value of a tax abatement

Tax Abatement? ask the owners of Stuy Town, with their J51: the gov giveth & the gov taketh. IMO, TA should not be a determining factor on a purchase. In one way, a TA is a ticking time bomb: After you buy, will you sell before it ends & if so, how early? Sorry I didn't answer your specific question; guess I'm saying that TAs are kinda a wash: you'll get tax relief in the early years, but there's tax shock in the later years.

Jim, you're on the right track, but if its a 20-year abatement, it will phase out in the last 8 years. In any event, and you may know I made this point today on another thread, it's worth a LOT. Using your example, I come up with a value of $$112,844-you get 12 years of $7200, then 2 years of 80% of 7200, then two years of 60% of 7200, etc. To keep matters simple, in the case of a 20-year abatement, maybe just figure it's 75% of the formula you suggest. This will roughly take account of the phase-out.

And then add in the declining value of your apartment as the monthly tax looms over it. The big savings that make you pay more will soon become the big tax bill that makes a future buyer less interested in paying quite so much (monthly payments being all anyone cares about).

what determines your property tax in a condo-is it the value of your apt- how is that determined is it your appraisal

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

Most people don't fully consider the impact of the expiring abatement on their apartment's value. Buyers are highly sensitive to monthly costs. Buildings with exceptional monthlies are slammed upon resale. It is critical to attempt to determine what the impact of the expiring abatement will be on the building. Most don't just trot along until the abatement expires and then increase maintenance or monthlies by 50% on Jan 1. They get ready for the expiration by increasing monthlies 5% a year for the last 10 years (plus whatever increases would normally be imposed for higher labor/fuel costs etc.) So in the last years, monthly costs will go up like clockwork. If the final figure leaves the owners wondering how on earth they ended up in such an expensive building, just imagine the reaction of prospective buyers. My impression is that many owners of new construction who bought in the last 7 or so years were extremely naive about all this. I predict there are going to be a ton of "new" buildings out there in the next 15 years with crushing monthly fees that won't add up for prospective buyers unless the overall cost of the units compensates for this. The buildings will struggle to find ways to reduce the monthly charges which means attempts to refinance if possible, cutting amenities, increasing flip taxes--but there is only so much a building can do to cut expenses.

Yes technically you should look at the apartment without the abatement, and then present value the abatement. Its tough because you are selling a much less desireable monthly payment once the abatement runs out, potentially mitigating you resale severely. The abatement has the full present value, if and only if you pay a price that reflects a full tax load. Chances are to outbid the next person, you will be bumping your price to reflect some value to the abatement.

I can only speak for myself, but I just walked away from a re-sale apartment that I otherwise loved because the tax abatement was to expire in 2 years and the taxes thereafter were just absurd. Those combined with the high maint. charges on the newish construction building made the carrying charges higher than any rent I've ever paid, even without considering my mortgage.

My point is... what you find a "value" now may turn out to bite you in the ass when you want to sell it.

Fact is an abatement is nothing more than a trick. It allows people to buy apartments they couldnt otherwise afford on a monthly payment basis. I am sure the way banks look at them have changed drastically as well. This is why condos got so nuts. 10% down, a big abatement...two people making $200k each could buy just about anything. Now they cant, just in time for some of these abatements to be rolling off.

"two people making $200k each could buy just about anything. "

Try two people making $150K or so COMBINED.

Four years ago, I couldn't believe how many people with HHIs of only about $150K or so getting themselves into million dollar apartments.

For goodness sake, an abatement is not a trick: it's a reality. I am a part owner of a number of rental buildings. My net cash on the buildings with an abatement is dramatically higher than those without one. This is no trick-it's money in my pocket and not in the City's. In some of the new buildings in Brooklyn and RI there will be virtually no RE tax for 12 years. This is no trick and it's an amenity with a lot more value than, say, marble in the bathrooms.

flatiron: I don't think the issue is the payment during the abatement, so much as the long-term payment AFTER the abatement expires. It is short sighted to think of any property's value for only the present. What happens when that abatement is up? Who is going to want to buy your 12yo apartment with taxes through the roof? Good for you if you can find someone to take that on, but I'm a smarter buyer than that. At least marble holds its value.

The concept of present valuing the abatement expressly takes into account that it only lasts a set period of time.

An abatement obviously has value,but to the extent you pay more for an apartment because of the abatement you are in effect pre-paying the taxes. Personally, I would look at an apartment "price" as two components: the abatement value (purchase price - abatement value), at least as an exercise to compare the unit's pricing relative to other non-abatement properties. If two units were identical,and one had an abatement, then, logically, the one with the abatement should sell for some premium amount which values the abatement, but again one should recognize that in effect that premium is a prepayment of taxes.

By the way, I take the point that people can get confused/duped by the temporarily low monthly payment,but that is because they are not examining it closely. I also take the point that low monthlies (for any reason)can make a property more attractive. Here I am trying to look at the "value" of the abatement logically.

oops...i meant say apt price = the abatement value PLUS (purchase price - abatement value).

I am just trying to get an idea of what the pricing would be without the abatement, giving some rough estimated value to the abatement.

One thing to add here is the way which Coops/Condos must be valued by the City: they must be assessed "as if" they were rental buildings, and then using the income and expenses valued. This is by law. You can actually look up for any Coop or Condo building which rental buildings were used as the comparable rental buildings by the assessor. Now, here's the rub: these brand new buildings will have other brand new rental buildings used as the comparables. As such, the rents will be high and so will the valuation: in older buildings (like a lot of prewar Coops) you have many tenants paying significantly lower rents (a lot of RS/RC tenants) so even though the units as Coops or Condos are worth the same or more, the RE Taxes will be significantly less because of the way the city MUST value the buildings (in the case of Coops, it's just one tax bill, in the case of Condos they divide the building total by the various "percent of common interest").

So, when your 421 abatement expires, you get a "double whammy" - not only do your taxes go up because the abatement goes away, but they go up to a number which is higher than what you think are similar buildings/units in your area.

____________________

David Goldsmith
DG Neary Realty

I considered a condo with a tax abatement before. It was a 20 yrs, and the taxes were something like $100. If you are thinking of selling in 10 years, it might make sense (if the price is very convenient,) since the next owner will consider the savings over the following 10 years he will have on the abatement.

Is it just me or does tax abatement look a lot like option ARMs in terms of it's effect on RE prices / affordability. In both cases, it works well if the buyer can sell in 5 years with a net profit.

I think we need to distinguish : 1) the abatement is something of real value, for a limited period of time, 2) during the effective upfront period it makes monthlies lower so it can provide greater access to some buyers and when this effect disapears some are arguing that this will impact the market price because of the universe of potential buyers will be lower

30..thanks for the comment...But isn't it true that the post-abatement tax situation in year 11 (for examplein case of a ten year abatement) will be no different than the taxes if the building had never had an abatement for the preceding 10 years?

"But isn't it true that the post-abatement tax situation in year 11 (for examplein case of a ten year abatement) will be no different than the taxes if the building had never had an abatement for the preceding 10 years?"

Yes. But..... 1) People tend not to look at what that number will be in 10 years when they see the current - near zero - number; 2) it will actually be higher than it is projected to be because in 10 years the assessment will be higher due to the natural progression of tax increases (that is to say, you might think taxes in 11 years will be what the unabated number would be today, but you'd be leaving out the 10 years of tax increases between now and then); and 3) My point was that if you look at 2 buildings with almost the same apartments; 1 which is 15 years old and has an expired abatement (or never had one) and one which is being built today with a tax abatement, odds are in 10 years when the abatement expires, the taxes will be higher on the newer building which currently has the abatement (as opposed to the same because they look the same, are in the same area, are the same size, etc).

____________________

David Goldsmith
DG Neary Realty

I see but let me ask: if you compare new abatement building today vs. new building with no abatement (or much less years of abatement), when you get to year 11 (post abatement) if they are the same age, and roughly comparable, so they rent for roughly the same, then taxes will be the same. My question being -- isn't your cautionary point applicable to any new building, not per se because of the abatement? (i dont know much about what buildings do/don't get the abatement but i have seen a big difference in years for new developments in wmburg).

I understand that people tend to illogically focus on the number TODAY. What I am trying to get to here is a logical way to look at it.

Logical is to ignore it in the purchase price and then present value the savings at some rate. Maybe use the mortgage rate.

Rhino..not clear what you mean to say by "ignore it in the price" and then present value the savings. To present value the future stream using the mortgage rate might be ok but then you also need to grow the future stream at some rate,which involves additional assumptions.

"isn't your cautionary point applicable to any new building, not per se because of the abatement?"

Yes, but if someone is looking at new construction buildings in a given neighborhood, they usually all have them or none. But it was more to point out that what often happens is people look at two buildings which look pretty much the same, but one has run it's abatement out and the other hasn't, and they don't realize that when the day comes that they are both zeroed out, the newer one will "flip" from having significantly lower taxes to having significantly higher taxes.

The reason you see different years of abatement is that in different locations within NYC, there are different TYPES of abatements given.

But there's another issue, which I've discussed before regarding Coop maintenance levels: when the monthly costs are within a certain range, people don't put a huge emphasis on the differences. But if one of the units has a monthly (either CC + RET or maintenance) which is over what buyers "feel" is the "high limit", all of a sudden it can have a HUGE impact on price. So what I'm trying to get across in this case is that for the newest buildings, what I'm seeing a bunch of is units which, when their abatements expire, the total monthly will look HUGE (partly because the taxes will be higher than the older buildings) and people won't even look at them. We hear a lot right now about "rent vs buy". Well, if you end up with a 1 BR apartment where the CC + RET is $2300 a month, what's going to be left over for debt service, especially when it was only marginally attractive when the monthly costs were $1000.

30..Thanks. Excellent points. Maybe it's just not human nature, but the solution seems to be for people to not be so seduced by the abatements upfront.

I would add that even if the taxes are not huge, my impression in some buildings is that the abatement makes people gloss over the too high common charges for bullshit amenities that, apparently and unfortunately, appeal to some people.

My sense is that buyers by and large do not adequately account for what will happen to apt value as the abatement nears expiration. They see the lower current monthlies and figure 10-20 years is a long way off. THus, with lower monthlies, they are willing to pay more for the unit than they would a comparable unit with unabated taxes. Many do not consider that the building will act to anticipate the expiration by phasing in increases long before the expiration of the abatement. Thus, the value of the unit will go down well before the abatement actually expires because monthly charges will be increasing steadily. Of course, the market "should" take it all into account, but because--as we've seen through the insane behavior of buyers leading up to the crash--buyers who make up the market are not necessarily rational actors. They may act, as a group, overly exuberant one minute and then when reality strikes appear as drunks coming down at a party at 4am suddenly realizing there's no more booze left. For those who buy and overpay when lured in by the abatement may be shocked into reality when the monthlies begin to soar, values decrease, and the units become more and more difficult to sell. Unfortunately, this usually occurs right around the time that the shiny new finishes on their newly constructed condo begin to seriously age and a renovation is needed. What then goes on the market is an aging no-longer-new condo unit that needs fixing up yet has ridiculously high monthlies and a market value reflective of the unit's markedly lower appeal (and value) in the market. Some of us have said this for years on here: good luck to those who bought new condos with fancy amenities in the last 5+ years--I don't see how their story ends well.

guys -- hypotheticals are all fine
The reality is that most of these new developments with the tax abatement are no longer priced at a premium relative to comparable properties -- they all suck and are moving down proportionally, while many existing properties are stuck at a premium either because the psychology of the individual owner is at play or the person is stuck having bought recently.
So, in practice in the current situation, there is little evidence of a premium and the new dev person, at least the smart motivated ones, can use the tax abatement to get a sale in this market, and the buyer -- if they want to act at this point instead of waiting is no worse off.
let them have their booze and booze it up
if you dont want to buy at this point, then the point is quite moot for you anyway

"The reality is that most of these new developments with the tax abatement are no longer priced at a premium relative to comparable properties"

Could you give us a few examples of what you are talking about?

=They are all still priced at a premium to resale condos so no idea what you mean

Kyle, I see your point, and agree that the "market" doesn't always rationally reflect all this info (hence the bubble).

But when you say "ridiculously high monthlies", it sounds like you are saying the monthlies are in some sense too high, but isn't the point that the monthlies only look ridiculous if the buyers paid too much because they were shortsightedly looking only at the low abatement period monthlies,not that the monthlies are too high in themselves. Maybe someone could give an example to make this stuff more concrete.

great post Kyle. are 15-20 year tax abatements a relatively new thing in RE in manhattan? it would be nice to see what happened to older buildings that enjoyed that type of deal if it's an old arrangement.

as far as i've seen so far, RE is so sticky that even the most obvious variable doesn't get reflected until all is said and done. how on earth people are buying in states that are basically bankrupt (new jersey, california), for example. that's like buying a call option on already established budget disasters. prices only go down after property taxes already went up, even if that spike was a predictable one. homebuyers don't seem to be able to anticipate even the most obvious thing imho.

imho this happens cause homebuyers are running away from renting. it's not a math type of transaction, it's an emotional one.

according to aboutready,
http://www.streeteasy.com/nyc/talk/discussion/15698-quick-question-about-rent-stabilization
aboutready
about 4 weeks ago
ignore this person
i think the tax abatements for new development condos ought to be eliminated, preferably retroactively. i don't see why the city's tax collections should be so diminished to support wealthy homeowners, and to support a housing program that has been both controversial and not very successful, creating only one affordable unit for every two eliminated.
-
So valuing an abatement under aboutready, it has no value.
Unless you are a tenant in which case you should get a benefit.
Figure out that incongruity and selfishness.

Jim, this has been a great thread. Thanks for starting it. I can easily see from your comments that you can easily gauge the value of an abatement (even if not to the penny). You can check with the tax exemption office at HPD, but I think the availability of the deep (ie longer term) abatement has been eliminated in parts of Brooklyn and Queens so that developments started after the change in law will NOT have the benefit of them. In a few years time, this will make the buildings that do appear all that much more attractive.

good point hfs, sounds more like ideology than a careful study of good data. don't think it's an easy calculation to do though. how do you know whether a building would have been built without the program? those that wouldn't have employed mostly local labor. those incomes paid local income taxes and most of that $ was spent locally.

anyway, how long ago did this tax abatement system get implemented for the 1st time?

Obviously,retroactively undoing a tax abatement would be highly inefficient in terms of the NYC economy, because that type of arbitrary government action raises the risk premium for all business activities in the cities, for the same reason that risk premiums are higher in banana republics.

just to be clear. here's the next comment from aboutready:

"my retroactive comment was meant as sarcasm. but i guess you're not smart enough to realize that, even though you seem to have followed my comments rather carefully."

hfs has some issues.

CCounty ..lol...oh shit, did I step into that melee. I hope not. To be clear, I reacted to a sentence, not knowing the context.

it all good....how could you know. hfs is a wackjob.

Truly. He came at me with guns ablaze...based on NOTHING.

Admi: where are you seeing 20 year tax abatements in Manhattan?

"But when you say "ridiculously high monthlies", it sounds like you are saying the monthlies are in some sense too high, but isn't the point that the monthlies only look ridiculous if the buyers paid too much because they were shortsightedly looking only at the low abatement period monthlies,not that the monthlies are too high in themselves. Maybe someone could give an example to make this stuff more concrete."

I'm not sure I'm going to be able to put this in terms that make sense, but I'll try: the factoring in of monthlies to price vs where in the business cycle we are is a non-linear thing. I can't find the quote, but I seem to remember seeing Barabara Corcoran saying at one point "Last year buyers didn't even ask what the maintenance was". I'll give some Coop examples since those are easier for me to remember and I'll try and find some Condo examples later:

Take 250 Mercer Street: in 1992 maintenance on a 1 BR was about $1,500, which at that time was seen as "way too high". As a result, it was almost impossible to sell a unit at any price, and the units which sold seemed sort of random - that is to say, looking at units on the market and which one's sold, you couldn't come up with any logical argument for why one unit sold rather than another; in some cases you saw units sell for more than other similar units were asking. The only answers I could come up with is you had some renters buying the units they were already living in from their landlords, you had much less transparency in the market in terms of information (no SteetEasy or equivalent around), and you had a large number of units on the market so I assume people were buying without the knowledge of everything which was available. now, fast forward to the boom years. People have been buying these same units with minor price adjustments for the mtc being on the high side. As a result, the units appreciated more than the market average because of this non-linear relationship between "too high mtc" and "pricing effects". The types of numbers I'm talking about are $100,000 to $125,000 in the down market vs hovering about $1,000,000 at the peak. I'm not sure you've seen that same magnitude of "swing" on units with more average monthlies.

____________________

David Goldsmith
DG Neary Realty

jimstreeteasy
about 3 hours ago
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CCounty ..lol...oh shit, did I step into that melee. I hope not. To be clear, I reacted to a sentence, not knowing the context.

Interesting Jim, the statement was verbatim. And columbiacounty didn't post any "context" that preceded the statement on a retroactive carveback. Only a statement following. I didn't see any sarcasm in the statement and apparently neither did you.

Sarcasm was a lie. For some reason when aboutready lies, that is acceptable to some, including columbiacounty.

Read the original thread. See how even after aboutready called it sarcasm, she then reverted to support for that position.

Read the record.

Your first reaction above was spot on target.

http://www.streeteasy.com/nyc/talk/discussion/15698-quick-question-about-rent-stabilization

there's the link

isn't that the same link you already posted? has it changed in some way?

Interesting what you focus on.

Why not acknowledge your lie and aboutready's lie?

because you are a complete asshole.

So, I'm an asshole and that makes your lies and aboutready's lies ok?

one has nothing to do with another.

glad to see we can finally agree that you're an asshole.

so your lies and aboutready's lies are independent of me being an asshole.

lets stay on topic: you're a raging asshole.

No, the topic is your lies.

And you'll note above that you said that you wouldn't acknowledge your lies "BECAUSE you are a complete asshole" (emphasis mine) and then just one post later "one has nothing to do with another."

Which is it? Aboutready's lies are because I'm an asshole or her lies are independent of me being an asshole?

you're an asshole.

You know, this is just evidence of why you shouldn't lie in the first place.

You lie once, then you lie to cover it up, then another lie. Starts to snowball columbiacounty.

columbiacounty
1 minute ago
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you're an asshole.

Like I said yesterday, on that front, we are two peas in a pod.

nope...you're an asshole.

Is that an autoreply feature you are using again?

hfs, AR clearly states she is being sarcastic in that thread, so I fail to see the lie.
If you could explain that might help all of us to understand your rants and raves about "lies and pea pods"

nope...just the obvious truth. you're an asshole.

please, one second
I would like to hear peapod out.
Peapod, please explain the lies...If people on this board are lying i really need to know about it.
Someone needs to be policing this place!

Peapod, I nominate you!
Who seconds?

ok, so we've established the following:
columbiacounty is an asshole, like me
columbiacounty lies
aboutready lies

upperwestrenter, welcome back. Are you going to start calling people a hot dog?

nope....we've established that you're an asshole. that's about it. also, it seems that you are a long time lurker. show yourself, you asshole.

only those who are worthy of the designation.
in your case...no
you my friend, are peapod.
And please, I never left...

So explain the lies to me peapod, I'm anxiously waiting.
Still no seconds on peapod as acting shuriff?

columbia, at least upperwestrenter has some creativity in his posts. We've got hot dog, now peapod - reasonably creative. You are stuck on asshole and no defense of your lies.

wait a second...peapod, are you the brother of aminoacids?
Are you looking for revenge?
This is getting better by the second!

You've never left?

What/who is aminoacids - I must know.

Please tell me it doesn't have anything to do with Skinner.

hfscomm1 aka jmbuch aka azmino 76 aka ????===show yourself, you cowardly asshole.

wait a second peapod, you have yet to answer my question of HOW AR lied...that's what I'm looking for.
And as an observer, I asked in a very civil manner. So, once again, Peapod, Can you further explain these lies?

And don't be too creative with your answer (unlike my names for those that deserve them)

What makes me a coward? Please explain your bravery. Tell us how you take a taxi to Equinox gym.

Peapod, please, explain the lies...or else how can anyone take you at face value?
I want a detailed explanation on these lies...link to the post and copy and paste (totally out of context I hope)
thanks

you seem obsessed with me. are you writing a term paper?

How AR lied was established very clearly in the thread that I posted (twice in fact, as columbiacounty pointed out).

No term paper.

peapod, we've established that you have read through all the posts on this board, but we have yet to establish how AR or CC are liars (your original claim.)
Can you please inform us?
Or have you forgotten? I would have figured you did your research, since you apparently know everything else about people on this board.
so, let the history lesson begin peapod

how many different identities do you have?

columbiacounty, tell us about your rage over the window in the bathroom of the rental apartment you looked at.

already been covered. do you have any material of your own to contribute?

ok then tell us about the flat screen TV that seemed to offend you.

same as before....just giving me back my own posts? can't you do any better?

hfscomm, I have found a thread proving you are a douchebag:

http://www.streeteasy.com/nyc/talk/discussion/16553-hfscomm1-is-incompetent-and-i-have-proof

there ya go, proof
enjoy

so...douchebag1....what is your point?

upperwestrenter, was my name "peapod" that short lived that you couldn't put it in the headline of the discussion you created?

Hfs, you are a piece of shit.

And now for the not so comic relief. Just in case you understood my last post, I'll try and make it more complicated. In acoustics, there are something called Fletcher-Munson Curves (which I believe are now referred to as 'Equal-loudness contours'). Some of you may be old enough to remember those "loudness" buttons on old stereo amplifiers/receivers. The concept is that at low sound pressure levels ("sound volume"), your ear perceives the scale of sound (frequency wise) differently than at higher levels. At low levels, your ear "hears" (perceives) less bass and very high frequencies than at higher levels. So, at low sound levels, your brain perceives a lack of bass - even though it doesn't exist.

It's sort of a weird analogy, but it's the same thing with high monthlies (but I guess the inverse): at low sales volume levels/low prices, people react A LOT to what they perceive as "too high" monthlies, but as sales volume/sales prices increase people stop focusing on the monthlies to the same extent and as a result monthlies which were "too high to even consider buying in that building" all of a sudden get close to ignored.

Ha well its even easier to ignore the risk of artificially low monthlies in good times than it is to ignored too high monthlies. These tax abatements will be great when prices fall low enough that they're "free".

Rhino, insightful reply to 30. Why though didn't you pepper it with some violence or an epithet?

Don't get weak on us meathead.

30yrs: nicely said. I tried writing that this morning and ended up deleting the potential post twice because I couldn't find the right way to express what you so ably write above.

30, kyle:

It seems clear that 1) there may be varying apartment price/demand sensitivity to monthlies at different market conditions involving volumes, rising market (the Corcoran quote idea) 2) there can be a kind of tipping point where people think monthlies are just "too high" and that could have a disproportionate impact on price.

I also see that because the abatement lowers monthly overall costs for a buyer and therefore expands the universe of buyers, that could therefore impact price on the upside when the abatement is in effect, with the effect tapering off once the abatement expires (however, I don't know how significant that can be; a proxy for that might be how much impact higher downpayment requirements have on apartment prices). I can also see that an expiring abatement could lead to greater defaults, especially in a poor economy.

However, none of the above points necessarily means that post-abatement an abatement building will necessarily have too high monthlies or surprisingly high monthlies, etc. which is what you guys seems to be saying. I really don't get how having an abatement today will in any way per se lead to higher than normal monthlies once the abatement expires, or lead to some disproportionate negative impact on sale price (other than the amortization of the value of the abatement as it runs out, as I mention below).

If the unit with a 20 year abatement today, has an estimated tax of XXX (absent abatement), and if you assume that taxes more or less keep pace with inflation, then today's XXX number gives you a roughly accurate idea of the economic tax burden in 20 years. If you look at the XXX monthly today (as if there were no abatement) and it seems roughly OK, then having the abatement simply doesn't mean it will be unreasonable, too high, disproportionately effect prices, etc. as the abatement starts to expire. If XXX would be too high today (if there were no abatement) then the unit price should already be lower today. [ If taxes turn out to increase higher than inflation, then the abatement actually is worth more than anticipated, i.e. a greater benefit to today's purchaser, and the relative post-abatement tax burden of the building vs. buldings of comparable age shouldn't be effected since taxes went up more than inflation for them also.]

Basically, I think the answer is that people should value the abatement roughly (as I started out this post, as refined by one commenter for the tail-off), and then assume you're "paying" for that abatement through an increased purchase price, and see if the building unit looks in line with the market price for non-abatement units. As the abatement trails off over the years the premium paid for the abatement will amortize away. If the abatement was worth say 15% of the purchase price in year 1, and the real estate market is static, and there is no inflation in tax rates, then after the abatement expiresin year 20 the market price of the unit should be 85% of the initial purchase price.

By the way, I don't discount that some idiots (facilitated by a stupid housing finance system) -- expecting a rising market to bail them out -- might buy into a building where they could only afford the abated monthly payment but it doesn't make much sense that that could effect the whole market for such buildings....I don't know.

OK, let's see if I can conjure up an example. Take 2 units currently on the market:

130 West 20th Street, Prima, Apt. 5-D, and
5 East 22nd Street, Madison Green, Apt. 14-G

Size advantage goes to 5 e 22 at 680 vs 620 for 130 w 20.
Condition advantage goes to 130 w 20
Views I think about the same.
Location? perhaps 5 e 22, but some would say 120 w 20 so let's call it a toss up?
Asking price? 5 e 22 $799K, 120 w 20 $780 (but sponsor unit so will pay higher closing costs)
Monthlies? 5 e 22 $991/month; 130 w 20 $920 per month

OK, so they aren't identical, but certainly would have the same buyers looking at them?

But 5 e 22 has a cc of $488 and RET $503 to make up that $991,
and 130 west 20 has a cc of $825 and RET 95 to make up that $95.

In about 10 years from now, let's say everything (costs)is up 20% and
5 e 22 has a cc of $586 and an RET of 604 totaling $1,190, but
130 west 20th has a cc of $990 and a now un-abated RET of $800 for a total of $1,790.

Does that sound like a reasonable situation to you? If so , what do you think the results will be?

____________________
David Goldsmith
DG Neary Realty

I think the value of an abated apartmenr goes down every year by the amount of principal that would generate enough interest to equal the amount of the tax increase....all other things being equal.

30, thanks for an excellent example of what could be the pitfalls of someone who looks only at today's monthly charges.

If we assume that the "quality" of these two apartments is roughly the same (for the sake of discussion) then EAST is a much better deal than WEST-abated because the monthly charges are way higher for WEST, in RET taxes (post abatement),and even more so in CC. Someone would have to be an idiot to look only at today's monthlies (distorted by the abatement) to not see that. There is nothing wrong with the abatement per se, unless someone is just a fool and not looking at what numbers would be without the abatement. To make an extreme case, if a large abatement were expiring in a month no buyer would look at today's charges only, and neither should a buyer in looking at an apartment with a longer abatement.

I think someone should look at:

- Without the abatement the monthlies would be EAST 920 (488cc,503ret) vs. WEST 1491 (825cc,666ret; i get the ret taxes from backing 20% less than the future number you give). That is a huge difference that ought to be reflected in a much lower price (again, assuming similar quality)..but I am not sure how to value that precisely.
- The abatement itself has some value which, roughly,would be 571 per month x 12 x 8 years or 55,000 (I used 8 years to account for the tail-off over 10 years). That 55,000$ probably doesn't come close to compensating for the whopping monthlies difference.

- The biggest problem with WEST is the CC which is 87% higher than EAST on a psf basis. Non-abated taxes in WEST are also 46% higher on a psf basis.

30. I didn't directly answer your question. I think (again, assuming "quality" roughly the same, using that word to take into account the mix of size,location, finish, amenities etc...for the sake of discussion) that in 10 years when the abatement expires then WEST will certainly be worth less, but it also ought to be worth less today, if one looks at it logically. If the abatement makes it hard for people to see that, then maybe abatement buildings are dangerous investments because too many people are seduced by low monthlies today and pay too much. [Maybe a seller in a high monthly building should market his apartment with prepaid monthlies held in escrow, a kind of personal abatement, if it makes people so willing to ignore basic economics].

"but it also ought to be worth less today"

I think what kyle and I have been trying to tell you (hope I'm not putting words in kw's mouth) is that it doesn't matter what "smart people" think OUGHT to be how the world operates, what IS important is to look at the empirical evidence as to how the world ACTUALLY HAS BEEN operating for a fairly long period of time. I didn't do a search (not a lot of time right now), but I'll bet those listing aren't priced totally out of whack in terms of what those things have actually been selling for.

I think we're trying to answer the question with "the VALUE of the tax abatement is TO THE DEVELOPER", which should be of now surprise, SINCE THAT IS THE STATED OBJECTIVE of the abatement program: to get DEVELOPERS to build buildings which they otherwise would not build. It's NOT "to save buyers of new condo's money on their RE Tax bills".

To be clear, I was not saying the abatement ultimately benefits buyers. If the unit sells for more because of the abatement the buyer is in effect prepaying taxes and is not benefiting, and I personally suspect that is what happens. Economists would no doubt argue about the empirical evidence, though.

The degree of egregiousness of the example 30 gave above obviously depends on how similar the units EAST and WEST really are.

30..Are you saying all buildings with abatements are somehow toxic, bad investments? I'm not convinced of that because I think it has to be case by case, and I still don't buy it that every abatements per se are result in some kind of mispricing. The example you picked had very high CC in the abatement building, so it was kind of distorted.

with 20/20 hindsight, i think we need to ask ourselves what the difference is between teaser interest rates and tax abatement?

Columbia. There is fundamental difference -- tax abatements represent a real reduction in tax liability (although you may pay for it by paying a higher price for the apartment); interest rate teasers are paid for higher rates later, or by granting what is in effect an option to the lender.