The Future of Real Estate Tax Incentives

A Discussion

Tax Incentive Programs

Original Intent

Encourage needed upgrades for existing housing

Reduce operating costs for highly subsidized projects

Stimulate needed residential construction and related economic activity

Hold city expenditures to the minimum needed to reach these objectives

Objectives of Tax Incentives?

1950’s Encourage needed upgrades for existing

housing

J-51

1960’s Reduce operating

costs for highly subsidized projects

Article XI

1970’s Stimulate needed residential construction

and related economic activity

421-a

1990’s Reduce operating

costs for highly subsidized LIHTC projects

420-c

Other Cities

Many places have PILOT programs DC, Philadelphia, Seattle, Cincinnati have as

of right programs◦ May cap total amount awardable in a year◦ May require affordability◦ Usually 8-10 year abatement period◦ Some programs are highly targeted (e.g. SRO

program in DC)

New Construction

Usually require a threshold investment May require affordability component

◦ Seattle – 20% of units “affordable”

Rehab

Tax Incentive Programs

The Context

Real Property$16,860

Personal Income$7,608

General Corporation$2,300

Banking Corporation$1,336

UBT$1,675

Sales$5,528

Commercial Rent$603

Real Property Transfer$788

Mortgage Recording$414

Other; $3,069

Source: Fiscal Year 2012 Adopted Budget

NYC Tax Revenue by Type 2011(in millions)

Annual RE Tax Incentive Expenditures 2011(in millions)

Source: Annual Report on Tax Expenditures Fiscal Year 2011

421-a$911.6J-51

$256.7

Article 11$49.1

420-c$57.0

Other Residential$252.6

Commercial Indus-trial

$755.3Individual Assistance

$674.3Other$18.8

All Residential$1,527

2011 Tax Expenditures and Units By Program

Units with Tax Exemptions Annual Dollar Costs of Exemptions (in millions)

J-51

421-a

Article 11

420-c

- 200,000 400,000 600,000 800,000

583,776

124,267

37,164

12,000

J-51

421-a

Article 11

420-c

$257

$912

$49

$57

Source: Annual Report on Tax Expenditures Fiscal Year 2011 and DOF Data on J-51

$0 $200,000,000 $400,000,000 $600,000,000 $800,000,000 $1,000,000,000

‘01

‘02

‘03 ‘04 ‘05 2006 2007 2008 2009 2010 2011

1988-2000

In FY 2011 $911.6 million in Tax Revenue was Foregone in 421-aWhat Year Did Exemption Starts?

Taxes Maint Labor Admin Utilities Misc Fuel Insurance$0

$50

$100

$150

$200

$250

Monthly Expenses per Stabilized Unit - 2009

Source: RGB 2011 Income and Expense Study

The Issues

Talked to 28 industry and government leaders about,◦ Objectives and effectiveness of programs◦ Administration of programs◦ Practical issues

Survey

Many old tax incentive programs designed to take advantage of different state and federal programs◦ Article 2 for Mitchell Lama◦ Article 5 for federal programs◦ Article 4◦ Article 16/UDAAP

These are not growing and slowly fading out

Old Tax Incentives

Is this still a valid objective?◦ New variations

Energy efficiency Preserving at risk buildings Preserving affordability

Encouraging Rehab

J-51◦ Is it too complicated?

Processing takes too long Approval amount subject to too much variation

◦ Does the Roberts decision make this program more “efficient” going forward

Encouraging Rehab

J-51◦ Is the term long enough?

Promoting Rehab

Is this a valid objective of public policy? Does the incentive generate construction

that would not otherwise occur?

Encouraging For Profit New Construction

421-a◦ Panelists said current tax rates are a significant

barrier to new construction.◦ Could a reformed tax policy for new rental

housing achieve the same objective more efficiently?

Encouraging For Profit New Construction

421-a◦ Does the economic value of the incentive go to

the seller of the land or to the project?◦ How can we insure it goes to the project?

Encouraging New Construction

Should the 421-a link to rent stabilization continue?◦ Does the Roberts decision make these programs

more “efficient” going forward?

Encouraging For Profit New Construction

In general, do the tax incentives match the term of affordability restrictions of the projects?

Promoting Affordability

Article 11/ 420c Generally seems to be working Possible changes

◦ Should one program go the Council and the other be as of right?

◦ Could Article 11 extensions be approved without Council approval?

Promoting Affordability

Are there new priorities that should be brought into the tax incentive process?◦ Over Mortgaged buildings◦ TPT projects◦ Preserving former Section 8 and Mitchell Lama

projects◦ Energy efficiency◦ Preserving affordability

Promoting Affordability