Buyers, take note: Discounts can be found as thousands of luxury apartments are set to lose a valuable tax break in the midst of a softening resale market.
Fewer Tax Breaks, More Discounts in New York’s Condo Market
Stefano Ukmar for The New York Times
For thousands of luxury condo owners in New York who have received deep tax breaks for a decade or more, the taxman is coming.
The end of those benefits, through an expired program known as 421-a, could not have come at a worse time for many sellers, who are faced with mounting taxes and stiff competition in a weak market. Some are selling for marginal returns or even less than what they paid several years ago.
For savvy buyers, that could mean discounts in fancy condos that were built from the early- to mid-2000s, with leverage to negotiate and a much clearer picture of their future tax bills.
The moral is the same for longtime owners and potential buyers in tax-abated buildings: never mind the price tag, do the math.
A 10-year sales analysis of 7,238 condo units with waning 421-a tax breaks showed that their sale prices grew by 12 percent in that time, compared to a substantially stronger 29 percent in the overall condo market, according to the listing website StreetEasy, which used city data collected by the New York University Furman Center. In 2009, the annual tax bill for a one-bedroom apartment in one of these abated buildings was $792, by 2019, the median annual tax bill for such a unit rose to $13,080.
While prices for these abated units ultimately went up over the past decade, the last five years tell a different story, with sales price actually falling an average of 3.6 percent, just as many 421-a abatements have phased out.
“Sellers were essentially overvaluing these units — until the abatement started to expire,” said Grant Long, the website’s senior economist. Early buyers may have overlooked inflated prices, because the abatement kept their monthly carrying costs relatively low. But many of these abatements are now expiring just as a slowdown in sales and falling prices has made it harder for sellers to stand out, he said.
The neighborhoods with the most condo units set to lose their 421-a benefits in the next two years are the Upper West Side with 1,217 units, Chelsea with 706, Midtown West with 484, Flatiron with 440, and Midtown East with 427.
Goodbye Tax Breaks
The 10 neighborhoods with the most condo units that will lose their 421-a tax abatement benefit by the end of 2021.
Upper West Side
Upper East Side
Brighton Beach, Brooklyn
Sources: StreetEasy; NYU Furman Center
By The New York Times
A Temporary Perk
Created in 1971 to spur development in neglected neighborhoods of New York, the 421-a program allowed condo buildings to be exempted from millions of dollars in property taxes for 10 to 25 years, depending on location and other criteria. The program expired in 2016, but the tax breaks persist depending on when a building was built. Owners of 421-a apartments pay a fraction of the property’s full taxes during a period of exemption, with the tax burden rising steadily until it reaches the full assessed value.
“The concept on paper is to increase affordability for a buyer,” said Jonathan J. Miller, the president of Miller Samuel Real Estate Appraisers & Consultants. “But it doesn’t factor in human behavior.”
Even though an owner’s tax bill from the city shows the abated and unabated tax amounts, owners tend to overestimate their income growth and underestimate future tax assessments, Mr. Miller said. It’s hard for condo owners to anticipate how much their total tax bills will grow over time because the city could increase their property assessment annually.
Initial prices in abated buildings also tended to be higher, because the landowner would charge the developer a premium for property that qualified for the abatement program, and the developer would pass that cost onto buyers, he said. (Some developers also took advantage of 421-a exemptions when building rentals, but the expiration of those abatements has less impact on renters.)
Many bought tax-abated units at prices that they justified with low monthly carrying costs, or plans to rent the units before higher taxes kicked in. The sticker shock at the end of abatement is twofold: The share of the total tax responsibility steadily rises as the abatement drops over time, while the overall tax bill often climbs when the city reassesses the property. Sellers in buildings with expired abatements are also often competing with owners in similar circumstances, sometimes in the same buildings, which can push sale prices down further, Mr. Miller said.
New York is also in one of the toughest markets for sellers in years, said Lindsay Barton Barrett, an agent with Douglas Elliman.
“People are sensitive to everything now,” Ms. Barrett said of buyers, who have ample choice and might be leery of buying a unit that used to have much lower carrying costs, even though the taxes may now be similar to what they would pay at comparable unabated buildings.
“It’s almost this sense of unfairness — that the person who came before them got this benefit, and they’re not,” she said.
That apprehension has led to some bargains at condos with designer pedigrees.
The lobby of the Centurion at 33 West 56th Street in Midtown, a 2008 condo where a valuable tax abatement will expire next year.Credit…Martin Eiden/Compass
At the Centurion, a 2008 condo in Midtown with an abatement that was designed by the firm of I.M. Pei, a 2,011-square-foot, three-bedroom apartment sold for $4 million in March, almost 10 percent below the asking price. The abatement expires in 2020 and the seller, who bought the apartment for $5.4 million in 2012, took a significant loss.
“Sometimes people are just priced out of the buildings that they bought in,” said Martin Eiden, an agent with Compass, who sold the listing and has represented other units with expiring abatements. The apartment received a 10-year abatement in which taxes would rise 20 percent every two years, until reaching the full tax bill — from less than $13,000 in 2010 to about $28,000 this year.
“The idea of a full tax coming in 10 years down the road is very far-off for a lot of people,” Mr. Eiden said, and it is hard to predict just how high the taxes will rise at the end of that term. And there are political unknowns: Recent caps on state, local and property tax deductions as well as higher transfer taxes on luxury sales changed the calculus for some buyers.
For foreign investors, who make up a large share of the owners in these buildings because of the initial high return on rent, it could still make sense to sell for less than what they paid, he said, because of a favorable currency exchange rate — or simply to avert further losses.
“I think they penciled out for a certain return,” said Ian Slater, an agent with Compass, about clients who banked on rising rental income in abated buildings, especially around the financial district. “But with so much rental competition, I don’t know how much the rents have grown, while their carry costs have risen.”
Mr. Slater is listing a bundle of five units at the W Downtown Hotel & Residences in the financial district that will soon lose its tax abated status for $4.875 million, a 20 percent discount from its last asking price.
A Shift in Buyers
As profit margins shrink for investors who have been renting out their units, there are opportunities for buyers who intend to actually live in the apartments.
At 100 Riverside Boulevard, a 2006 condo tower on the Upper West Side, an 851-square-foot one-bedroom apartment was listed in October for $1.15 million — less than when it sold for $1.3 million in 2015.
When the current owner bought in 2015, the annual taxes were around $9,800; in 2019, the final year of abatement, the annual tax bill had jumped to almost $16,000.
“The carrying costs are getting ridiculous” for condos, said Christopher Kromer, the listing agent with Halstead. (Taxes for condos are generally higher than in co-ops, and amenity-heavy newer buildings also tend to have higher common charges.) But that phenomenon is market-wide, he said, and there is no additional tax risk for someone buying in a formerly abated building.
In other abated buildings that were popular with investors, the balance may be shifting to primary residents. At 15 William Street in the financial district, an abated building originally aimed at single business people, ownership changed in 2010 after the developer struggled to find buyers, and returned with a family-friendly marketing campaign.
“It just doesn’t make sense for investors anymore,” many of whom hailed from Colombia and Venezuela and anticipated a certain monthly return based on the abatement, said Maria Velazquez, an agent with Douglas Elliman with several listings at the building. In their place, she has seen more families buying in the building, lured by falling prices, and amenities like an indoor pool and children’s playroom.
There were two-bedroom apartments in the building starting above $1.6 million, while the median price for condos of that size in Manhattan was over $2 million in the third quarter, according to a Douglas Elliman report.
Prices were lower in part because the building is older than nearby competitors, but the rising taxes were another likely factor. In one high-floor apartment listed for $1.65 million, the annual tax bill went from about $1,170 in 2010 to over $30,000 this year, not including annual common charges of about $19,500. The price of the apartment has dropped 9 percent since 2017, when it was listed for $1.815 million.
A Look Ahead
Despite the 421-a program ending in 2016, there are still thousands of apartments with some period of tax relief, and for buyers who can budget accordingly, there are several options to consider.
Buildings such as One Manhattan Square, a luxury tower in Two Bridges that secured a 20-year abatement just before the program expired in 2016, have heavily promoted the low taxes and carrying costs to lure buyers. Sales there have so far been sluggish.
But the lure of lower taxes has not lost its shine.
“If there is any abatement left, it’s helping, even if it’s phasing out,” said David Kazemi, an agent with Bond working in Brooklyn. While many Manhattan abatements are ending, Brooklyn has several projects with 15-year or longer abatements. Any relief is welcome, he said, especially when you consider that some unabated one-bedroom condos in northern Brooklyn have annual tax bills of $6,500 to $8,500
Wayne Ngai, who works in real estate investment banking, bought a two-bedroom condo in Greenpoint, with an abatement through 2031, for just under $1.06 million in May. He and his wife, Cayla Chen, will pay an abated tax of about $2,500 a year, when they would otherwise owe about $13,500. The couple will pay a similar share of the property tax until the last five years of the abatement, when their burden will rise 20 percent a year until reaching the full assessment.
To soften the blow of rising taxes, the condo board in Mr. Ngai’s 10-unit building retains an attorney who can challenge the city’s tax assessments, in the hopes of keeping future tax bills lower.
For now, the reasonable carrying costs and a low-interest rate on their mortgage means the couple can afford to own in a quickly developing neighborhood near the subway. Will they be around when the taxes begin to jump in about six years?
“In my ideal world,” said Mr. Ngai, “I get out before then.”
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