Might as well be dead? J-51 reboot may not be enough

Even if Hochul’s property tax break passes, landlords might still ignore it

Zombie hand in front of J-51 tombstone
(Illustration by The Real Deal with Getty)

A property tax break could come back from the dead, but its revived form may scare off landlords.

Gov. Kathy Hochul this month pitched a new version as part of her executive budget, but even if it passes, it is not clear that anyone would seek it.

The changes seem to ignore landlords’ arguments that the city used out-of-date renovation cost estimates to calculate the abatement’s value. J-51 had fallen out of favor because of its declining value and regulation of rents landlords could charge in buildings receiving it.

Under Hochul’s proposal, apartments must still be rent-regulated while the landlord gets the benefit, and in many cases beyond that. It also introduces new affordability requirements, but does not directly address how the city calculates the “reasonable” cost of repairs.

“Basically, it looks like the difficulties in obtaining benefits for this law are not worth the bother,” Paul Korngold, an attorney that specializes in real estate tax issues, said in an email.

The rent stabilization requirements associated with J-51 have been the subject of scores of lawsuits, and were pivotal in a legal fight waged and won by residents of Stuyvesant Town and Peter Cooper Village against the complex’s owner, the Blackstone Group.

That case determined that buildings must remain rent-stabilized while receiving J-51, and — because of changes to the rent law in 2019 — apartments cannot be deregulated if they were stabilized before the tax break kicked in.

The governor’s pitch, which resembles a bill sponsored by Assembly member Edward Braunstein, requires that rents remain regulated for at least 15 years, even if the abatement term is shorter.

There are a few key differences between the governor’s proposal and the old J-51.

Hochul’s version is an abatement, and does not appear to exempt taxes on increased valuations resulting from renovation work. The previous program provided an exemption on such increases for up to 34 years.

“It looks like the benefits are not worth the bother.”

Paul Korngold, real estate attorney

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Her proposal also does not apply to conversions of non-residential properties, although she has pitched a separate incentive for turning offices into apartments.

Under Hochul’s proposal, owners could have their tax bills reduced by up to 70 percent of the improvement costs for as long as 20 years. The previous program often allowed for a 90 percent abatement, Korngold said.

The value of the abatement would still be based on a “reasonable cost” schedule put out by the city’s Department of Housing Preservation and Development. Landlords, believing that the schedule resulted in unfairly small abatements, have long called on the agency to more accurately estimate renovation costs.

To be eligible for the governor’s version of the tax break, rental buildings must be at least 50 percent affordable, part of the state’s Mitchell-Lama program, or receive “substantial government assistance.”

Condos and co-ops can qualify if they have an assessed valuation of less than $45,000 per unit, which is a slight increase from the old J-51, but still severely limits eligibility among such properties.

It is not clear how occupied multifamily projects would go about abiding by the affordability requirements if they were not already subject to a regulatory agreement.

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Martin Heistein, a partner at Belkin Burden Goldman, said the governor’s proposal aims to further limit the conversion of rental properties to condos and co-ops by barring them while benefits are underway. The 2019 rent law had already discouraged such conversions.

The new J-51 also would prevent landlords from increasing rents on stabilized apartments for major capital improvements while receiving the tax break. The 2019 rent law severely restricted these rent increases. Owners would have to choose between the J-51 benefits or rent increases to offset some of the cost of building-wide upgrades.

Still, Heistein said he was encouraged that the governor included the proposal in her executive budget because it recognizes that owners need financial assistance. It remains to be seen if the proposal amounts to anything more than that, as tax breaks for landlords and developers have become unpopular with Democratic legislators.

“J-51 has proven time and again to allow owners to make major upgrades, as opposed to just repairs,” Heistein said. “I just don’t know if these changes go far enough to induce an owner to take advantage of the program.”

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