New York City Section XI Property Tax Exemption Program: Providing Attractive Tax Benefits for Multi-Family Properties | Katten Muchin Rosenman LLP
- The Housing Preservation Opportunities Program (the Program) offers attractive property tax exemptions for multi-family projects located in New York City, including those that may experience economic hardship or have existing tax benefits that are soon to expire (such as 421 (a) or J51 tax advantages).
- The program offers a 40-year property tax exemption that sets property taxes on residential portions of multi-family properties at a percentage of potential gross residential and commercial income.
- The amount of benefits available for a project is divided by New York City Housing Preservation and Development (HPD) into two broad affordability groups, each with different levels of property tax benefits. The program requires that all residential units be subject to rent stabilization for the duration of the program, whether through units currently at stabilized rent or through the registration of units whose rent is not rented. is not currently stabilized, as a condition for inclusion in the program).
The program, which offers multi-family properties with partial exemption from property tax under Section XI of the New York State Private Housing Finance Act (Section XI), is an attractive benefit to New York City multi-family properties, especially those that either face financial challenges and legal restrictions on deregulation resulting from the Housing Stability and Tenant Protection Act of 2019, COVID-19 or otherwise , or have other property tax benefits expiring soon (such as the existing 421 (a) or J51 tax benefits). The program typically provides 40-year Article XI property tax exemptions for multi-family dwellings with the aim of achieving HPD’s stated goal of “ensuring long-term affordability and the operational viability of quality housing ”. The benefits granted under Article XI have been used to preserve the continued affordability of existing multi-family dwellings, as well as to expand affordability to include unregulated properties.
In order to clarify the owner’s thinking on the program, HPD recently released a Terms and Conditions sheet outlining the requirements, conditions and benefits of the program. This terms sheet provides greater clarity and guidance to homeowners who are evaluating the program. While we have summarized the main terms of the Terms and Conditions sheet, it is important to recognize that HPD has a wide discretion in determining the final terms of the property tax benefits granted to a particular project under the program. Therefore, an owner seeking to avail himself of the property tax advantages granted under the program will find himself in a negotiation with HPD on the extent of these advantages and the scope of the various affordability restrictions that will be imposed on the project – the Katten’s attorneys are adept at assisting in such negotiations with HPD and are available to guide owners in navigating the Section XI process.
Eligible owners / properties
The program requires that the property be owned by a corporation or Housing Development Fund (HDFC) formed with the consent of HPD. Current owners of existing projects are eligible, provided they enter into a nominee agreement with an existing HPD approved HDFC or a new HDFC. Beneficial ownership may be retained by for-profit or non-profit entities under a nominee agreement approved by HDFC (such beneficial owners, together with HDFC, referred to as “Owner”). Eligible properties include rent-stabilized, rent, or low-income or unregulated multi-family rental properties that are in good physical condition or for which physical improvements can be made without using the HPD grant.
The administration of the program by HPD also allows HPD to prioritize which projects to include in the program based on specific characteristics described in the condition sheet, as well as attributes that HPD believes serve “other significant benefits. housing policy ”. The specific characteristics described in the Term Sheet include whether (1) a significant portion of the units is limited to or below 50% and 30% of the area’s median income (AMI), (2) a significant portion of the vacant units is reserved for formerly homeless households (referred to as ‘homeless put aside’), (3) housing conditions will be improved by the completion of pending rehabilitation or immediate repairs that require tax exemption to facilitate financing, (4) the property is currently experiencing operational problems, as evidenced by an inability to meet standard debt service coverage ratios or income / expense ratios, and (4) a significant portion of units will see their reduced rents for existing tenants due to their inclusion in the program.
Benefits of the Article XI tax exemption
The program provides Article XI benefits in the form of a 40-year partial exemption from the estimated residential value of the project through a gross rent tax (GRT) calculated as a percentage of residential income. and gross commercial potential of the project. Essentially, the property taxes payable in respect of the residential portion of the project are set at the percentage of the GRT determined by HPD (unless the property taxes are otherwise less than the adjusted exemption from the GRT). The sizing of this exemption is determined by HPD using one of the following two methods:
Method 1 – Projects currently at stabilized rent:
- Projects with current average rents below 60% of the area’s median income (AMI) and for which a significant majority of units are rent-stabilized, and where there is no, or a limited difference, between preferential and legal rents, will have their advantages dimensioned by HPD according to method 1.
- Method 1 projects can be considered by HPD for inclusion in the Program to benefit from an exemption with a TSO set at 5% (note that projects with current average rents above 60% AMI can benefit from an exemption with a TSO set at 15%).
- The GRR may be adjusted upward by HPD if the net present value of the exemption exceeds $ 50,000 per unit.
- The TSO could be adjusted downward by HPD in order to (1) meet a minimum income / expenditure ratio of 1.05 and a debt service coverage ratio of 1.25 for senior debt, (2) finance immediate physical needs, or (3) achieve additional policy goals as directed by HPD, such as funding bridging reserves for immediate substantial homeless placements.
Method 2 – Projects with unstabilized portions or at risk of losing rent stabilization protections:
- Projects for which there are currently no rent restrictions or for which there is a potential for rent increases or loss of rent stabilization (e.g. dwellings whose rents have not stabilized, or projects with a the difference between the preferential and existing legal rents will have their benefits scaled by HPD according to method 2.
- Method 2 projects can be considered by HPD for inclusion in the program to receive an exemption (1) having a TSO set at 10% for years one to five, and (2) having a TSO for years six to 40 which will be calculated based on a cost-benefit analysis that compares the value of the regulation to the cost of the exemption. The Term Sheet describes the assumptions to be used in performing such a cost-benefit analysis.
- The GRT for years 1 to 5 could be adjusted downward by HPD to meet a minimum income / expense ratio of 1.05 and a debt service coverage ratio of 1.25 for senior debt.
- If the bearable GRT for years 6 to 40 exceeds 10%, the higher GRT will apply for the 40 years.
The program requires projects to enter into a 40-year regulatory agreement that coincides with the term of tax benefits granted under the program. This regulatory agreement is recorded against the project. In addition to the affordability restrictions described above, at least two-thirds of homes must have rent and income limits below 165% of the MAI. Such regulatory agreement will limit all residential units and must contain the following restrictions (in addition to the other restrictions described in this document):
- Stabilization of rents: All residential units must be rent stabilized (including registration of units that are not currently stabilized) and these restrictions will extend beyond the duration of the exemption.
- Rent restrictions:
- Rents for all units should be limited to one or more regulatory levels with an average of at least 10% of the MAI below the current market rent for the neighborhood and where the limited average rents are no more than 10% higher. % at current rents.
- Method 2 projects must either (1) restrict rents of at least 30% of units to 60% or less of the MAI, with at least 15% of all units restricted to rents below 30% of the MAI and less than 50% of the MAI, or (2) accept a minimum 20% layaway for homeless people.
- Income restrictions:
- Units with rents capped at 80% or less of the MAI may be rented to households earning up to 10% of the MAI above the regulated rent restriction (unless otherwise restricted).
- Dwellings with rents limited to more than 80% of the MAI can be rented to households earning up to 20% of the MAI above the regulated rent restriction (unless otherwise restricted).
- Homeless people put aside: Unless a Method 2 project adopts the 20% homeless layaway option described above, all projects must include a minimum of 10% homeless layaway. shelter, which must be satisfied using current vacant dwellings and / or units that become vacant after closure.
- Debt, charges and transfers: DHH approval is required for all project transfers (including transfers of any beneficial interest) and any debt or other lien on the project.
Closure requirements for projects eligible for the program are outlined in the Terms and Conditions sheet and include: (1) Review and approval of Section XI benefits by New York City Council resolution, which must include a letter of support from the city Council members in whose district the project is located, (2) completion of an integrated physical needs assessment of an approved business and completion of immediate and short-term physical needs term, (3) compliance with the City’s Aging at Home initiative, (4) be subject to the salary requirements in effect if located in a zoning zone initiated by the City, (5) notification to all tenants for inclusion of the project in the program and regulatory restrictions and exemption conditions; and (6) submission of owner disclosure statements and documents for review and approval by the HPD sponsor.