Is the 421a tax abatement beneficial?

Yes, it absolutely is -- to the developer. He can get a higher sales price because you'll use the bogus abated amount to calculate your monthly costs. Then he'll have your money for the long run. You, on the other hand, will have radically higher costs in what will seem like no time. When you go to sell, the buyer will use the real (and substantial) tax to calculate her monthly costs, and that will suppress the price you'll be able to sell for.

Sorry for the long-winded answer. The short answer is yes.

Agreed.

Wait till your property goes down in value as the taxes go up, and wait till you can't pay the property tax because you overextended yourself without knowing it.

421A tax exemption, that is probably what you mean.
Look at what the final tax bill when the 421A is complete. That's the deal you're getting. If that deal makes sence than the exemption is a gift. If the exemption make the deal a possibility for you than it's a poorly disguised trap. The exemption is to entice the builder/developer it's not really ment for you.

The truly simple answer, unfortunately, is it depends. As falco says above, approach the deal as if there were no abatement (that is, make sure you're aware of what the unabated taxes will be in 10 years). If it still seems like a good deal, great - you may save a bit in the short term, though you may well be paying a higher purchase price upfront. If not, look elsewhere. In my book, as long as you're aware of what your costs will be, this is not a dealbreaker nor a dealmaker.

I see opportunity for a rather ugly scenario as the tax abatement approaches its end of life. Two years before the end of abatement you start seeing higher than normal listing activity and increased competition among neighbors. Then it gets closer to T minus zero and buyers start looking at the properties as they would a property today that has a massive (forever!) assessment lurking. Imagine the ugliness.

At least it's better than with Coop lofts and the J-51 program, where you really had NO IDEA what was going to happen with the maintenance increases. Ar least with a Condo and a 421A, yo can make an educated guess as to where you are going to end up 9not that anyone does).

But let's not forget: the WHOLE PURPOSE of the 421A program is to GET DEVELOPERS TO BUILD, not get purchasers to buy - so why should it be so surprising if that's the way it's working out?

If you are shopping for a condo where the price range per square foot is the same with similar amentities and CC. 421a abatement is beneficial (duh!). If 421a condo is priced higher than the one that is not (assuming the same), then you must calculate its cost in the long run.
Alanhart and Stevejhx had mentioned only one sided answer where it's not that simple.

I recently bought a condo where it is 421a abated with lower CC and ppsf than the other condos.

A good example would be that SOHO loft with 23% drop in price. From 1.8mil to 1.29mil with CC of $2200/month. If you find a similar apt for 1.3mil with 421a abatement, it's a better deal. Alan and Steve is saying that 421a abated apts would be priced at 1.5mil in most circumstances...but there are always exception to this and many can be found if you look enough.

--I see opportunity for a rather ugly scenario as the tax abatement approaches its end of life. Two years before the end of abatement you start seeing higher than normal listing activity and increased competition among neighbors.

Add in that all these apartment buildings came to market essentially at the same time. Plus, isn't it true that the future calculations are made at present tax rates. Anyone who thinks that NYC re taxes are not going up is, well, probably buying at inflated prices in new condos.

apt23 is right--don't forget to account for future tax increases. Back in February I wrote a story addressing the downsides of new condos (http://www.nytimes.com/2009/02/08/realestate/08COV.html?pagewanted=3) and this part about the abatements was pretty startling to me:

"Consider the following hypothetical situation, provided by Paul J. Korngold, a real estate lawyer in Manhattan, which he said was consistent with many Manhattan units selling in the $1 million to $2 million range under the 421-a program. What starts out as a $1,214 annual tax bill climbs to $4,613 in the third year, $8,012 in the fifth year, $11,411 in the seventh year and $18,209 when the abatement expires.

But those numbers assume that the city doesn’t raise assessed values or tax rates. Factoring in what Mr. Korngold called a historically conservative 3 percent combined average increase, the unit owner who begins with a $1,214 annual tax bill owes $10,046 in the fifth year and a staggering $32,887 when the abatement expires."

That's an enormous number- like carrying another mortgage.

Teri

Hi Teri.

And the developer for most new developments made the decision to go amenity-heavy, sometimes downright crazy, partially because total cc+tax costs were kept low due to the abatements. so at the end of the day you have disproportionately high common charges (which will probably also rise substantially as developers are notorious for underestimating those costs), on top of very high taxes.

abatements are a particularly ugly shoe among many yet to drop

Enjoying a 421a abatement means more money in your pocket in the near-term, and a reasonable presumption that the market value of your property will be suppressed (or depressed) for a long time as the abatement subsides.

It's basically a trap designed to entice the mathematically challenged, or those who prefer short-term benefits over long-term.

Overall -- unless the phase-out is priced into the deal by a sophisticated buying public (which I doubt) -- it's a detriment to the buyer, and a benefit to the developer.

Exemption, people. EXEMPTION EXEMPTION EXEMPTION!!! IT'S AN EXEMPTION NOT AN ABATEMENT!!!! (thank you falcogold, by the way, for sticking up for the light and the truth)

I don't think it's an exemption...it's an abatement. The amount is lowered to almost, but not quite, 0. Abatement = lowered.

Main Entry: abate�ment
Pronunciation: \%u0259-%u02C8b%u0101t-m%u0259nt\
Function: noun
Date: 14th century
1 : the act or process of abating : the state of being abated
2 : an amount abated; especially : a deduction from the full amount of a tax

I don't know about 421a, but my J-51 [on an apartment I've since sold] was structured as both an exemption and an abatement. It first drew down 100% of each year's taxes from an imaginary pot of money (depending on each year's tax rate), then worked as an abatement for the phase-in of taxes over the remaining years (out of an original 35 years).

The exemption is a great break. Critics point out to the larger property tax once the exemption is gone, which is a valid point, but you have time to prepare for that and figure out what those costs are. You should figure out if you can afford a place without the tax abatement. Also, i don't think the 421a should be the major factor that you use to decide on buying a place; it's just an added plus.

I'm sure this has been answered elsewhere, but is there a simple way to determine what the tax on a coop or condo in manhattan should be? WE're looking at a place which has an abatement that expires in 10 years, and want to know what to expect in terms of property tax should we stay that long.

Teri - Kudos on the article. It is one I considered when it first was published and reference to friends as they mull over new condo ownership.

http://www.streeteasy.com/nyc/talk/discussion/8340-the-condo-trap

condojake - you think the exemption is a "great break" but are you considering how it artificially increases the price of the unit, and how the phase-out will negatively affect the value of your unit in the future?

Sure, the abatement may be money in your pocket in the short-term, butI think it will make it difficult to realize significant price appreciation on your investment, and therefore it's a wash, at best.

fcorrao: abatements and exemptions have very specific real estate tax definitions, and they are different. An abatement reduces your tax liability by a dollar amount. An exemption reduces the taxable assessed value of your property which the tax rate is applied to. it's similar to the difference between a tax deduction versus a tax credit in income taxes. 421-a is an abatement. j51 (for renovated or converted buildings) can include an exemption, an abatement or both.

I thought 421 was a tax exemption & abatement. My williamsburg property RE tax has been the same for the last 4 years ($11/month). After 10 years, it's suppose to creep up.

Same goes with another condo in manhattan.

my thoughts

http://www.urbandigs.com/2007/04/biggest_scam_in.html

written April 2007 as we neared peak

oops, i originally wrote that in June 2006...damn, its been a long road

ud is the king!

all other posters, don't bother.

;-)

I don't think the exemption is a huge factor in setting the initial price. I think the price from the developer is more of a function of the unit being new construction, additional amenities and the markup associated with a condo. I also think generally any potential loss in value associated with a phase out is offset by market increases in the long run.

condojake - i respectfully disagree with both points.

1) I think the developer knows they can more easily achieve the premium in price for the new product with this city program to incentivize development. If the developer cant make a profit, then why would they build? Certainly not for the good of the city. Developers build for one reason ---> profit

On the buy side, it absolutely plays a very big role. I had a bunch of new dev buyers whose main reason for focusing on new devs was the very low monthly carrying costs that offset the higher price. In other words, they rationalized paying the suggested price by the developer by focusing on what it would cost them to carry the property. With the abatement, lower monthlies were offset by the higher price and higher financing costs.

2) your second point works in markets that see sustainable growth. But what if you bought a new dev near peak, paid the premium, and now you have a product that is worth 25% less in todays market and will gradually phase in higher carrying costs every 2 years, as with the 421A program. Certainly 'the market only goes up' mentality was proven very flawed. What if the property value decreases and takes 20 years to recover to peak levels? Housing, in general, is held for about 5-7 years I believe. So that way of thinking is more of a supporting argument to maintain a denial that price appreciation will more than offset any impact of higher carrying costs down the road

I disagree with ur post urbandigs.

I bought 2 properties in the past 2 years with 421a. These properties were priced lower than any condos around the neighborhood with LOWER CC and same amentities.

You just can't assume that 421a condos are ALWAYS priced higher...that is an ignorant statement. Condojake, Falco makes a good point which sides both ways.

Only fools make purchase based on abated monthly amount. Any reasonable person with a least a pea size brain would consider the purchase price with full tax in effect.

My point: The article is for those with 0% down with tease rate ARM who can only afford the monthlies at that rate.

ba294, are you sure your properties were completely comparable to the ones that were priced higher? I.e. location, view, finishes, amenities.

Also, are you sure your taxes "creep up" after ten years, rather than simply kick in?

Clear analogy is 0% financing for 12months on your furnitures.
you google it and find the cheapest furniture to be $1000. This store also happens to offer 0% instore financing (no credit report). So this basically means 0% financing is an added bonus.

Store B has one for $1000 as well but no financing.

So the clear winner is Store A.

Simple Grade 1 stuff.

alanhart, mine creeps up after 10 years and full effect in 20years (williamsburg)
My manhattan condo is 10 years than full tax rate.

Same location (within few blocks) same finishes and amentities.

i disagree ba294. Why does that make me ignorant? Because perhaps the location, the product, the views, the light, or other variable affected the list price? Generally speaking, are you saying new developments with their abatements are priced LOWER than existing condo resales? Is that your argument? Or that its just not always the case. Fine, maybe its not always the case, but way more than not, new dev units expect a premium over existing resale condos.

The tax abatement should be a bonus, but it got to a level where price per sft for new dev far exceeded that of existing resale.

Dont take my word for it, MillerSamuel goes back over 6 years and you can see the difference between NEW DEV $ per sft vs EXISTING $ per sft...its all in the DATA!

http://www.millersamuel.com/charts/gallery-view.php?ViewNode=1223228761aPnBM&Record=14

Take note of the widening gap between Q2 2006 and Q1 2008, when many new devs started to close from the boom; 2007 especially.

I am not saying tax abated apts are priced lower. I agree with you that they are generally priced higher but this is due to new built and finishes (as condojake had mentioned) You can't just say that the higher price is due to the tax abated new condo. New condo vs old condo, there is obviously going to be a price difference. You just can't base it on 421a. Like you had said, floor, lighting, NSEW, finishes determine the price. So how are you basing this 421a condos price to be solely based on this tax abated amount?

ba294, it's a simple economic equation, taking as an assumption that virtually all buyers care about their total monthlies much much more than any other financial concerns. The zero taxes create a vacuum that both the developer and the buyer happily fill.

All I am saying here is:
When you buy a 421a condo, consider it as a bonus (I agree with you urbandigs).
There are good number of condos out there now where you can get these 421a condos for much less than the resale ones WITH tax abatement.

Alanhart,

When one buys a condo (reasonable person), you take PPSF + CC/psf into consideration, given amentites. RE taxes are consider equal around that given neighborhood and treated as a bonus. So if one sees an identical apt for higher price but equates to equal monthlies (to another with lower priced), one must walk away.

Alanhart,
Here is a good question. Are all ARM loans bad? If you answer no, then you are agreeing with me on this topic.

They might take those into consideration for comparative/pissing contest purposes, but at the end of the day all they look at is monthly outlay. 99.99.99% of all people, anyway.

All ARM loans are dangerous.

But bad? Usually, except during times of extraordinarily high rates, and when there's a big spread vs. fixed. For those with short ownership horizons, the solution is not to buy at all.

If the ARM w/ a teaser rate was taken to rationalize a home purchase above the means of the buyer, then YES, the mortgage product is very bad. Are option ARMs bad? No, when used properly and it doesnt affect the discipline of the buyer to stay within their means in terms of buying and choosing NOT to buy more house than they can afford because of the OPTION of paying a low rate for a temporary period of time

that is what happened. Buyers discipline was thrown out the window as they stretched affordability and bought too much house because of the structure of the exotic loan product that allowed the house to be affordable for 1, 2, or 3 years only.

ARM loans create low monthly payment, and some irresponsible pple base their purchase based on this monthly number. For many, ARM lonas can be used creatively and profit from it.

For instance, I bought my last sold apt with 5year ARM at 1% lower rate and sold at the 5 year mark.

typo "base their purchase price on this monthly number"

besides, those exotic loan products were designed to compliment a booming housing market where irresponsible speculation engulfed the masses. People took out loans without understanding what they were getting involved in, only to get in on the hot asset class at the time. and banks didnt care about underwriting standards, only to sell the product, which was the loan.

just because some people used those products for the right reasons, its narrow minded to assume the masses did as well. They didnt

Weren't they actually designed for high net-worth individuals and fast-track executive types?

well on the back end, yes.

Alan,
yes at this time, ARM does not make sense for any except for 7-10year ARM.
I think we are all on the same page but you guys are generalizing this too much. There is always an exception to every rule. Tax abated properties can be very attractive if you do your research and play it right. In this case it's simple, like many had suggested, treated as a bonus.

treat it as bonus...sorry another typo

> I don't think the exemption is a huge factor in setting the initial price.

CJ, I'm with ud on this, I absolutely disagree 100%.

Consumers definitely fall for it, and developers will take everything they can get for a consumer.
There is a reason that I've seen the abatement listed on ads 2 or 3x the size font of all the other stuff... not to mention all the "cost of ownership" calculations they do for you and were all the rage on the boards.

Ok, I really don't want to be that guy, but you all are going to turn me into a crazy old man muttering under a bridge if you don't reform your ways. There is no such thing as a 421-a abatement. It's a 421-a exemption. Your property taxes don't get abated by 421-a, a portion of your assessment is exempt from taxation. Please don't confuse the two or I may take my frustration out on small defenseless animals!

So, take two otherwise-equal condos, one with tax-reduction (A) and one without (B).

If the present value of the tax savings was $50K, then any premium of A over B less than $50K would leave you ahead. I'd make it a lot less than $50K, due to uncertainty. You certainly wouldn't hand the whole $50K over to the builder, right? Let's say you paid $30K more.

Of course, when you sell after 10 years, you can't expect to get that $30K from the buyer. It's gone.

http://www.nyc.gov/html/dof/html/property/property_tax_reduc_421_a.shtml

Who cares if its called abatement or exemption. The key thing is that it is a trick designed to build and sell new development for those who either don't care about the long-term effect on dampening the price, or who are naive.

I admit I fell into the latter category a couple years ago when I was looking at condos, and I know another guy who fell into it too. We both started thinking about how awful this would be when the abatement/ exemption / freebie / teaser (whatever the hell you want to call it) started phasing out, and we both bailed on our new-construction deals.

I think exemptions (and abatements) influence consumer decisions, I just don't think the markup is purely based on them. Condos generally have lower maintenance and there are still very few in the city. Also, I don't think the huge increases in NYC real estate prices (or those in the country) can be tied solely to exemptions (or abatements). Exemptions or not, developers will continue to develop and get as high a price as they can. 421a is an almost 40 year old policy program; I feel like if this was such an issue, we would have seen the impact on the consumer a long time ago.

I feel what gets lost in this discussion are those that are trying to take that first step into homeownership. I think as far as policy goes, it is a better benefit than most first time homebuyer programs that focus just on lowering downpayment.

Condojake, I think you make a valid point. I think what you describe is how a subsidy such as 421-a would function in a stable, rational market. However, a certain amount of rationality got tossed to the side during the past 5-6 years. During the bubble, when people became more willing than ever before to %u201Creach%u201D in order to buy in NYC, I do think that monthly cost-to-own became the most important metric used when deciding whether to purchase. A $600 monthly reduction in taxes, therefore, was treated as roughly equal to a $100,000 decrease in purchase price, without consideration for the fact that the exemption would expire down the line.

Because the real estate market became so tight, the subsidy value of 421-a exemptions got transferred to developers rather than going to condo-owners. The developers, in turn, transferred the subsidy value to sellers of developable land by bidding up the cost of building square feet. The net result is that 421-a reduced housing costs for no one, and principally benefitted long-term landholders who sold out.

Another overlooked aspect of 421-a is its role as an equalizer between taxes on houses and apartments. Condos and co-ops are taxed at massively higher rates than houses in NYC, as a function of actual market value. 421-a has played a substantial role in bridging that gap, but obviously it%u2019s temporary. When a cataclysm of exemptions begin to expire, I expect to see a lot of angry and surprised condo owners agitating loudly for an overhaul of NYC%u2019s insanely complicated and inequitable tax structure, and I wouldn%u2019t be surprised if it leads to real reform. Remember, those tax projections in your offering plan are just that: projections. The state legislature can ultimately tax your condo however the hell it wants.

you nailed it condojake.

to pjc, did you overpay for your first condo compare to other condos in the area at the time? If so, was it the 421a exemption that made you overpay 50-100k?

Another log on the fire: these abatements and exemptions can make prime loans into sub-prime loans inadvertently: with zero taxes, the borrower fits conforming guidelines. Add $1500 a month to the expenses....... POOF!!!!!!

I'm surprised no one has mentioned that there has been a break to lower income housing outside of Manhattan due to the selling/purchasing of 421 certificates.

How does any purchaser of a condo apartment know if there is a tax abatement that may expire in 2-3 years? Is the seller obligated to advise the buyer? Does the city have a list of existing abatements?

http://www.therealbillackman.com/bill-ackmans-90-million-dollar-condo-gets-special-attention/ I love the "spin" on this

The whole concept of tax abatements on uber luxury properties is pretty outrageous. Just another example of the government giving the city away to the mega-wealthy

@fc - have you seen new pilot of "Billions?" Do you think it is roman-a-clef with Bobby Axe meant to be Bill Ackman and the Hamptons purchase a thin veil for BA's penthouse purchase? And do you think Bobby Axe's rival in the show is meant to be Einhorn? And on totally separate note, why isn't is household knowledge that Sheryl Sandberg and David Einhorn are first cousins? or is it?