Tax Abatements and What it Can Do to the Market
On the same topic of property assessments which we talked about last week, I think it’s very interesting to look at what is happening in other parts of the world such as the United Sates, as well as recently back home here as Nanaimo which has approved a 10-year Tax abatement for the new Conference Centre Hotel.
In the United States, as well as other parts of the world, to stimulate development and housing governments sometimes offer what is called a tax abatement. This is something that puts off or partly withholds taxes for a given period of time, most often 10 years so that people are paying a fraction of what they would normally pay and at the end of that 10 year period the real taxes kick in. In the last few years it ramps up to what the current taxes would be.
Tax abatements can be a double-edged sword. Why? Because it can put some people at a marked advantage in the market place.
If you look at what is happening in New York, it is crazy the effect that these abatements have on the market. These tax abatements are done for seemingly good reasons at the time such as spurring growth and producing more housing when there is a shortage, but when these are put in place, it appears that not that much thought is put into the long-term ramifications.
An article in The New York Times dated December 8, 2019 shows what can happen in the future as below
The Taxman Cometh for Some Condos
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.
- Published Dec. 6, 2019 Updated Dec. 9, 2019
“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.
At the Centurion, a 2008 abated condo in Midtown 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.
In another building, 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.”
I know, that is New York but it is still the reality of what happens, and it is just on a different scale in different areas.
In late 2017, Nanaimo Council approved a development permit and a 10-year property tax exemption for the project. That exemption is estimated to save PEG Development roughly $4.5 million. The hotel is also eligible for an exemption from development cost charges, an estimated savings of $650,000.
You may ask, what is the harm with this? To me, it puts someone else in an advantageous position. What Nanaimo has done is a tax EXEMPTION, no partial taxes here!!! If I owned a hotel in town and had been paying taxes on it for many years, I would not be happy. If you have already bought the land and are in the design process to build a hotel, then you really have a problem.
I guess, right now our biggest problem is the snow and cold here, so focus on clearing your driveway as the taxes will always be there waiting for you when you’re through shoveling.
Have an awesome weekend and stay warm 😊
Brian & Myles McCullough, McCullough Marketing Services
RE/MAX of Nanaimo