Misinfo Monday - Real Estate Tax Abatements

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

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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)

Misinformation Monday - Pied-a-Terre Tax

The proposed pied-a-terre tax, which would be paid annually and affect second (or third or tenth) homes worth roughly $5m or more, is a rare thing that put everyone else is in a tizzy while I really have no strong feelings one way or the other.

I see the arguments on both sides, but mainly I think it's part of a greater conversation about structural inequality, what is owed by people who have benefited greatly from the pandemic at the (direct or indirect) expense of others, and what happens when states are able to compete for residents by undercutting one another on cost of living/doing business and taxes.

The thing I do feel strongly about? That misleading press and grandstanding needs to stop. Do not tell me that this tax impacts "middle class" New Yorkers or that it will somehow magically close the budget deficit. Neither is true.

But again, it's a conversation, and the more open -- and honest -- discussion we can have, the more likely we are to find well thought out, useful solutions. 

xo

Anna

What's the Deal?

The pied-a-terre tax, which was introduced back in 2019 but has recently picked up support, would be an annual tax on homes in NYC with an assessed value of $300,000 or more (roughly $5m market value) that are not the owners' primary residence and are not being rented out or otherwise occupied by the owner's family, instead sitting vacant for the owners' occasional use.

How much would it actually cost these owners? I'm going to quote attorney Andrew Luftig here rather than do my own math:

Property Listed for $7 million (market value) with an assessed value of $672,306 - 

$672,306 (assessed value) MINUS $300,000 (pied-a-terre tax doesn’t apply to 1st $300,000) = 372,000 * 10% (proposed tax %) 

= $37,200 a year assuming the legislation implements the proposed tax in its current form.

Of course, it would be complicated because the city would be tasked with figuring out veteran/senior/disability exemptions, whether someone is using/renting the property enough for it to be considered, etc. It's also become a talking point because of the recent blue wave in Albany and the upcoming mayoral race.

In the "for" corner: New York City is facing a $5.25billion budget shortfall; people who own second homes here do not pay for services they use (police/fire/roads/garbage/etc); these homes are vacant for most of the year while over a hundred thousand New Yorkers, including many children, are homeless; these people made money during the crisis while other New Yorkers stood in hours-long food lines.

Representing the "against" side: high-income New Yorkers already pay more than their fair share (although this tax would be levied against a different group of high-earners); it would decrease price on luxury real estate and potentially hurt long-term NY tax revenue; the estimated annual revenue from the tax is far lower than initially stated ($232m annually down from $390m); this is more political spectacle than useful policy.

As I see it? Everyone's kind of right. To some extent all of these things are true. And I think this is why I don't have a strong opinion on the matter.

One other thing I'll add: To anyone who fears that these people selling their homes would cost NYC tax revenue, I'd argue that, in the short term, the sales of these units could actually benefit the state in the form of transfer taxes. Collecting roughly 2% of every sale would get us way closer to fixing the current deficit than a meager annual tax would. There's also little proof that they would actually bail on NYC rather than pay a few extra grand every month.

Why Does This Matter?

Again, because it's part of a larger conversation and debate around wealth disparity, equity, and "building back better." 

We really f*cked up the stimulus because at the time the government was run by garbage monsters (technical term) who still champion trickle-down economics, a model popularized by the Koch brothers, who actually funded business schools to legitimize this laughable, repeatedly proven wrong concept. 

BUT I DIGRESS.

Look, as someone who grew up in Appalachia and has spent eight years living in Harlem, I'm no stranger to the impacts of poverty on communities, whether they're white or people of color. And over my lifetime I have watched the inequality/poverty get worse, especially during the decade-of-a-year that was 2020. We need to do something about it, because this level of inequality is not sustainable. Spend 5 minutes on Gen Z eat-the-rich TikTok and you'll see the ramifications of ignoring the problem. 

So yes, I do think that some people who believe they pulled themselves up by their bootstraps will end up needing to pay more than what they feel is fair. But I'm also not sure that adding this tax will be helpful. Why fuel the narrative that NYC unfairly taxes wealthy residents over a very minimal revenue increase? Seems....bad. Everyone needs to put their egos aside and think, logically and honestly, about what makes the most sense. 

Further Reading/Watching

For more, please check out the links below.

Brick Underground - What is assessed value and how is it used to calculate a pied-à-terre tax? (article)

The Real Deal - Pied-à-terre tax revenue estimate slashed by 41% (article)