Came across properties with a few years left on their 421a tax abatement - what is the right way to think about value? I thought about a sum of the parts approach: look up annual taxes, multiply by time remaining on the abatement. Could also discount to present value if one wants to be precise. The resulting subsidy should be subtracted from the asking price. On the other hand, I am wondering if... [more]
Came across properties with a few years left on their 421a tax abatement - what is the right way to think about value?
I thought about a sum of the parts approach: look up annual taxes, multiply by time remaining on the abatement. Could also discount to present value if one wants to be precise. The resulting subsidy should be subtracted from the asking price.
On the other hand, I am wondering if buyers willingness to pay will be much lower down the line due to the much higher maintenance charge or a high tax bill. But is this what happens in reality? Do apartments drop in price once abatements expire?
In a perfect world, the remaining years of the abatement would be priced in perfectly, however, in reality I wonder if this is actually happens? I can imagine a scenario where a lot of apartments in a building are listed all at once because original owners cannot afford the carry cost, while the pool of potential buyers suddenly shrinks.
What are overall views on 421a tax abatements and properties with such abatements?
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Response by truthskr10
about 5 years ago
Posts: 4088
Member since: Jul 2009
If people approached 421a tax abatements the "right way, people wouldnt buy 95% of them.
The problem is people do their comp work based on that year's monthly expenses including the abatement and ascribe a wrong value to the condo they are buying.
7 years later, they are looking to sell, but their monthlies did not go up to an average 3% a year but 20% a year.
Look at it as a question of financing.
Very round numbers
Today you want to buy a condo that is 2 years old into a 10 year abatement.
It has common charges of $2000 per month and in the first of five 2 year tiers of abatement to rise in the near future. So now the taxes are $400.
You sell 8 years from but now the common charges are a (normal) increase to $2500 a month but the taxes are now ($2000 unabated + $500 regular increases) $2500 too.
(Though taxes are breaking from the gravity of 3% but lets ignore that for simplicity)
What does the extra $1600 a month cost the new buyer when they do their assessment and comp work?
What does it cost in a traditional mortgage? A 30 year mortgage at 3% will cost you $1581 a month.
So how or when do you apply that diminishment of value of $375,000 to the unit?
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Response by truthskr10
about 5 years ago
Posts: 4088
Member since: Jul 2009
edit
A 30 year mortgage **OF $375,000** at 3% will cost you $1581 a month.
So how or when do you apply that diminishment of value of $375,000 to the unit?
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Response by Krolik
about 5 years ago
Posts: 1370
Member since: Oct 2020
Thanks for the response. So is there evidence that apartments drop in price after the abatement expiration?
This article (though about Philly) claims otherwise.
Sorry I should have proofread what I wrote. My grammar was horrific with too many buts and nows in wrong places. I dont know what happened.
But this thread made me think of an apartment I was close to buying at the Gramercy Starck. It was peak post financial crisis, and I was trying to steal a penthouse for $1.8mm. I went up to $2mm but was very uncomfortable with the 421A abatement (and the kitchen, its terrible)
At the time, the common charges per month were $1624 and the abated taxes $210 .
Not far from my example.
It ended up selling for $2.363mm
https://streeteasy.com/sale/359100
It was recently on the market and lifted. Certainly COVID a factor but that cant be the only reason.
Common charges up modestly to $1982 a month
Taxes.......now $3852!
A similar building without a 421A, amongst other things would at least have a tax certiorari filing every year to keep the assessment/taxes down.
It would still be high but lower than this.
https://streeteasy.com/sale/1463708
421A new developments are a total honeytrap to anyone keeping a unit more than 6 years.
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Response by Krolik
about 5 years ago
Posts: 1370
Member since: Oct 2020
Thanks for the example, truthskr.
The selling price of 2.4m in 2008 and listing price of 3.3m recently suggest a 3% per year appreciation, which is not great but also not terrible (though, what it sells for remains to be seen).
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Response by Krolik
about 5 years ago
Posts: 1370
Member since: Oct 2020
So would it be fair to say that myopic market misprices 421a abated properties by not taking a long enough view?
In some cases, I see the abated units actually increase in price significantly, especially in South and East Harlem. I would have expected these units to go up in price more slowly than market based on the current owners using up 12-24k in state subsidies per year. Is there some other factor related to the area that is causing very quick price appreciation?
In the above penthouse example, the property went from selling for 2.3m to being listed for sale at 3.3m which is still a 3% per year positive return (of course, unclear if it will actually sell for this much). While this is not a great absolute return, it could be a pretty good levered return for someone who bought it with a mortgage.
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Response by yournamehere
about 5 years ago
Posts: 172
Member since: Mar 2007
Value it as if it had no abatements - full tax load. Then add the present value of the remaining abatements.
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Response by Krolik
about 5 years ago
Posts: 1370
Member since: Oct 2020
Thanks very much! Assume can use cap rate for discounting @about 5%?
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If people approached 421a tax abatements the "right way, people wouldnt buy 95% of them.
The problem is people do their comp work based on that year's monthly expenses including the abatement and ascribe a wrong value to the condo they are buying.
7 years later, they are looking to sell, but their monthlies did not go up to an average 3% a year but 20% a year.
Look at it as a question of financing.
Very round numbers
Today you want to buy a condo that is 2 years old into a 10 year abatement.
It has common charges of $2000 per month and in the first of five 2 year tiers of abatement to rise in the near future. So now the taxes are $400.
You sell 8 years from but now the common charges are a (normal) increase to $2500 a month but the taxes are now ($2000 unabated + $500 regular increases) $2500 too.
(Though taxes are breaking from the gravity of 3% but lets ignore that for simplicity)
What does the extra $1600 a month cost the new buyer when they do their assessment and comp work?
What does it cost in a traditional mortgage? A 30 year mortgage at 3% will cost you $1581 a month.
So how or when do you apply that diminishment of value of $375,000 to the unit?
edit
A 30 year mortgage **OF $375,000** at 3% will cost you $1581 a month.
So how or when do you apply that diminishment of value of $375,000 to the unit?
Thanks for the response. So is there evidence that apartments drop in price after the abatement expiration?
This article (though about Philly) claims otherwise.
https://www.inquirer.com/philly/business/real_estate/20170115_When_tax_abatements_expire__property_values_don_t_suffer__study_shows.html
For your reference - discussed on some other threads.
https://www.nytimes.com/2019/12/06/realestate/the-taxman-cometh-for-some-condos.html
Sorry I should have proofread what I wrote. My grammar was horrific with too many buts and nows in wrong places. I dont know what happened.
But this thread made me think of an apartment I was close to buying at the Gramercy Starck. It was peak post financial crisis, and I was trying to steal a penthouse for $1.8mm. I went up to $2mm but was very uncomfortable with the 421A abatement (and the kitchen, its terrible)
At the time, the common charges per month were $1624 and the abated taxes $210 .
Not far from my example.
It ended up selling for $2.363mm
https://streeteasy.com/sale/359100
It was recently on the market and lifted. Certainly COVID a factor but that cant be the only reason.
Common charges up modestly to $1982 a month
Taxes.......now $3852!
A similar building without a 421A, amongst other things would at least have a tax certiorari filing every year to keep the assessment/taxes down.
It would still be high but lower than this.
https://streeteasy.com/sale/1463708
421A new developments are a total honeytrap to anyone keeping a unit more than 6 years.
Thanks for the example, truthskr.
The selling price of 2.4m in 2008 and listing price of 3.3m recently suggest a 3% per year appreciation, which is not great but also not terrible (though, what it sells for remains to be seen).
So would it be fair to say that myopic market misprices 421a abated properties by not taking a long enough view?
In some cases, I see the abated units actually increase in price significantly, especially in South and East Harlem. I would have expected these units to go up in price more slowly than market based on the current owners using up 12-24k in state subsidies per year. Is there some other factor related to the area that is causing very quick price appreciation?
In the above penthouse example, the property went from selling for 2.3m to being listed for sale at 3.3m which is still a 3% per year positive return (of course, unclear if it will actually sell for this much). While this is not a great absolute return, it could be a pretty good levered return for someone who bought it with a mortgage.
Value it as if it had no abatements - full tax load. Then add the present value of the remaining abatements.
Thanks very much! Assume can use cap rate for discounting @about 5%?