April 24, 2008

Inside Third & Bond: Week 34

Today the Third & Bond crew contemplates the financial impact of making, or not making, the 421-a deadline later this year.

With the flowers in bloom (tra-la-la) and sunny 70-degree days here at last, it finally feels like spring. In not too long the City’s 421-a office will start stamping applications, “rejected” and we’ll all know the last residential projects in brownstone Brooklyn to squeak through before the 421-a deadline. Although DOB is still sitting on our underpinning permit – making it impossible to pull the approved new building permits, we aren’t worried about missing the June 30th deadline (yet).

The 421-a abatement for this project means a considerable difference in taxes – our appraisal put the value of the abatement for the project as a whole at $2.7 million. For the buyer of a typical two-bedroom at Third & Bond, we estimate monthly taxes of $63. If the project did not have a 421-a exemption, monthly taxes would be more like $909, a whopping increase of $846/month.

Yikes, right?

If this buyer wanted or had to keep the same monthly carrying costs, then the price she would be willing to pay for the unit without 421-a tax abatement would be substantially less than for the same apartment with 421-a. In other words...

...the $846 in higher taxes equates to a $140,000 mortgage in terms of self-amortizing mortgage payments – and so the sales price would have to decrease to make up for the higher taxes, if she wanted to keep her mortgage and carrying costs at 421-a levels.

We were struck by this huge differential in taxes on a condo with and without 421-a and were curious what taxes would be if our prospective buyer walked down the street and bought a comparable co-op as a resale. Our sources tell us that for a similarly sized two bedroom co-op, taxes might average $314.

So, buyers of very similar units could be faced with property taxes of $63 or $314 or $909 each month. These huge swings are due in part to the variation in how properties are valued for tax purposes.

Both co-ops and condos are valued by the City as if they are rental buildings, i.e., assessors come up with the value of a given co-op or condo by looking at comparable rental buildings. But a comparable rental building for a co-op is typically an older building with some rent stabilized tenants whereas a comparable rental building for a condo is typically a newer building with market rate rents. See, most co-ops are older buildings built 30-100 years ago. Many were rentals converted to co-ops in the last couple of decades. Most condos were built in the last 15 years and so missed the Great Rent Stabilization era. It’s pretty silly – virtually the same building will have wildly different values depending on whether you are calculating from a baseline of rent stabilized income or market rate income. The result is that property taxes generally run lower for co-ops than for condos without 421-a.

If there wasn’t this difference in the way co-ops and condos are assessed, then there probably wouldn’t be a need for 421-a in the first place. But now that we’ve had it, the marketplace has a lot of variation in it that impacts buyers and sales prices.

Without 421-a, we would face the pressure to lower sales prices across all units in order to be competitive with the co-ops and condos-with-421-a and that would have the potential to change our project drastically. We might opt for different design, floor plans, and finishes in order to either cut costs or to make the project extremely high end. Or, we might not do the project at all.

And if we knew making the 421-a deadline wasn’t feasible… well, the property might not have been compelling in the first place. Think about it from the previous owner, the Vitanzas’, point of view: purchase offers would have been substantially less to account for the difference in sales prices. Would those purchase offers still have made it worthwhile to pick up shop and move to Red Hook or would it have been better to sit on the property for another couple of years? Would the Vitanzas still be operating their plumbing business on Third St—leaving the land underutilized as two vacant lots with two relatively small industrial structures?

This isn’t just an empty exercise: when the 421-a deadline passes on June 30 the value of land in the newly excluded area will change dramatically (we think). The questions are by how much and for how long.

Fortunately, there are months of sunshine before that happens so at Third & Bond we’ll be making as much hay as we can.
Inside Third & Bond: Week 32 [Brownstoner]
Inside Third & Bond: Week 31 [Brownstoner]
Inside Third & Bond: Week 30 [Brownstoner]
Inside Third & Bond: Week 29 [Brownstoner]

From our lawyers: “This is not an offering. No offering can be made until an offering plan is filed with the Department of Law of the State of New York."

Posted by Brownstoner at 11:33 AM | Comments (23)
Categories: Gowanus, Third & Bond Blog

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