International News

Late Capitalism Caused the Grenfell Fire

This should never have happened. (grenfellactiongroup)

This should never have happened. (grenfellactiongroup)

With the death toll climbing to 72, the horrific apartment tower fire in London on June 14 is as maddening as it is heartbreaking.  Many residents died completely unaware of the danger around them, others were told to stay in their units, a few jumped out of windows.  How could such a calamity strike in 2017? The answer has implications beyond London and the UK.  The truth is, it could happen in NYC and in some ways already does.  It happens because late capitalism has driven us to collectively abandon the hard lessons of civic responsibility and the public interest that we’ve learned over the last 100 years.

The New York Times has an in-depth look at the fire and the blame falls squarely on late capitalism run amok.  More specifically, the fire appears to have been caused by a refrigerator on the fourth floor that exploded in an apartment (it’s unclear as to why yet).  Normally, large concrete towers would be able to contain such a blaze at least long enough to evacuate the building and/or for firefighters to contain it with minimal damage. However, several factors contributed to the rapid and fatal spread of the fire at Grenfell. 

First, in an effort to “beautify” the building’s exterior (more on this later), highly flammable aluminum cladding was installed around the building.  The material is made in America but is only allowed on buildings in three states (the same cladding caused the recent fire in a high-rise apartment building in Dubai).  The refrigerator was positioned on an exterior wall and the cladding quickly caught fire and spread up and out across the building.

Second, business-friendly government officials (spanning all major parties) eager to reduce “red-tape” ignored repeated warnings from fire experts on the cladding, instead favoring the arguments from the construction industry on the low cost outweighing the minimal risk.  Objective, informed expertise was secondary to a self-serving private interest.

Finally, and most shockingly, residents (most of which are low-income) were virtually ignored despite raising concerns for years over basic regulatory measures for fire inspections, sprinklers, clearly marked fire escapes.  These residents knew how dangerous their home could potentially be and organized repeatedly to change it by pressuring management and the government.  Those pleas were ignored and many of those that made them are now dead.

Neoliberalism preaches the power of the market. Deregulation, privatization, and globalization are supposed to be the three pillars of a free and prosperous golden age.  Grenfell Towers is the stark counterpoint to this illusion.

The tower was built in 1974 as social housing (pubic housing) run by the government at the local borough level.  In 1996, as part of an effort to deregulate and disinvest the government from housing, the tower became part of a newly formed Tenant Management Organization (TMO) called the Kensington & Chelsea TMO owned by the local council.  The organization’s leadership is made up of residents, people appointed by local elected officials, and several independent members. Uniquely in the UK, K & C is also an “arm’s length management organization” (ALMO) that is normally an independent property management organization. So it is landlord and manager, in fact the biggest in the UK. 

This semi-private structure is supposed to allow more local control and greater efficiency but, as many critics argue, it does the opposite.  The mission and incentive structure for the organization is to lower costs above all else.  Finding cheaper ways to run something is perfectly fine, but there are other efficiency priorities that need to be balanced, such as basic safety.  As has become increasingly apparent as more information comes out about the fire, that wasn’t the case with K & C - nor did locals have the agency within the complex to change that focus.

On the other hand, it appears that non-residents had more say in the operation of the building.  Though the tower has a working-class population, the surrounding area is one of the wealthier sections of London.  Pressure from these residents, some of which are on the leadership council, to beautify the exterior (so they don’t have to look at a stark, brutalism building) was given priority. The aluminum cladding that propelled the fire was installed last year as part of an 8.7 million pound renovation to appease these wealth neighbors rather than to fix long-standing resident complaints. 

I can’t think of a more brutal example of late capitalism than Grenfell.  A building constructed to serve the public interest and provide affordable housing was (effectively) privatized and deregulated. In the process its owners prioritized wealthy neighbors instead of working-class residents.  The result was a cosmetic change with known risks that has killed 79 people.

We have public institutions because we live in states with governments designed to represent the public interest, the shared destiny of its citizens.  However flawed these institutions are, their existence and function are central to the idea of that shared identity and shared purpose.  They are the only way to create legitimacy in a society with competing interests and values.  When we devalue these institutions, we devalue the idea of civic responsibility to each other and our society. 

Privatization is often categorized as a binary choice between incompetent, wasteful bureaucrats and efficient, expert businesses.  That’s bullshit, but it’s also myopic. Any organization, public or private, can be well run or poorly run. The difference is the bottom line.  For private companies it is to run a profitable business to maximize shareholder value, which, for the most part, is just fine.  But that’s not how we should view public institutions. Their bottom line is to provide public services to support and nurture a complex society. 

In the UK and the US particularly, we have internalized the supremacy of the market as the ultimate tool to run our society.  As a consequence both countries have been rocked by financial crises, rising social inequality, and erosion of trust in the state.  When you spend decades ripping functions out of the state’s hands, that’s inevitable.  We blame the state for this, but we should be blaming the market. Everywhere you look, whether it’s the retrenchment of monopolies, the dilution of labor protections, or the disinvestment of infrastructure, our society’s priority of short-term profit has fundamentally weakened our ability to protect our citizens from basic risks like fire. 

The true tragedy of this episode and the inevitable future episodes to follow is that we have already learned these lessons, in some cases a century ago.  The Triangle Shirtwaist Factory Fire in 1911 killed 146 garment workers in NYC. This outrage created the modern regulatory system for buildings in NYC and the US and spurred the creation of the International Ladies Garment Workers Union to fight sweatshop conditions.

Is NYC better prepared than London today? Perhaps, but I wouldn’t be too sure for the simple reason that our city, like many local governments across the country, is starved for resources.  Basic inspections are backlogged. Maintenance work is delayed. Complaints are barely registered. 

I’m not just speaking about public housing.  Frankly, NYCHA has done an incredible job maintaining their facilities under such dire restraints for years.  There are reasons for concern and diligence, but the potential risk isn’t in public housing alone. How many small, old buildings in NYC are prepared for a fire? How many large new buildings?

The problem isn’t just fires.  The problem is much larger and deeper.  We’ve gone through terrible traumas as a society, but many of them occurred before anyone today was alive.  The public institutions that were built to address these issues worked, but now we’ve forgotten why they are needed. Our collective complacency as residents, as owners, as officials, is clear and disturbing.

The lesson from Grenfell, like the Triangle Fire before it, is simple.  If we take our civic responsibility seriously, we must support the public institutions that serve it.  We can’t trust that the market will solve our problems for us. We need the market to fit into our civic needs, not the other way around. More innocent people will be killed if we fail to learn that lesson yet again.

How the Panama Papers Could Impact NYC Housing

Billionarie Row in Manhattan (inman)

Billionarie Row in Manhattan (inman)

This week has seen the first published articles about one of the largest document leaks in history, all coming from the Panamanian law firm Mossack Fonseca. The firm has risen to international prominence by funneling the personal wealth of hundreds of politicians, foreign leaders, business owners, and celebrities into off-shore accounts. The process of off-shoring personal wealth has been a long-accepted though discreet practice for high-worth individuals to skirt local tax obligations, but has come under increased international scrutiny in the age of wikileaks, Snowden, and focus on income inequality.

What is so stunning about the Panama Papers, aside from the sheer amount of documents exposed, is the specter of corruption and illegality of the firm's clients that could have a significant and long lasting impact on the political and financial makeup of many countries.   

Though the firm has defended its practices, the blowback from the leaks has already claimed its first victim in Iceland and appears to be starting or accelerating investigations in countries all over the world. It has certainly caused deep embarrassment for many world leaders.  The true fallout remains to be seen and could take years to fully unravel.

However, the sad truth for casual observers hoping for some schadenfreude against the super-not-cool wealthy is that the firm (most likely) has not committed any crimes and having off-shore accounts or shell corporations are not illegal in most countries.  It doesn't mean that people didn't break the law in obtaining their wealth or in not disclosing it properly, but the leaks don't provide a rack of smoking-guns by themselves.

The leaders of financial secrecy (financial secrecy index)

The leaders of financial secrecy (financial secrecy index)

Tax havens aren't just confined to international territories either, so despite the prominence of Mossack Fonesca internationally, we probably haven't come close to understanding the extent of the practice globally through their leak alone.  That is certainly the case even here at home.  The US has become a magnet for shadow wealth itself through several states that have lax disclosure and tax laws.  

Delaware (and Nevada in the West) has long been known as a business-friendly state due to their fast and low cost incorporation processes as well as looser disclosure and tax laws.  There are in fact more corporations (over a million) in Delaware than residents (under 950,000). There are perfectly legal and valid reasons to incorporate in Delaware and over 60% of Fortune 500 companies have done so (coughs, full disclosure: homeBody is a Delaware Public Benefit Corporation.) 

However, many of these laws also create loopholes that are easy for more nefarious people to exploit and no one can do much about it if they do. One of the most prominent ways to exploit these laws in the US is to form an LLC (limited liability company) whether in Delaware or Nevada (or a few other states as well).  LLCs in those states don't have the same reporting and disclosure requirements that corporations have and don't require the actual owner's name, assets, or business interests. This practice, legally called beneficial ownership, makes them especially attractive to international (and possibly criminal) interests that want to discreetly park some of their wealth in the US. 

1209 Orange Street in Wilmington, DE - The home of nearly 300,000 companies (nyt)

1209 Orange Street in Wilmington, DE - The home of nearly 300,000 companies (nyt)

For many of the super-not-cool wealthy, the best way to hide their money is to form an LLC and use it to buy NYC real estate.  NYC is one of the most popular destinations for international wealth because, in addition to its obvious cache and amenities, it is seen as more stable than markets like Dubai and even Miami, while (somehow) being cheaper than London or Hong Kong.   

Much of the crazy boom in luxury building in NYC over the last 10 years is a direct result of the crazy boom in international wealth looking for safe harbors.  The New York Times did a widely covered series on this game last year and reported that about $8 billion is spent on real estate over $5 million a year in the city and that over 50% of that is to shell LLCs.

You can read many articles like this one complaining about how most of these apartments sit empty for 10 months out of the year as a result of this trend.  Even many property managers that we speak to are frustrated with the practical and communal challenges that it creates.  And despite Mayor Bloomberg's infamous claim that having all billionaires move to NYC "would be a Godsend" the reality is that these folks don't spend a lot of time (or a lot of money - taxes or otherwise) in the city.  Much like art being stored in freeports, NYC is just a sexy insurance policy for many of the super-not-cool wealthy.  

It's hardly a rhetorical question to ask does one billionaire spending less than two months in the city (and paying very little property tax relative to their property's worth) contribute more to the city's economic, cultural, and civic life than an equivalent 11,000 individuals making $90,000 (the region's estimated 2016 AMI) who live and work in the city every day? 

It's also hard to argue that the rise of extreme shadow wealth, the proliferation of ways to hide and transfer it, and the disruption on the local housing market that those two forces have created are benefiting New York City in the short-term - let alone if we consider the long-term implications. Having a powerful, hidden, and largely rootless class of individuals (that even when they are in the city, don't take the bus or subway, don't send their kids to the schools, and don't much care about police and fire pensions) directly or indirectly steering policy priorities doesn't bode well for the long-term needs that the city must address.

This is why the fallout from the Panama Papers will be so fascinating to watch. Will it actually affect the NYC housing market? My view is that it will potentially damage the "asset market"  near the top end, but have little impact for the rest of the market. That doesn't mean that there couldn't be long-term benefits from this leak, though.

At the local level, there have already been moves for greater disclosure in NYC real estate by the de Blasio administration, but so far these have been limited in scope. There isn't much support from the industry since the market remains white-hot for luxury real estate, so securing more reform would be a political battle the Mayor might not be willing to fight at the moment.

There hasn't been much action at the state level either, where Governor Cuomo is facing pressure to close the LLC-loophole in relation to campaign contributions. Despite this pressure, his new budget has not included any mention of that issue, so there doesn't seem to be any chance that any LLC-related reform will take place, whether in real estate or campaign finance.  

At the national level, it has not gone unnoticed that the US government (including President Obama and then-Secretary of State Clinton) pushed for the free trade deal with Panama in 2011 despite warnings that it would encourage tax evasion and money laundering. It is unlikely that anything will change at that level nor is it likely that any prominent US firms or individuals will be outed by the Panama Papers anyway, since it is easy enough for them to hide money state-side. However, there could be more pressure on Congress to address how LLCs help beneficial owners avoid US tax laws. There would also be a lot of vested interested opposing any changes.

A lot of lights off up there (wikipedia)

A lot of lights off up there (wikipedia)

The real impact on the NYC housing market, at least in the immediate future, will likely come from international developments.  We could potentially see a spike in real estate transactions as individuals under investigation or political pressure in RussiaChina, and elsewhere try to move funds before the hammer comes down. If more and more countries launch investigations into the leaks, a lot of them will come through NYC, which could mean sellers will flood the market to cash out beforehand or that units could even be seized.  Those outcomes are purely speculation at this stage, but you can see how little they would affect the "shelter market" that the rest of us are in.

A potential positive outcome on the housing market could be a broader reassessment of the policy priorities that have dominated the city over the last decade.  The amount of capital that has flooded the asset market because of the influx of shadow wealth could be steered to the larger shelter market through better tax policies (421a is still off the books anyway) and better land-use and density polices.  Rather than bending the market to chase those super-not-cool wealthy buyers, we can bend the market back to the people who live and work in the city. My guess is that it could be just as booming a market.

Most real estate observers have said the industry put on blinders during this period and didn't ask questions.  It wasn't there job to, but maybe it could be.  Now that many governments and policy leaders will be asking questions, the industry could stand to reassess itself and determine that transparency and accountability will only benefit its long-term prospects.  If the blowback from the Panama Papers gets bigger and louder, the city might just stand to benefit from it as well.