Benjamin Franklin wrote that death and taxes are the only things we can be certain of, but Ben didn’t live in New York City.
Savvy city real estate brokers know that paying property taxes and more importantly, getting a break from them are anything but certain in this metropolis.
For real estate professionals, that’s nearly as big a source of frustration as it is to homeowners, because the way property taxes are calculated can be crucial to marketing real estate.
For many, it comes down to one key number: the 421, a provision of the city tax code intended to spur new residential projects, which can significantly lower an apartment buyer’s taxes for many years. It’s indispensable for brokers marketing new developments. The 421a provides tax breaks for new construction, while the more limited 421g provides tax breaks for conversions in Downtown Manhattan. There’s also the lesser perk of the J-51, covering rehabilitation or conversion projects outside Downtown.
But while the 421a is as well-known to most New York City property owners as the 1041 is to federal income taxpayers, it doesn’t mean that navigating the tax system is simple.
“I’d just like to see something that’s consistent across the board,” said Shaun Osher, who recently founded Core Group Marketing after spending many years marketing new development at Prudential Douglas Elliman Real Estate. “The value of two properties may be the same, but the real estate tax numbers will be completely different. It’s very confusing.”
In one recent example, the New York Times reported that 650 West End Avenue on the Upper West Side, a condo building, saw an increase in valuation of 400 percent in one year extraordinary appreciation even in New York City’s turbocharged real estate market. The tax implications were similarly turbocharged, and disproportionate to other buildings in the area, according to the condominium board president, who hired a lawyer to contest the assessment.
But what irks some real estate agents more than perceived inconsistencies in valuations are complicated tax calculations, some of which favor ground-up construction over building rehabilitations, which are easier and cheaper for developers.
In the past decade, the routes to tax breaks for apartment building rehabilitations or conversion projects have shrunk, to the real estate industry’s unhappiness.
“The overtaxing of conversions is a negative trend,” said Steven Ganz, executive vice president of Core Group Marketing. “You could have 80 cents per square foot [of purchase price] being just your taxes.”
Meanwhile, a 421a for new construction can mean a difference of thousands of dollars in monthly taxes to buyers.
When a development gets the tax break, most brokerages feature “421a” prominently in their real estate listings, and call it a valuable marketing tool.
“We encourage developers to apply for the 421a tax abatement when doing new construction,” said Patricia Cole, senior vice president at Corcoran Group Marketing, the new development division of The Corcoran Group.
The savings can be large. For projects that don’t have a tax abatement, common charges and taxes used to total $1 or $1.25 a square foot monthly. “But now, taxes alone come in close to those numbers,” said Cole.
But not every new development can get the 421a tax break. Construction in a Manhattan exclusion zone, between 96th Street and 14th Street on the East Side and 96th to Houston Street on the West Side, does not qualify for 421a benefits unless the developer has some sort of affordable component or concession, or government assistance.
Developers converting commercial buildings to residential apartments in Downtown Manhattan can get a hefty tax break called a 421g, but for those rehabilitation or conversion projects outside of that neighborhood, there is only the J-51, a less substantial perk.
The formulae for calculating these three types of tax breaks are complex, and even city officials had to think hard to determine which tax package hands apartment buyers and thus brokers the best deal.
“It’s hard to say, because it’s all relative to the amount of money you put in,” said Lisa Yee, director of tax incentives programs at the city’s Department of Housing Preservation and Development.
Yee’s boss, Margot Sklar, the department’s associate deputy director of tax incentives programs, agreed, pointing out that location also plays an important role. But she said that, when the dust settles, purchasers of rehabilitated or converted apartments end up getting a lesser deal.
“Under J-51, for a market rate condo you wouldn’t get nearly as much,” she said.
But it’s not all bad news for conversions. Some real estate brokers still aren’t aware of an amendment to tax legislation passed by the New York State Legislature in August 2003 that enables more development projects to qualify for the 421a. A project no longer has to be 100 percent new construction to meet the criteria, as long as more than half the project consists of new construction, Yee said.
That should make marketing partial conversions much easier, Ganz said.
“Sometimes you’ll have a five- or six-story building being built up 10 more stories, and before you couldn’t get a 421a, which does affect your sales price,” he said.
Ganz pointed out that most Manhattan buyers are informed and savvy, and if they don’t know the details of a 421a, they know it’s a tax break for them.
“I’d say 80 percent of buyers I deal with know the tax terminology,” he said.
In a more complicated twist, the city’s Department of Finance also offers a tax break called the Condominium and Co-op Tax Abatement Program. Instead of spurring development, the perk is supposed to equalize the disparity in taxes paid between certain types of homeowners (namely, those in single-family homes and those in apartments).
Any condo or co-op building can apply for the abatement at any point in time, but receiving the 421a or 421g makes them ineligible. However, in some cases, a building receiving a J-51 tax break would be eligible. That abatement will expire in 2008, but will most likely be renewed, as it has been in previous years, city officials said.
Sound confusing? It is. And brokers trying to guide their clients through the tortuous world of New York City real estate are sending up signal flares especially when they consider that the taxes paid are paying for the bureaucracy to assess more taxes.
Most find another way to present the situation to potential buyers, focusing instead on the city’s high reading scores at public schools and excellent social services, among other assets.
“Yes, we do pay high property taxes here,” said Richard Ingenito, manager of the new Bellmarc Property Management Sales Group. “But people are getting something back for their taxes, and they’re deductible on the federal level.”