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November 13, 2006
Don't Be Fooled: 421A Tax Abatement
A: Let me be absolutely clear! The 421A Tax Abatement which is granted to developers by the city as an incentive to build and develop neighborhoods, is great for the developer's sales team as they ask top dollar for new units with temporarily low monthly expenses and a DUPE TO THE BUYER WHO INTENDS ON SELLING AFTER THE ABATEMENT EXPIRES!
I'm sure I will get a lot of harsh words for this post from either some colleagues or sales managers, or developers, but I can't help it! This is how I feel and think its important to at least play devil's advocate to anyone considering paying over $1,300 a square foot for a new development whose asking price can be this high because the monthly expenses are temporarily low due to the 421 Tax Abatement.
As I noted on a previous post, "What is a 421A Tax Abatement":
421 Tax Abatement - The Cooperative and Condominium Abatement Program provides partial tax relief for condo owners and co-op tenant-shareholders to reduce the disparity in property tax paid between residential Class 2 properties (i.e., condominiums and cooperatives) and Class 1 properties (i.e., one-, two-, and three-family homes), which are assessed at a lower percentage of market value.
The reason I think this temporary tax relief is a dupe for buyers who intend to sell their new home AFTER the abatement expires, is because in the world of real estate...THE MONTHLY EXPENSES (MAINTENENCE + REAL ESTATE TAXES) OF A PARTICULAR PROPERTY ARE DIRECTLY CORRELATED WITH THE AFFORDABILITY OF THE APARTMENT AT RE-SALE. THEREFORE, A PROPERTY WITH HIGHER MONTHLY EXPENSES MUST LOWER THEIR ULTIMATE ASKING PRICE TO COMPENSATE FOR AFFORDABILITY OR ELSE IT WILL NEVER SELL. ON THE FLIP SIDE, A PROPERTY WITH VERY LOW MONTHLY EXPENSES CAN GET AWAY WITH A HIGHER ASKING PRICE ON THE OPEN MARKET.
This is such an important factor for any prospective home-buyer to understand! If you are paying $1,300 a square foot for a 1,000 square foot Junior 4 apartment in a new development, with monthly maintenence of $875 and real estate taxes of $115 (due to the 421A tax relief), what happens after the abatement expires and the actual assessed real estate taxes kick in? That $115 in monthly costs to you will now shoot up to about $600-$700 or so, perhaps even more, making the property less affordable? When you go to resell, your the one without a chair when the music stops!
Now lets apply this to real life and specifically look at a new development that was granted a 421A Tax Abatement, to get a better idea of what I am saying. On a recent visit to The Ariel West sales office, my client was considering purchasing a new apartment that was benefitting from a 421A tax abatement for 10 years. Here are the details of one of the property's we were looking into:
245 West 99th Street - Ariel West Apt. 21A
Size: 2,526 SFT
# Beds: 4
# Baths: 3.5
Maintenence: $2,291
RE Taxes w/ 421A: $201
Asking: $3,500,000
Price Per Sq. Ft.: $1,386
Marketed By: Corcoran Sales Center
Now, the number that is important for sake of this discussion is the monthly real estate tax of $201 for this apartment. The way abatements adjust is that every 2 years the monthly real estate tax rises 20% until maturity. At least that is what I originally thought. When I decided to put the sales agent on the spot and asked him what the assessed tax value of this apartment would be AFTER maturity of the abatement, we were shocked to find out the formula isn't as simple as a 20% adjustment every 2 years until maturity!
In fact, once the 421A tax abatement expires in 10 years the annual tax costs of this apartment would be aproximately $31,000, or $2,583 a month! You should have seen the sales agent's face when I told my client of my concerns right then and there.
I ask you:
HOW MUCH CAN MY CLIENT REALLY SELL THIS APARTMENT FOR IF THE MONTHLY'S JUMP FROM $2,492 A MONTH TO $4,875 A MONTH IN 10 YEARS?
From a seller's standpoint I would have to inform my client to lower their asking price to compensate for the now much higher, monthly expenses of this apartment. Sure you can try to ask $4.5M, but that doesn't mean you'll get it! In the end, my client decided to pass on this deal as they were hoping to keep their monthly expenses closer to the $3,500/Month mark. Smart move if you ask me; but then again the people buying these very expensive new developments usually have the luxury of not worrying about money.
Most people don't have this luxury!
UrbanDigs Says: Don't believe the 20% every 2 years hype that even I once believed and that most sales agents and brokers tell their clients. Instead, ask the developer's sales team to tell you what the actual taxes will be upon expiration of the 421A tax abatement BEFORE you buy so that you are fully informed of what you are getting into! I know for a fact that every new development is different and some neighborhoods will not experience what I discussed here (such as 70 Washington in DUMBO, Brooklyn), so make sure to go out of your way to educate yourself on this very important factor before you sign that contract and put your deposit down!
Quick Tip: No rocket science here. Look to sell your new condo when there is still 5-6 years left of the tax abatement so that you are not left without a chair when the music stops. By unloading when the monthly expenses have not yet reached their peak, you will be able to get a higher asking price before the monthly expenses top out and restrict affordability.
Originally published June 28th
Posted by urbandigs at November 13, 2006 8:49 AM
Is there a way to find out the post-abatement tax amount without having to rely on the sales agent's word? Is the info accessible somewhere? Property Shark has tax info but they have a disclaimer that it is only estimated. They have a link to the NYC dept of Finance, but I can't seem to find the info there either.
Posted by: Madame X at June 28, 2006 4:42 PM
If there is I do not know about it. Hopefully someone else will read the comments and contribute a site that will give this info, because I would be greatly interested in it.
I know that the nyc.gov site has a section for confirming the tax assessed to a particular property so one can check that their bank is charging the correct amount monthly for escrow. But I dont think it will show the tax value after the abatement expires.
Posted by: Noah at June 28, 2006 4:52 PM
I know there is a tax abatement dept at nyc finance. if you are lucky to get thru to a live person they will tell you. also try calling a real estate atty --they too may know the answer . good luck
great post UD!
Posted by: 3 cents at June 29, 2006 7:45 PM
Does anyone know anything about the J-51 abatement?
Posted by: mike at August 17, 2006 5:57 PM
Will any of the proposed changes to the 421a program affect new developments already under construction and scheduled to open in the spring'07?
Posted by: Peter at October 22, 2006 7:07 PM
Peter - What changes are you reffering to? I'm not sure I am aware of these proposed changes.
Posted by: Noah at October 23, 2006 11:28 AM
Mike - J-51 abatement info:
The J-51 Program is administered by the NYC Department of Housing Preservation and Development (HPD) to encourage the renovation of residential properties by granting partial tax exemption and abatement benefits. Benefits vary, depending on the location of the property and the extent and nature of the improvements.
HPD determines eligibility for this program, and Finance implements the benefits once HPD approves your application. Please refer to the HPD site for further information on eligibility and on applying to this program.
Once approved, you will receive a Certificate of Eligibility from HPD along with the property tax abatement application, which you can then return to Finance.
Posted by: noah at November 13, 2006 9:40 AM
why is 70 washington st different?
Posted by: si at December 31, 2006 7:49 PM
Where did you come up with the amount of monthly taxes in the year 2017? I understand that the taxes are assessed every two years to make sure the 20% increase is based on the most current taxes but how do you know what they will be in 10 years? Also, the amount of money that someone buying a $3 million dollar home is going to save is OBSCENE considering how much one has to earn to be able to afford the mortgage payments alone! Let's not start worrying about the monthly increase in 10 years for someone who earns over $1,000,000 a year or gets a year end bonus of $5,000,000. I'm not saying that you don't have a point for someone who inherited the money to buy an apartment or an older couple who might have money in the bank but no steady income. But let's get real...who are you worried about? The abatement is fantastic for developers and buyers alike. And don't forget that to qualify for these tax incentives the sponsor's have to do some kind of affordable housing in the city of Manhattan. This is a good thing! Sales people are responsible fro telling potential buyers about the abatement and the "current assessed taxes". Seems to me that the rest of the work should be done by the broker who has the customer and the buyers attorney.
Posted by: Zia at January 10, 2007 5:56 PM
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