finding the un-abated R. E. Taxes?

[narikin]

How does one work out what the taxes on a condo unit would be if it were not abated.

I'm looking at a 1100 sq ft unit in a 35 unit building from 2001. I can go to Property Shark and find out some figures for the buildings taxes, and the share of building costs for the unit I like is listed, as 1.8% of the building and 1.5% of the land, so do I just divide it up, or what?

I'd really like to know what the figures are going to be once the abatement on this unit ends (5 years to go) I know thats in the future, but would be great to at least know what it would be now, for example, if there were no abatement.

just trying to protect myself from a possible shock in 5 years time...

thanks.

[bigkdc]

Depends on type of abatament...if it is a typical 5-year, it will go up the same amount each year in equal increments. So if you know what year 1 and 2 is, you can roll it forward to determine the full amount. That being said, city is moving stuff around with tax rates and prop values so best thing to do is to just ask.

[narikin]

I believe its a 10 year abatement, and did ask the sellers broker. he looked at me blankly, like I was asking him some complicated theoretical math question. will continue to push him, but meanwhile wanted to see what I could work out myself...

[jennicak]

http://www.urbandigs.com/2006/11/biggest_scam_in.html (http://www.urbandigs.com/2006/11/biggest_scam_in.html)



November 13, 2006

Don't Be Fooled: 421A Tax Abatement

A: Let me be absolutely clear! The 421A Tax Abatement which is granted to developers by the city as an incentive to build and develop neighborhoods, is great for the developer's sales team as they ask top dollar for new units with temporarily low monthly expenses and a DUPE TO THE BUYER WHO INTENDS ON SELLING AFTER THE ABATEMENT EXPIRES!
http://www.urbandigs.com/tax-relief.jpg
I'm sure I will get a lot of harsh words for this post from either some colleagues or sales managers, or developers, but I can't help it! This is how I feel and think its important to at least play devil's advocate to anyone considering paying over $1,300 a square foot for a new development whose asking price can be this high because the monthly expenses are temporarily low due to the 421 Tax Abatement.
As I noted on a previous post, "What is a 421A Tax Abatement (http://www.urbandigs.com/2006/03/what_is_a_421a.html)":
421 Tax Abatement (http://www.nyc.gov/html/dof/html/property/property_tax_reduc_coop_condo.shtml) - The Cooperative and Condominium Abatement Program provides partial tax relief for condo owners and co-op tenant-shareholders to reduce the disparity in property tax paid between residential Class 2 properties (i.e., condominiums and cooperatives) and Class 1 properties (i.e., one-, two-, and three-family homes), which are assessed at a lower percentage of market value.

The reason I think this temporary tax relief is a dupe for buyers who intend to sell their new home AFTER the abatement expires, is because in the world of real estate... THE MONTHLY EXPENSES (MAINTENENCE + REAL ESTATE TAXES) OF A PARTICULAR PROPERTY ARE DIRECTLY CORRELATED WITH THE AFFORDABILITY OF THE APARTMENT AT RE-SALE. THEREFORE, A PROPERTY WITH HIGHER MONTHLY EXPENSES MUST LOWER THEIR ULTIMATE ASKING PRICE TO COMPENSATE FOR AFFORDABILITY OR ELSE IT WILL NEVER SELL. ON THE FLIP SIDE, A PROPERTY WITH VERY LOW MONTHLY EXPENSES CAN GET AWAY WITH A HIGHER ASKING PRICE ON THE OPEN MARKET.This is such an important factor for any prospective home-buyer to understand! If you are paying $1,300 a square foot for a 1,000 square foot Junior 4 apartment in a new development, with monthly maintenence of $875 and real estate taxes of $115 (due to the 421A tax relief), what happens after the abatement expires and the actual assessed real estate taxes kick in? That $115 in monthly costs to you will now shoot up to about $600-$700 or so, perhaps even more, making the property less affordable? When you go to resell, your the one without a chair when the music stops!

Now lets apply this to real life and specifically look at a new development that was granted a 421A Tax Abatement, to get a better idea of what I am saying. On a recent visit to The Ariel West (http://www.arielcondos.com/) sales office, my client was considering purchasing a new apartment that was benefitting from a 421A tax abatement for 10 years. Here are the details of one of the property's we were looking into:
245 West 99th Street - Ariel West Apt. 21A
Size: 2,526 SFT
# Beds: 4
# Baths: 3.5
Maintenence: $2,291
RE Taxes w/ 421A: $201
Asking: $3,500,000
Price Per Sq. Ft.: $1,386
Marketed By: Corcoran Sales Center (http://www.corcoran.com/property/listing.aspx?Region=NYC&listingid=867404)
Now, the number that is important for sake of this discussion is the monthly real estate tax of $201 for this apartment. The way abatements adjust is that every 2 years the monthly real estate tax rises 20% until maturity. At least that is what I originally thought. When I decided to put the sales agent on the spot and asked him what the assessed tax value of this apartment would be AFTER maturity of the abatement, we were shocked to find out the formula isn't as simple as a 20% adjustment every 2 years until maturity!
In fact, once the 421A tax abatement expires in 10 years the annual tax costs of this apartment would be aproximately $31,000, or $2,583 a month! You should have seen the sales agent's face when I told my client of my concerns right then and there.

I ask you: HOW MUCH CAN MY CLIENT REALLY SELL THIS APARTMENT FOR IF THE MONTHLY'S JUMP FROM $2,492 A MONTH TO $4,875 A MONTH IN 10 YEARS?From a seller's standpoint I would have to inform my client to lower their asking price to compensate for the now much higher, monthly expenses of this apartment. Sure you can try to ask $4.5M, but that doesn't mean you'll get it! In the end, my client decided to pass on this deal as they were hoping to keep their monthly expenses closer to the $3,500/Month mark. Smart move if you ask me; but then again the people buying these very expensive new developments usually have the luxury of not worrying about money.

Most people don't have this luxury!
UrbanDigs Says: Don't believe the 20% every 2 years hype that even I once believed and that most sales agents and brokers tell their clients. Instead, ask the developer's sales team to tell you what the actual taxes will be upon expiration of the 421A tax abatement BEFORE you buy so that you are fully informed of what you are getting into! I know for a fact that every new development is different and some neighborhoods will not experience what I discussed here (such as 70 Washington in DUMBO, Brooklyn), so make sure to go out of your way to educate yourself on this very important factor before you sign that contract and put your deposit down!
Quick Tip: No rocket science here. Look to sell your new condo when there is still 5-6 years left of the tax abatement so that you are not left without a chair when the music stops. By unloading when the monthly expenses have not yet reached their peak, you will be able to get a higher asking price before the monthly expenses top out and restrict affordability.
Originally published June 28th


Posted by urbandigs at November 13, 2006 8:49 AM

[Front_Porch]

Urban Digs -- a CitiHabitats broker named Noah Rosenblatt -- is right on the money with this one! Banking on a 421(a) tax abatement exposes you to a risk that your carrying costs rise and you need to find a "greater fool" to dump your apartment onto in five years.

The buyers best equipped to shoulder this risk are young professionals, whose incomes should rise as their carrying costs do, or "pioneers" who believe that over a few years their neighborhood of choice (Financial District, Far West 40s, Harlem, or fill in your own here) will become more desirable over that timeframe to balance the rising taxes.

ali r.
{downtown broker}

[bigkdc]

front porch - would be interested in your view on this...

From a pure theoretical valuation perspective, urbandigs is absolutely correct. An increase in carrying costs should impact your asset value (whether its from taxes, increasing int rates, higher common charges, etc).

However, I get the sense that the math changes as you move into multimillion dollar apartments.

Clearly for the first time buyer who is making a rent vs buy decision for a sub $1 million 1BR the above holds true - there is a direct impact of higher carrying costs on the value of an apt.

For those that are buying multi-million dollar apts, the math is a bit different. In theory it should be the same but if you have the money to buy such an expensive place, the marginal few thousand a month isn't as impactful. In other words, if one has $500K+ to put down on a place, there is going to be less concern about an incremental $25K/year in taxes. The bigger concern will be the attractiveness of the apt in question. Therefore the increase in prop taxes for high end units wont have much of an effect on the actual asset value.

Thoughts?

[narikin]

thanks - a very good an informative read.
and scary.

funny how many people think that a 20% reduction of the abatement equals a 20% rise in the tax paid. it does not.

put as simply as possible, if your unabated tax value is $1000:

yr 1-2 100% abatement: $0
yr 2-4 80% abatement: $200
yr 5-6 60% abatement: $400
yr 7-8 40% abatement: $600
yr 9-10 20% abatement: $800
yr 10+ 0% abatement: $1000

(though of course the tax assessment would rise over 10 years, so the amounts will be higher)

but misleading agents encourage the mistaken thinking that if you buy into a condo at year 4, that is paying $200 tax, then it will 'rise' by 20% next time to
$200x20% = $240
and in another two years to
$240x20% = $288...

BIG maths error. not the same thing at all.
amazing how selling agents are very blurry about this. hmmm.

This property I was looking at is 5 years into a 10 year abatement, and about to rise steeply, but, that said its CC was not so bad compared to other condos I've seen (and laughed at the figures of). Still its asking value is inflated right now by the low charges, which means the asset value will decline in proportion as its monthly cost gets un-abated.

some people are really going to have a rude awakening in a few years time.
hope I'm smart enough to avoid that.

Having said all this, I've also viewed some small Co-Ops with just 4 or 5 units and low maint. charges, who are slightly neglecting their building and going to have a nasty shock when the exterior maintenance attracts the building inspectors wrath. unless they have real reserves in hand, those owners are going to be hit hard in the pocketbook too.

[Front_Porch]

front porch - would be interested in your view on this...

I get the sense that the math changes as you move into multimillion dollar apartments . . .

Clearly for the first time buyer who is making a rent vs buy decision for a sub $1 million 1BR the above holds true - there is a direct impact of higher carrying costs on the value of an apt . . .

If one has $500K+ to put down on a place, there is going to be less concern about an incremental $25K/year in taxes. The bigger concern will be the attractiveness of the apt in question. Therefore the increase in prop taxes for high end units wont have much of an effect on the actual asset value.

Thoughts?

Well, bigkdc, you just said about five interesting things at once, and I can't hit them all in one response.

So let me start with two wide sweeping generalizations:

1) In most neighborhoods in Manattan, there is no rent-vs.-buy decision. Even at the insane rents of the Manhattan market, paying 15% brokerage fees, renting is generally cheaper. I'm in a non-new Midtown condo: I could sell it to you for $525K, which means your carrying costs would be $3,400 a month, or you could rent it for what .. . $2,200 maybe? $2,400 maybe? Even with a mortgage interest tax break, it's not even close. Situation is more marked with expensive new condo apts, which is why investors find their apartments are "sitting" at the $8,000 prices that would let them cover their costs. The apartments will rent eventually, but at lower prices than that.

Realize, of course, that this argument comes from someone who loves buyers and sellers, and makes more money from them than from renters.


I believe people who buy new condos now are betting on the future: of neighborhoods, of New York, of their careers zooming . . . they have an optimistic sense of future asset values, and that's perhaps why future taxes don't weigh on them much.

Also, 2) IMHE, there is no $500K down payment condo buyer. Someone trying to get $5M out of their home currency and into New York bricks, sure. But $500K? You're either being a co-op, where you down payment helps get you a lower price ppsf, or you're putting 10% down on your condo and letting your hedgie friends invest your cash.

Does that make sense?

ali r.
{downtown broker}

[bigkdc]

Sort of. I guess my question boils down to - if you are wealthy enough to buy a $3mm or $4mm apt, do you really care about your taxes going up a few thousand a month? Or, in other words, do you think people in the market for apartments at that level are really paying much attention to the common charges and taxes? I would guess it starts to matter at some level (like when the meier buildings had those absurd common charges for a while) but so long as they are within reason I would think it wouldn't matter too much.

[Front_Porch]

Sort of. I guess my question boils down to - if you are wealthy enough to buy a $3mm or $4mm apt, do you really care about your taxes going up a few thousand a month? Or, in other words, do you think people in the market for apartments at that level are really paying much attention to the common charges and taxes?

While there is definitely a break point between $2M and $3M apartments (because the first $1M of mortgage interest is tax deductible for one person, so effectively a couple can deduct $2M) purchasers above that price point are more sensitive to details than you might assume.

For one thing, the kinds of people who tend to have $3M or $4M tend to be very money-centered people, and they think about their finances a lot.

For another, at those price points, there are high-reward alternative uses of money (hence my crack about hedgies) and so the opportunity costs of an additional $20,000 in taxes are actually rather high.

ali r.
{downtown broker}

[bigkdc]

While there is definitely a break point between $2M and $3M apartments (because the first $1M of mortgage interest is tax deductible for one person, so effectively a couple can deduct $2M) purchasers above that price point are more sensitive to details than you might assume.

For one thing, the kinds of people who tend to have $3M or $4M tend to be very money-centered people, and they think about their finances a lot.

For another, at those price points, there are high-reward alternative uses of money (hence my crack about hedgies) and so the opportunity costs of an additional $20,000 in taxes are actually rather high.

ali r.
{downtown broker}

So in your opinion a tax abatement going away in a $1MM apt will have the same proportional impact on value as the abatament going away in a $3-4MM apt?

[Front_Porch]

So in your opinion a tax abatement going away in a $1MM apt will have the same proportional impact on value as the abatament going away in a $3-4MM apt?

Theoretically, yes.

It sounds like you have an actual comparison in mind, so if you'd like to provide more details we can discuss. In my opinion the variables would be the profiles of the buyers (are we dealing with young buyers whose parents are purchasing for them, and must have condos, or buyers who could consider co-ops?), the amount of competing inventory in the price range (do the apartments in question have substitutes, or are they one-of-a-kind?), and neighborhood (many of the buyers pioneering in the Far West 40s feel that rising taxes won't be a resale issue because they feel the neighborhood will improve, and that will be a compensatory factor.)

ali r.
{downtown broker}

[bigkdc]

Actually no real comparison in mind. Just trying to get some better insight into this crazy real estate market we exist in. Thanks for the knowledge.