seemingly non-functional features on the vehicle's predecessor armored it against damage from towing.

Social Democrats

The Communists who rebranded themselves as Social Democrats are remaking America using a "clean sheet of paper" approach.

In their zeal to protect "the working class", the Communists made property owners the "bad guy" and are punishing them with increased property taxes and by freezing rents.

For the young kids who were not paying attention in school, Communists hate private property and the people who own any.

One high-profile investor, Sergey Brin, dumped the stock he owned in a Real Estate Investment Trust that owned and managed apartments in New York City. It was reported that he decided it was better to sell at seven-cents-on-the-dollar of his original investment that to stay invested and get whacked for assessments that would put him underwater.

Let that sink in for a moment. In the opinion of a guy having a net worth of about 1/4 Trillion dollars, having your name on a deed to a piece of income property in New York City is not an asset. It is a liability.

Since property tax revenues are the product of multiplying the assessed value of the property by a fixed (but rising) tax rate, any changes to the assessed value of the property will impact the revenue collected by NYC.

In the baldest possible way, Sergey Brin just told Mamdani and the other Communists that the market value of vast swaths of NYC commercial real estate is now only worth 7% of what it was circa 2019.

All of the other holders of real estate are watching. Wanna bet that there is a line of property owners at the assessor's office demanding that there assessments be adjusted to the new reality?

A secondary effect is that it will lock up credit. The book-value of the property serves as collateral for loans. Those loans are used to finance upgrades like more efficient heating and cooling, WIFI and communication infrastructure, mitigating environmental hazards like lead and asbestos and cockroach dander. The wholesale destruction of the book-value of NYC's (and Seattle and Chicago...) property will paralyze the access to the credit needed to maintain the desirability of the individual properties and ultimately the desirability of the city.

But wait, there is more...

Brin bailed out of a sinking ship. The REIT he bailed out of owns thousands of rental units. When the REIT reorganizes or liquidates, it appears likely that nobody will step-up to assume the responsibility of managing the multi-family buildings. That is, collecting the rent and to paying the taxes and utility bills and executing the basic blocking-and-tackling of doing what needs to be done. Nobody wants to take a bite out of that poisoned apple.

The REIT Brin abandoned is just first of many. 

So how is that going to work when the boiler in the cellar craps-out in January? The REIT was vaporized. Will the city suddenly open a department filled with property managers? Where will they come from? Who will pay their wages or will Mamdani expect them to work for free? Where will the budget for replacing the boiler(s) come from? Who will evict the dead-beats and the drug dealers?

How are the Communists running NYC going to handle the evisceration of their property tax revenues? Albany cannot print money. Trump is unlikely to rescue them. There was a system with checks-and-balances in place. The Communists took a wrecking ball to it. That wrecking ball also destroyed the trust investors had in institution of NYC. A glib "My bad. Come back" isn't going to cut it.