THE PAST, PRESENT, AND FUTURE OF REAL ESTATE TAX ABATEMENTS
- Although a significant number of New York City condominium owners enjoy reduced real estate taxes due to the 421a tax abatement program, many are less informed on the specific details and highly impactful changes to the program. We accordingly thought it would be helpful to briefly discuss the purpose, specifics, and evolution of new development real estate tax abatements. (While 421a covered both rental and condo units we will only be focusing on condos in this update.)
- The 421a tax exemption was created in the 1970’s to spur development in NYC at a time when new construction was stagnating. The program was further amended in the 1980’s to incentivize the creation of affordable housing.
- Broadly speaking, the program worked by temporarily reducing purchasers’ real estate taxes over a specific period, thus making the units more ‘saleable’ for the developer.
- The program provided a 3-year real estate tax exemption during construction for the sponsor followed by a 10, 15, 20, or 25-year abatement of individual unit taxes depending on the type of project and location.
- A Geographic Exclusion Area (‘GEA’) was designated which covered higher-priced locations including prime Manhattan, Northern Brooklyn, and the Queens waterfront. In order to qualify for 421a within the GEA developers were typically required to dedicate 20% of their constructed units towards affordable housing. Projects located south of 110th Street in Manhattan would receive a 20 year tax exemption for building affordable units on-site (as part of the subject condo project) and a 10 year exemption if they elected to build them in another location. In the rest of the GEA on-site affordable housing allowed for a 25-year exemption, while off-site provided 15 years.
- Generally the condo units’ post-construction real estate taxes would be almost zero until they bumped up to market levels by 20% increments over the last 5 years of the abatement.
Expiration of 421a and Creation of the Current ‘Affordable New York’ Plan
- Leading up to (and following) the expiration of 421a in January of 2016, a heated debate ensued between city officials and private developers. Many city representatives argued that 421a did not provide sufficient affordable housing to justify the foregone tax revenues while developers contended that the cost of building in New York was so high (in part due to the price of land and construction) that an abatement was necessary to make affordable and market-rate development feasible.
- Not surprisingly, there was a drastic increase in developers filing for tax abatements as the 421a expiration approached, with 2015 seeing a record 54,619 units-worth of new condo and rental applications. Tellingly, between January and May of 2016, the city approved just 3,311 units, an 86% year-over-year decline.
- In April 2017 the current tax abatement plan, dubbed ‘Affordable New York’, was put in place. It notably excludes Manhattan condominiums and has a maximum assessed value/unit cap for qualifying projects.
- Some of the primary provisions include:
- The project cannot be located in Manhattan or contain more than 35 units.
- The project must have an average assessed value not exceeding $65,000 per unit.
- Each purchaser must agree to maintain the unit as their primary residence for at least 5 years.
- A 100% real estate tax exemption for a construction period of up to three years; and a 20-year post-construction tax exemption (a 100% exemption during the first 14 years and a 25% exemption during the next 6 years)
- Certain luxury condominium projects which: i) commenced construction between June and December 2015 and will be completed before December 31, 2019; or ii) commenced construction between January 2016 and June 2019 and will be completed by June of 2023 may still qualify to receive the previous 421a exemption.
Thoughts Going Forward
- It is possible that the abatement will be renegotiated in the future — though that is unlikely in the near term.
- Buildings which still have several years of tax abatements (for example One Waterline Square, One West End Avenue, and 15 Hudson Yards) may benefit.
- Individuals may be more reticent to purchase in overly amenitized new developments with higher associated common charges given the lack of a tax exemption to reduce the monthly cost of home ownership. This may lead developers to focus more on more essential (e.g. doorman) vs. elective (pools and golf simulators) amenities.
- We may see a greater leveling of the playing field between resale and new development apartments.
- The luxury condo market pricing correction that we have already witnessed, combined with the lack of 421a, may reinforce more strategic and moderately-paced development in NYC and possibly put downward pressure on the price of land.
Please don’t hesitate to reach out to us with any questions, or on any of your real estate needs.
Alex and Sybille