421a Tax Exemption: Don’t Say You Didn’t Know

This is dumb. Buyer should know exactly what he's getting. It's in the offering plan, so if you can't afford the cost of carry with the higher KNOWN IN ADVANCE taxes, you shouldn't buy. Otherwise you're no better than the buyer who takes on a purchase with a 2/28 arm with an exploding margin.

RS: did you read the piece? One point made is that the city keeps jacking up the assessed values of the buildings. Buyers are certainly not planning for that.

My prediction - the next big thing = prewar coops :)

>described by the broker as having “a New York meets Los Angeles meets South Beach flavor,”

Sounds like the recipe for a bad virus.

Sounds like the recipe for a bad virus.

Ha, or its another way of saying small, pretentious, and smarmy.

West34. The city feels raising the assessed value is easier than raising the tax rate. R.E. tax is one of the few large sources of money available to the city. The sales tax is subject to approval by the state legislature. Most coops get a 17.5% exemption, if the economy goes bad what's to stop the city from ending that program?

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

ligibility
Ownership -- Condominium owners and cooperative tenant-shareholders may not own more than three dwelling units in any one property. Units held by sponsors or their successors in interest are not eligible.

Other Exemptions -- Properties receiving a state or local tax exemption or abatement, such as J-51 Exemptions, 421a, 421b, or 421g may not be eligible.

Level of Benefit
The Abatement given to eligible units is based on the average assessed unit value in the building, as indicated in the chart:

Average Assessed Value Per Unit

Abatement

Less than or equal to $15,000

25 %

Greater than $15,000

17.5 %

“It is utterly ridiculous,” said Mr. Abrams, a co-president of Alternative Marketing Solutions, which helps publicize films. “I have a home in Los Angeles and Palm Springs, and California is famous for high taxes, yet we don’t pay anything close to what I will be paying.”

Mr Abrams, that exemption was for the benifit of the deverloper not for you. If the exemption did not exsist from the begining you might not have paid that heafty price for your property.

Tax exeptions = sucker bait

It's a hard when you find out you're not the catch of the day, you're the bait.
SUCK IT UP TOD...should have read the endless threads on SE on the dangers of exemptions and abatements.
What's utterly ridiculous is how a bigshot multiple house owner like Tod could be such a failure at doing just a tiny bit of homework.

c'mon, his intention all along was to flip for a quick profit. Now that values have fallen he plays the 'victim' card.. he's probably going to ask for a tax-break bailout next

Tax exeptions = sucker bait

---
Disagree, I bought knowing the exemption was going away and used the extra cash flow to pay down the mortgage faster. I based affordability assuming the full real estate tax not the initial mini-tax.

You want a RE tax "scandal" - IMO, the biggest one out there is the mismatch in Bk between assessed values for townhouses v. apartments.

Property taxes are FAMOUSLY LOW in California. The guy quoted is a retard. Proposition 13 passed way back in 1978, and is probably the MOST famous state ballot issue of all-time nationwide.

poor Tod.

Totally aggree with bugelrex!

Yeah, poor Tod, two houses in Cali and a fat apartment in manhattan. Yeah, poor Tod, probably over fed and over sexed as well. Being the 1% can really be exhausting. We shouldn't tax Tod at all considering the Job creator that he must be.

Noah has been warning about the 421 abatement for many years now:

A: Let me be absolutely clear! The 421A Tax Exemption 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! Originally published June 28th, 2006. Edited/Enhanced on April 25th, 2007.

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 Exemption.

Don't get me wrong, new developments are a great product and perfect for those who can afford them. But for those seeking an investment play, its hard to rationalize the price per square foot + higher closing costs on some of these developments considering they will get more expensive to carry every two years for the next 10 or 15 years.

As I noted on a previous post, "What is a 421A Tax Exemptiont":

421 Tax Exemption - 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 (MAINTENANCE + 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 maintenance 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 benefiting 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
Maintenance: $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/exemptions 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 exemption expires in 10 years the annual tax costs of this apartment would be approximately $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!

Here is how the tax abatement gradually expires:

EVERY 2 YEARS, 20% OF THE ABATED TAX TOTAL IS ADDED TO YOUR MONTHLY REAL ESTATE TAX PAYMENTS UNTIL MATURITY.

For example, if you just moved into your new development property and your real estate taxes start at $100/month, and mature at $800/month, then there is $700 of abated taxes. In 2 years, 20% of $700 (or $140) will be added to your monthly expenses bringing it up to $240/month. In another 2 years, 20% of $560 ($700 - $140 = $560 left) will be added to your monthly payments, and so on until maturity.

UrbanDigs Says: The 20% every 2 years hype is usually misunderstood. 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.

In 2018, there is going to be a massive glut of newer construction on the market since that is when the abatements start expiring. You can call it the 421a abatement Time Bomb.

No. Because the abatement scales down in 1/5 increments and the last 20% turns into 17.5% when the buildings enter the coop an condo program.

Very interesting article. I found especially interesting the part about how the city assessment is based on equivalent rent, not price. This seems like it makes it very hard for condos to ever become "cheap" in a price&monthlies vs rent comparison, but I know there are plenty of people out there who have positive cash flow renting their apartments. How does the city tax assessment for co-ops work?

Here's why the guy's an idiot. OK, perhaps one of many reasons. That 2018 tax quoted amounts to 1.24% of the price he's listed the home at. Guess what California's property tax rate is? 1.25%, I believe.

>1.24% of the price he's listed the home at. Guess what California's property tax rate is? 1.25%, I believe

Wow, you are willing to call this guy an idiot based on a 1 basis point margin that you "believe".

ebabrah, the city assesses co-ops the same as condo buildings. That is, "NY State law requires Finance to value residential condominium and cooperative buildings as if they were residential apartment buildings. We apply income and expense information from similar rentals to value these properties."

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

What continues to amaze me are the extremely low maintenance/taxes on prime, very high end 5th, Park, CPW coops selling in the very high millions. Is it that so much of the surrounding rental stock is RS, thereby totally skewing the "comparable" "similar" rentals?

IMHO Those artificially low valuations are a true tax scandal.

The system is skewed toward placing higher valuations on new buildings over old buildings.

It is ridiculous on both sides. I know apartments sold for over $1,000,000 with assessed values of $200,000.
Some 1000sf apartment i rented for $4000 with monthly tax bill of almost $3000！

Riversider: "The system is skewed toward placing higher valuations on new buildings over old buildings."

Sounds fair to me.

On the plus side, with 421-a abatements running their course, the city is getting much needed tax revenue.

"Here's why the guy's an idiot. OK, perhaps one of many reasons. That 2018 tax quoted amounts to 1.24% of the price he's listed the home at. Guess what California's property tax rate is? 1.25%, I believe."

Its actually capped at 1% for the first year I think, and can't go up by more than either 2% or the rate of inflation, whichever is LOWER forever. So even if it is 1.25%, its the best deal in the nation. So California property taxes are the lowest in the nation as a percent of the homes' appraised value. And they get relatively lower the longer you stay in them. So two identical Bel Air mansions might be taxed at $10,000 a year for one lived in for years and $100,000 a year for the one just purchased.

THIS is why California is only like the 25th most-taxed state in the nation. High income taxes (which are still a lot lower than New York, on average) are offset by ulta-low real estate taxes.

And just for Riversider...the higher inflation is in California, the lower your real property taxes in constant dollars. Those same Bel Air mansions might have a neighbor paying only $5,000 a year if they bought in 1979.

Jason, I thought it was 1% too but then saw some websites reference 1.25%. In either case, a far cry from “I have a home in Los Angeles and Palm Springs, and California is famous for high taxes, yet we don’t pay anything close to what I will be paying" as he'd be paying the same taxes if he'd bought something for $1.575M in LA in 2008.

my understanding is that Prop 13 (cali = 1.25% max assessment) was partly passed bc CA taxpayers found it unconstitutional to use private taxes to fund public schools?? ..way bback in the 70s??

what are the odds it'll happen in the tri-state?

i'd imagine the lower taxes would make equity (if still present) surge

or we're probably to caught up with online entertainment (lacking in the 70's) to really care

nyc property tax system is all f-ed up

if you look at the priciest homes, it's primarily in CA, (save Alpine NJ), trumping even Greenwich CT, most likely since much lower property/state taxes yield higher home prices (already accounting for weather, etc)..

if you focus on Alpine, NJ you see property taxes actually mimic CA more so than the rest of Jersey...

... since Alpine citizens have relatively low property taxes since they voted for private post offices/garbage which is much cheaper than public alternative, yielding much higher equity/home prices...

..of course the zip code list doesn't take into account NYC's reality where $2,500/sq ft penthouses are across subsidized housing, something you don't see in suburban CA...

Alpine does not have private post offices. Postal service has absolutely no impact on property taxes since the post office is not paid for with property taxes.

Hey Riversider, when are you going to return the money to the city that your getting from your special interest tax looophole?

that's bullsh1t, this tod should price it at 800k, i guarantee he'll sell it in no time

he got what he wants

"Alpine has a relatively low tax rate, thanks in part to the fact that it doesn't have a high school or mail delivery."
http://www.businessinsider.com/alpine-new-jersey-richest-zip-code-photos-mansions-2011-10?op=1

..trash removal also done by much cheaper private companies..

Alpine, NJ #1 on Forbes 2011 list
http://www.forbes.com/pictures/mhj45fllj/1-07620-alpine-nj

sheesh, wonder how many more NJ/NY/CT towns would explode in value and make the list if taxes were reduced to say CA's level.

Sounds like a textbook case in less government is better government. I'd take out my trash to the dump if it resulted in lower taxes.

Prop 13 had nothing whatsoever to do with any court ruling. It was just an anti-tax ballot initiative. It also said it took 2/3 majority to raise taxes and pass a budget in CA. And thus the state's long descent.

So ALpine is the richest town in America because it has private sanitation? Aren't all or most of the private sanitation companies run by the mob?

"Alpine has a relatively low tax rate, thanks in part to the fact that it doesn't have a high school or mail delivery."

As I said before, Alpine's tax rate has absolutely nothing to do with the lack of mail delivery. Property taxes do not fund mail delivery. Property taxes do not fund services provided by the federal government. Just like your property taxes do not fund the military.

"what are the odds it'll happen in the tri-state?"

in nj, slim to none. people here WANT their property taxes to fund their town schools, that's why they move to those towns. because in nj, you can technically buy a superior public education.

'i'd imagine the lower taxes would make equity (if still present) surge"

you're wrong. if people in the millburn/short hills or livingston districts had to share their school budget with newark and east orange (county) or trenton (state) property values would FALL. people wouldn't pay such a premium to live there. the ability of nj towns to largely finance their public school systems is a very significant reason for people to move to "good" nj towns.

and who didn't know anything related to the post office was federal territory? drop and give me twenty.

public school would be a waste in Alpine. The families there all want private schooling. Different community with very different needs. It works for them and nothing wrong.

The dispute that Englewood Cliffs had many years ago with Englewood over their school sharing agreement is an interesting story. Englewood Cliffs is pre-dominantly white and Englewood is very diverse. Instead of sending their kids to the high school in Englewood, the people in Englewood Cliffs wanted to isntead use the one in Tenafly, which is pre-domionatly white. The state said no, so they appealed. It turned into a very nasty debate, with the N word being regularly thrown around:

http://www.oocities.org/ebgold/

High Court Rejects District's Bid to End Alliance With Mostly Black School

Published: November 30, 1993

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A New Jersey school district with no high school was turned down by the Supreme Court today in its bid to end its alliance with a predominantly black high school and let its students go to another nearby school where most of the students are white.

The Court, without comment, rejected the argument by the Englewood Cliffs Board of Education that the state violated its students' constitutional rights by requiring the continued partnership with Dwight Morrow High School in Englewood.

The case is Board of Education of Englewood Cliffs v. Board of Education of Englewood, 93-373.

Englewood Cliffs officials said the decision deprives parents and children of the right to select their schools. "I recognize the Supreme Court not wanting to become involved in a local matter," said Ilan Plawker, president of the Englewood Cliffs school board. "The implications, however, are national in scope. Parents should have the freedom to decide where their kids go to school."

Arnold Mytelka, a lawyer for Englewood, said the Englewood Cliffs position would have increased segregation of the schools. "I'm glad to see that right has triumphed," he said.

http://www.nytimes.com/1993/11/30/nyregion/high-court-rejects-district-s-bid-to-end-alliance-with-mostly-black-school.html

"public school would be a waste in Alpine. The families there all want private schooling. Different community with very different needs. It works for them and nothing wrong."

never said it was. as is the beauty of nj. no one HAS to pay high prop. taxes, they choose to. you can shop around for what your prop taxes buy you, and in nj, within 40 miles of nyc, that's a pretty wode range of product. you can pay a lot and get nothing (like maplewood or montclair), you can pay a lot and get a lot (like short hills/millburn or livingston), or you can pay very little and get nothing but not because you're all broke and can't afford it, but because you're so fancy and don't need anything (anything west of morristown). nj is a beautiful little place and there is room for everyone. and the intrinsically corrupt nature of its politics allows for a surprising amount of practical autonomy in local affairs. just saying.

Socialist, i stopped paying attention, but millburn has for years tried to succede from the union of essex county and join the confederacy of union county (ahh ha ha ha). they keep smacking them down and saying, no! you stay and pay! but they do keep trying.

Alpine public kids go to Tenafly high school district.

Agree that NJ/NY/CT towns would probably be all top 10 if our taxes matched CA's lower rate.

http://www.forbes.com/lists/2011/7/zip-codes-11_rank.html

well maybe at some point Milburn will succeed in seceding from essex county.

"never said it was. as is the beauty of nj. no one HAS to pay high prop. taxes"

Except everyone must abide by gross income tax state (only about 6 or7 in the country, NJ being one of them) rules, which limits most deductions you can take in NJ, which CA allows..

- Property tax deduction beyond $10,000

- Mortgage interest deduction

- Rental deduction loss

- Cap gain loss

- Etc, etc

Which NJ residents can't deduct on their state tax returns, of which CA taxpayers can..

If NJ got rid of some of their gross income tax status, I'm sure you'd see some of the NJ towns creep up on the Forbes list.

>with the N word being regularly thrown around:

Ncolumbiacounty?

ph41
10 minutes ago
ignore this person
report abuse well maybe at some point Milburn will succeed in seceding from essex county.

oh shut up

oh no, lucille and ph41 are at it now?

oh my head, my aching head. two of my alternative personalities going at each other. maddening, please stop, stop, bring me some crème brûlée doughnuts.

"Except everyone must abide by gross income tax state (only about 6 or7 in the country, NJ being one of them) rules, which limits most deductions you can take in NJ, which CA allows..

- Property tax deduction beyond $10,000

- Mortgage interest deduction

- Rental deduction loss

- Cap gain loss

- Etc, etc"

that's true. idk about california, but come tax refund time, in my experience, new york sends you a check, nj never does. so that's true. you just have to look at every town like any other individual product and decide if it's worth it for you and your family. because they do offer very different things.

where in NJ did you live and for how long?

Yes, I believe NJ top % rate is lower than CA and NY..

but you actually pay NJ a sh*tload more than had you lived in CA or NY since it's a gross income state, limiting many of the Federal deductions that the majority of other states recognize...

gonna be a rude awakening for a lot of people. I know when I was shopping in bburg i was fairly dismissive of it. now im glad that my coop has the full tax burden built in.

"where in NJ did you live and for how long?"

oh, i'm not going to tell you that

"bring me some crème brûlée doughnuts"

the pistachio one sounds way better. but i think you should pass on the doughnut, you're filling out a little bit. are you pregnant?

Property and Income taxes are higher in NJ than in CA. In CA the top income brackets go up to $1MM or more. And we have discussed the RE tax differences. So the average effective tax rates are lower. Add to that the deductibility of CA RE and income taxes from Federal taxes...

> Property taxes are FAMOUSLY LOW in California

For existing homeowners. Not for new purchases.

"For existing homeowners. Not for new purchases."

They are capped at a MAXIMUM of 1% (or 1.25%) for new purchasers. Like for like, the are lower across the board.

...than NY, I mean.

But yes, if you actually read any of the posts I put above, you would see that I pointed that fact out very explicitly, so you added nothing to the discussion.

if no/small governemnt is really that good, why the same killers always support expanding the US military action in the world?

Two things:

1) I thought the NYT RE section was purely an advertising section, to be dismissed entirely due to its "shilling." Guess not.

2) Tax abatements are one of the most consistently misunderstood things on this board - often way overstated. See these other threads:
http://streeteasy.com/nyc/talk/discussion/10302-brooklyn-numbers-in-10-down
http://streeteasy.com/nyc/talk/discussion/21705-15-versus-25-year-tax-abatement

Tax burden by major city (all state and local taxes included) for a family of 3 making $50k per year:

http://retirementliving.com/tax_burden_3fam_2009.pdf

For $25,000, $50,000, 75,000, $100,000, and $150,000 (what is written on the bottom of the page, not what PDF says you are on on top) see pages 7-12.

>"bring me some crème brûlée doughnuts"
the pistachio one sounds way better. but i think you should pass on the doughnut, you're filling out a little bit. are you pregnant?

At my age, I get a pass on the extra weight, and no, pregnancy hasn't been an option in a while. Or ever I think. But doubly so now.

You can look state by state by year here (all taxes, not just property)

http://www.taxfoundation.org/news/show/335.html

Here it does it across states for 2009. The headline says

"New Jersey's Citizens Pay the Most, Alaska's Least". This is ALL taxes on average against average income.

http://www.taxfoundation.org/research/show/22320.html

"At my age, I get a pass on the extra weight, and no, pregnancy hasn't been an option in a while. Or ever I think. But doubly so now."

well, you can always get a pet and just be really happy for your friends who have children. children are overrated anyway. plenty of things to keep you busy in life.

>and just be really happy for your friends who have children

You've misinterpreted me

you're not happy for your friends who have children? seems cold

?

In general, I tend to blame the buyers with this issue. Also, most real estate attorneys would make sure that the buyers really "get it" that abatement is temporary.

With this said, I have had some agents give GROSSLY underestimated post-abatement $ figures--and I guess I could see how some people might be misled. Some cases may be attributed to ignorance or calculation errors, but others seem quite intentional. You know, like some agents consistently inflating the square footage of all of their listings, I've dealt with agents who consistently underestimate the monthlies on their listings.

I never consider a property (condo) without first checking the figures on the NYC Finance Dept website @ http://webapps.nyc.gov:8084/CICS/fin1/find001I

We are very happy with our 25 year tax abatement. (In fact when the 25 years are up it is likely it will be our children's problem.) Actually looking into things we found the agents overestimated the unabated taxes (that could be a Harlem thing).