A lotta tax talk in 2021, but it comes with the territory.
The big real estate tax abatements in NYC are J51 and 421a, which offer owners and developers financial incentives in exchange for either rehabbing or building new affordable housing. 421a is far more common.
Many condo buyers seek these properties out, because NY's real estate tax system is such a disaster that condos are taxed at much higher rates than brownstones. One of these tax abatements can save an owner $10's of thousands, especially after the 2017 tax law changes.
But, naturally, these programs have been rife with fraud and inefficiency, prompting questions over whether the loss in tax revenue is worth the mild gains in affordable housing. In particular, 421a has come under fire, and its fate may be tied (like everything else, apparently) to the upcoming mayoral election.
xo
Anna
What's the Deal?
Without getting tooooo much into NY real estate tax law, stabilization, etc, J51 and 421a tax abatements were dreamt up in the '70's when "white flight" led to decay and vacancy in the city. It incentivized developers to build/renovate in the city rather than the suburbs by providing massive tax incentives, and these savings were then purchasers (if a condo) or tenants (if a rental).
Just the basics:
J51 abatement -
- rehabilitation to an old building
- up to 35 years of reduced taxes
- for tenants, rent stabilized until phase-out of abatement
- for tenants, some buildings would remain stabilized even after the abatement ends
421a abatement (ended in 2016 but renewed in part, up for reconsideration in 2022):
- new construction
- up to 25 years of reduced taxes
- on "vacant," "mostly-vacant," or "underutilized" land
- special incentives in lower income parts of Queens, Manhattan, and Brooklyn
- for tenants, rent stabilized until phase-out of abatement
For those who want more of the nitty-gritty:
"The rules for the 421a tax exemption include several "enhanced affordability areas" in parts of Manhattan, Queens, and Brooklyn. Buildings with more than 300 residential units that are located within these areas would be granted a 100% tax exemption for up to three years during construction, plus a 100% exemption for 35 years after construction is complete, provided that they comply with one of three 421-a options.
For all other buildings that do not qualify for the enhanced-affordability option, these buildings would have a tax exemption for 3 years during the construction process and 35 years after construction ends, provided that they comply with one of the three other 421a options. However, the 100% exemption would only apply during the first 25 years after the completion of construction.
Throughout the period of the exemption, the developer must pay at least the property taxes paid on the property prior to the exemption being granted. Developers do not have to pay taxes on the increased value of the property for the duration of the exemption period, with a phase out period in which the tax benefit is gradually reduced over years.
The lost property taxes would otherwise go to the city government as property tax revenue."
This costs the city BILLIONS it would normally collect.
Over the past couple decades, what 421a in particular has done is speed up gentrification in areas the city designated as "underdeveloped," like Bed Stuy and Harlem, ironically making them LESS affordable for residents. Although there are a handful of "affordable" units in each project (if they ever get built -- looking at you, Hudson Yards), the VAST majority are priced at thousands per square foot,.
Gentrification has a negative connotation not always totally deserved, but programs like this lend credence to opponents of luxury development. A lot of these developments are poorly constructed, leading to lawsuits and issues that have in turn led buyers to mistrust new development.
And when it comes to rental properties (because this doesn't just apply to condos), there is a long history of landlords breaking rent stabilization laws and taking advantage of the tax breaks while also charging higher rents.
Why Does This Matter?
Like many of the things we're talking about, this is part of the conversation about how to bring NY back financially in a way that is effective and also helps reduce growing fiscal inequality. But unfortunately it's been highly politicized and, like the pied-a-terre tax, many of the people with the loudest voices have the least information. The goal should be to look at the benefits vs. costs honestly and holistically.
My hope is that now the real estate industry seems more willing to play ball and have hard conversations (since basically everyone has turned against it), and we HAVE to think bigger about ways to close NY's budget deficit, and we will elect a new mayor this year, we can actually make some change -- both in real estate taxes and in how the city is developed -- instead of tweaking a broken system.
Further Reading/Watching
For more, please check out the links below.
Commercial Observer - Split Ticket: New York Politicians and Real Estate at Odds (article)
Gothamist- How Your Tax Dollars Are Wasted To Build Luxury Apartments (article)
Gotham Gazette - Several Points of Conflict and Differentiation at Brooklyn Democrats' Mayoral Candidate Debate (article)
