Friday, December 18, 2009

Update on The "NYC Taxi Cartel"

NEW YORK (August 7, 2009) -- As Wall Street still wobbles under the pressure of a weak economy, one New York asset class stands firmly on all four wheels. Taxi medallions — required licenses fastened to the hoods of all New York City yellow cabs — have rocketed in value at a time when many investments have plummeted. The average rate in July for a corporate-licensed taxi medallion in the Big Apple was a record $766,000 — up 126% from $339,000 in 2004.

"It's an industry that has always gone up," says Andrew Murstein, president of Medallion Financial. "It has outperformed every index you can think of — the Dow, Nasdaq, gold, you name it."

In a ratio set by law, 40% of New York's 13,257 medallions — a number strictly controlled by the city — are designated for individual, as opposed to corporate, ownership. Individual owners are required to drive at least part time, while corporate owners have the option of hiring an agent to lease the medallion full time for up to $800 a week.

MP: That USA Today report was from July, and the "priciest piece of aluminum in NYC" - a taxi medallion to operate a single cab in NYC - has gone up another $13,000 since then, reaching a new record-high of $779,000 in November for a corporate medallion (see chart above,
data here), almost double the average price of $391,000 just four years ago in November 2005. The average price for an individually-owned taxi medallion also reached a new record high in November at $579,000, a two-fold increase since the summer of 2004.

Membership in the "taxi cartel" certainly has its privileges: above-market returns (18.1% per year for corporate medallions and 15.7% for individual medallions, vs. -0.52% per year for the S&P 500 since 2004), see previous CD posts
here and here.


At 12/18/2009 5:00 PM, Anonymous Anonymous said...

I always wonder why a Taxi Medallion that allows you to work at a job that reportedly pays $30,000, or whatever, a year is worth $ 579,000. And why, whenever the taxi commission is asked for an increase in taxi fares the cabbies always come out with statemments that they can't make a living in the industry. Couldn't they just sell their medallion? At the very least, shouldn't the value of the medallion go down between taxi commission decisions?

At 12/18/2009 6:21 PM, Anonymous morganovich said...

most commercial cabs are leased to drivers in NYC at $120 per 12 hours. that goes to the company, the rest to the driver.

i imagine the company pays for maintenance. i have no idea which pays for gas.

so let's look at the economics of this for a moment:

$120 X 2 per day X 365 days = $87600/year in fully utilized revenue.

for the sake of discussion, let's say that the cab is utilized for all possible shifts and annual revenue to a cab company is $87.6k.

that means a medallion is trading at $779/87.6 = 8.9 times revenue.

to get a sense of profit, we need to subtract maintenance, overhead, taxes, insurance etc. i have no idea how to price the former two, so let's just say it's as this NYC cab website describes:

Annual Overhead Costs: basic-model Crown Victoria: about $7,000 (the $28,000 car is replaced every three to five years); insurance: $5,000; car maintenance: $4,000 to $5,000; parking: $2,200;

this is 34k in costs pre gasoline.

that leaves 87.6-34.2 = $53.4 k in profit. tax that at a 40% corporate rate and you are left with $32k a year in profit from your $770k medallion, a 4.2% return on assets.

i have serious doubts you could borrow money cheaply enough for that to make sense. you'd likely be in the red.

and this is if you get 730 12 hour shifts a year. use a more realistic 80% utilization rate and you only have 21.5k profit, a 2.75% yield. not even the US government can get a 10 year loan that cheaply.

these are AWFUL numbers. unless the information i grabbed is way off, there is no way people would be paying this much to run such a business unless they are just rampantly speculating on medallion prices.

this sounds like a horrible business opportunity. is there something i'm missing here?

these medallions look to be at least 3-4X overpriced.

At 12/19/2009 5:05 AM, Anonymous Anonymous said...

Cabbies can't possibly be a large enough constituency to affect city policy that much. My bet is that NYC thinks it gets more tax revenue from income taxes on the sale of medallions that it would get on licensing fees in an uncapped licensing regime. The side effects cab customers suffer is immaterial to them.

Look at the rent/price ratio of single family houses in intentionally supply-constrained markets like California. They are similarly out of whack.

At 12/20/2009 11:54 AM, Blogger John Thacker said...

Cabbies can't possibly be a large enough constituency to affect city policy that much.

Heh. You're very unfamiliar with the city, then. I don't find this result all that unusual from a public choice perspective. Especially not when you add in a strange constituency of wooly-headed leftists who actively support the medallion system.

At 12/20/2009 4:13 PM, Anonymous Anonymous said...

Those leftists must be very wooly-headed. When it comes to one business interest (taxis), they want to screw the common man. When it comes to another (landlords), they want to screw the landlords. I can't see any common basis for this, it seems totally arbitrary and capricious.

At 1/09/2010 10:15 PM, Anonymous Anonymous said...

the only way it makes sense for an investor is if u have the borrowing...u put $600K into a medallion and u lease it out...u earn $2400 a month clean...i'm in the that's $28,800 a year on a $600k investment...not bad...better than a savings account...


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