Worth Becoming Rent-Stabilized?
This is a follow up question to a recent post of mine. My 3 family (Pre-2007 construction) is up for a potential tax abatement. (421a) In exchange, all units will have to become rent stabiized for the duration of the abatement. The units will be set at market rate, so at least in the near…
This is a follow up question to a recent post of mine. My 3 family (Pre-2007 construction) is up for a potential tax abatement. (421a) In exchange, all units will have to become rent stabiized for the duration of the abatement. The units will be set at market rate, so at least in the near term I won’t be losing income. I will save about $7000 a year (adjustable) in taxes for 20 years. I’m taking a poll: Would you make this trade-off? Are rent-stabilized units that much more of a headache? Is the downside worth the upside? This is on a nice street in Brooklyn on the border of Bed Stuy/Clinton Hill off the G train. Thanks for your input.
you should also be aware that you do not got tax exemption for the WHOLE period. towards the end of your exemption period, the exemption will begin to phase out. that can be the tricky part. you start to be required to pay a portion of the property tax and it phases in over several years. so at the end of the exmption period you will be paying property taxes but still have your units rent regulated.
moreover, i’m not sure if rent regulation will end the day your exemption completely runs out. it depends on the regulation, but in some cases, if you have a tenant living in a unit, they may be still get rent regulation protections until they move out. not sure if this applies in your particular case – it may not.
the advantage of course, is exemption for a very long period from property taxes. however, being a Class 1 property (3 family home) means that your value to tax ratio is lower than those in Class 2 for the most part (4 family and larger). 421a is mostly a program for Class 2 properties, and the tax benefit is more lucrative to them.
all that said, talk to a lawyer who knows this stuff. figure out your facts and rights and then decide. Rent regulation is mostly complicated because there are many similar versions (how long it lasts, etc) and the slight differences can make all the difference.
The stabilization clause would remain for the duration of the abatement–25 years–even if the rent goes above $2000. However, I can convert to condos with a fee, IF the tenants voluntarily leave. (Yes, that’s a BIG IF!)
So, in 10 years if I were able to convert to condos, I would be able to sell them with a 15 year tax abatement, which at current rates would save each unit about $200 a month in taxes. I figure $200 a month is equal to about $30,000 in extra value per unit. (A buyer could afford about $30,000 more on their 6% mortgage if they aren’t paying taxes.)
I can start the rents at slightly higher than market value, (and give current tenants a “preferential” lower rent that can be rescinded when resigning leases OR turning over apartment.)
Overall, I don’t feel too keen on the whole thing… Seems a little risky
Unless I was a professional landlord and really knew what I was doing, I would run, not walk, from a rent stabilized situation. For the part-time landlord, renting one or two apartments in their own home, having to offer renewal leases to RS tenants may offset any benefits you get from the tax abatement. landl0rd is undoubtedly right about the under 30 crowd, but you may inadvertently get a high maintenance under 30 that you end up stuck with for 20 years.
You should stay as far away from rent stabilization as possible. If you go that route you will be locked in with low rents and tenants that you will never be able to get rid of.
Once you register your property as rent regulated w/the city it is extremely difficult to change your status. In order to get out of rent reg. status, if you have tenants, the rent has to reach $2000 and your tenant has to have an income of $175K for two consecutive years. If you can vacate your tenants, then you have to invest in construction and prove to the city that you have sufficiently changed the apartments to qualify for “luxury de-control”. The city can pre-approve your construction plans, you can do the work and spend the cash, and then the city can change thir minds and decide – eventhough you have done all this work – you are still stuck w/rent reg.status.
Also, as others have commented, rent reg. status will kill your property’s resale value.
Sorry for the downer post, just be aware of what you are getting yourself into.
1) The abatement question should have been disclosed and discussed prior to purchase; 2) Would you really make this decision based on input from anonymous posters? 3) 421a imposes particular obligations on LLs, NOT “straightforward” rent stabilization; 4) Speak to your own attorney, and 5) If your attorney does not specialize in these matters, speak to one who does.
housepoor, see fact sheet on preferential rents.
http://www.dhcr.state.ny.us/rent/factsheets/orafac40.pdf
I’m not familiar with the tax abatement programs, but I’d assume if the market rent is 1500 and you have a lease for 1500 when the building becomes stabilized that’s the legal rent, and you can’t arbitrarily make it 2000 with a 1500 preferential rent.
Agree with landl0rd – it’s not so complicated or onerous once you get used to it.
When a building enters rent stabilization, how are initial rents set? Is there a formula? Can anyone comment on the difference between the registered rents and preferred rents? What will stop a newly rent stabilized building from setting the rent at, say, $2,000 and the preferred rent at something much lower (and where the market is at that time)? I’ve read where LL’s can raise RS leases up to the registered rents, even if that increase exceeds the allowable increase that year. If that is true, then it seems to be a very large loophole (and somewhat suspect as a result).
I did take the 421a on a 3 family in the same area but did not do it for a property on the other side of bed-stuy.
here is my take on tax abatement:
– Laws and regulations are not so complicated after you get used to them. Send lease renewals months in advance, file a form to register the building every year and increase the rent only in the amount allowed by the RGB.
– in general resale value is lower for rent stabilized buildings. that said, if a good numbers of years of tax abatement are still available when you sell, that should increase the resale value.
– Im my experience most tenants under 30 will not stay in the same apartment for too many years regardless of rent stabilization. Shared apartments have higher turnaround.
– As mentioned above by others, the mayor drawback is that you loose the right to not renewing leases (if they pay rent ontime). In the end it all comes down to who you tenants are. Pick them wisely and you should be fine.
– If you get a bad tenant, you can always mitigate the headache by treating you to a nice $7000 vacation every year:-)
Do you live there? If so, I would never give up the option to refuse to give a tenant another lease, which you would lose if you were stabilized.