Welcome

The Return of the Tax Abatement in New York City

May 17, 2021, 8:00 AM

Don’t call it a comeback—nothing can hold New York City down. As the revival momentum builds, developers will amend building usage to jive with the new-normal and the city will incentivize new construction to woo buyers back. We expect to see retrofitting of current office space for condo use, to support the continued work-from-home economy.

The reinstatement of 421a and 421g tax abatements is starting. Landmark buildings like 15 Broad and 123 Washington Street emerged post-9/11 from similar efforts. The 421a tax exemption program encourages the development of underutilized or vacant property by dramatically reducing taxes for developers and end-users for a set period whereas the 421g tax incentive program is a tax exemption and abatement for the conversion of commercial buildings, or portions of buildings, into multiple dwellings. Similarly, the less-often used J-51 abatement incentivizes renovation of an existing building by freezing the assessed value at the level before construction started, thus decreasing property tax on a dollar-for-dollar basis.

421a abatements were by far the most widely used in the past, and likely will be in the future as well. There are four variants of the 421a abatement—10-year term (Code 5110, 5117), 15-year term (Code 5113, 5118), 20-year term (Code 5116) and 25-year term (Code 5114). The longer the term of the abatement, the larger the savings you receive during your period of ownership. The post-construction tax benefits phase out over time based on a set schedule, and the property becomes fully taxable upon expiration of the abatement.

421g abatements are newer than 421a and have previously been focused in areas of lower Manhattan, particularly below Murray Street. Abatements under 421g lasted 12 years for non-landmark buildings and 13 years for landmark buildings, with all 421g variants expiring by 2020. These abatements were helpful in encouraging development in the aftermath of the Sept. 11, 2001 attacks. In the period after the tragedy, millions counted New York down for the count, saying it would never recover, and they moved to the suburbs in droves. Some of the additional incentives that lured business to lower Manhattan at that time included:

  • Rent subsidies of $5.00 per square foot for the first 750,000 square feet of office space leased at the World Trade Center site and $3.80 per square foot for the first 750,000 square feet at 7 WTC.
  • Commercial rent tax exemption for WTC tenants and retail businesses below Murray Street and a reduction for businesses within the wider Liberty Zone.
  • Sales tax exemption on build-out costs in the financial district.

The J-51 program is a combination of a tax exemption and a tax abatement and is thus more complex. It is emerging as a choice tool in developing the outer boroughs that were previously focused on commercial manufacturing. At present, most incentives and new construction is focused on these boroughs, primarily Queens and Brooklyn. Long Island City is the developer’s darling, offering gorgeous new towers and rich amenities alongside reduced taxes.

There are additional green-building abatements for buildings that feature solar panels, vegetative roofs, and general LEED (Leadership in Environmental and Energy Design) standards. 550 Vanderbilt, linked below is a prime example of a LEED building that is also eligible for a 421a tax abatement.

Examples of New Developments Eligible for Tax Abatement:

  • The Austin Nichols House, on the Brooklyn waterfront offers a J-51 15-year tax abatement for renovating an existing building.
  • The Flow House Condo in Long Island City offers a 421a 20-year tax abatement.
  • 550 Vanderbilt is a LEED Silver building and utilizes Biophilic Design principles throughout the building. It offers a 421a 25-year tax abatement.

Many of us have been conditioned to think that challenging times mean success is impossible—when in fact, the opposite is true, and it is a time for opportunity. Proponents of tax abatements argue that they create construction jobs, revitalize neighborhoods, and increase the tax base in a region by creating additional affordable housing units for residents. Of course, in New York “affordable” is relative, but they do in fact encourage those who left the city during the pandemic to return and lock in a deal.

The idea of saving on taxes is enticing for obvious reasons, so it is important to include on your list of requests when shopping with a real estate broker. New developments tend to have individual websites above and beyond listings on StreetEasy, and you can also check a building’s status on the New York City Department of Finance’s website.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Erin Sykes is Nest Seekers International Chief Economist, LEED AP.

Bloomberg Tax Insights articles are written by experienced practitioners, academics, and policy experts discussing developments and current issues in taxation. To contribute, please contact us at TaxInsights@bloombergindustry.com.

To read more articles log in. To learn more about a subscription click here.