The New York state 485-a section of the Real Property Tax Law was created with good intentions. Upstate NY cities were struggling with hollowed out urban areas full of old and obsolete office and industrial commercial properties. The 12 year partial exemption from property tax was meant to entice developers to convert a portion of these distressed properties to residential mixed used products. The trade offs would be a 24-7 catalyst for the cities, and a means to close a funding gap for developers on projects that may otherwise not be feasible.
While the goals of the law may have been clear to the policy makers in Albany, as well as the development community, the criteria and implementation of the tax exemptions have proved to be a bit too open to interpretation. Developers in Upstate NY’s stagnant economy are also forced to be creative to secure financing for even some of the best projects. This has led to uses of 485-a that appear to violate at least the spirit of the tax exemptions.
Issues start with the fact that while the state created the exemption, the execution is carried out at the local level. Cities and school districts must opt into the program. Once the municipality decides to participate, the tax exemption is applied by right if a project qualifies. Whether or not a project qualifies is determined by the city assessor, which can obviously cause different cities to apply the same program differently. In the case of Albany NY this means a misinterpretation of the law by a long time assessor has created a legal mess after reading the criteria as commercial “or” residential instead of “and”.
Other criticisms of the law center around the gray areas, allowed by the short wording and lack of enforcement tools in the 485-a provision. As the current law is written, there are no standards as to how much of the property needs to be commercial or residential. The result has been developers “throwing in” a single apartment, or token businesses to utilize only a tiny portion of the property. These stories are happening across Upstate NY but this piece from Syracuse.com highlights some of what the news outlet considers egregious applications of the 485-a exemption:
- Three vending machines at a Syracuse apartment building dispense candy, chips and soda. They have helped the building owner avoid more than $3 million in property taxes.
- In rural Oswego County, a former school that was converted to apartments avoids $21,000 a year in taxes by including a small office for a guy who mows lawns.
- Destiny Arms, a four-story luxury apartment building near the Syracuse Inner Harbor, leases two rooms in the basement to a massage therapist. The resulting tax break? $1.3 million over 12 years.
- St. Patrick’s Lofts, a Syracuse apartment building in a converted school, rents out the gymnasium for birthday parties or other special events. The tax break saves $55,000 a year.
Using the 485-a exemption may have made these projects possible, however, the press, the politicians and, most importantly, the public have not been impressed with these stories that outline questionable uses of the program. As a result, some cities like Buffalo have put a moratorium on the 485-a tax exemption, as New York State moves to apply standards to the application of the tax abatement.
Passed in July and going into effect January 1st 2021, Bill: A-8091/S5254 establishes requirements for projects that qualify for the tax abatement, as well as procedures to keep them in compliance throughout the entire 12 years the ownership is not required to pay the full property tax. The state will still require local municipalities to administer the tax exemptions, but these new standards should remove the ambiguity that exists between Upstate cities, and lessen fears that failure to approve projects will result in costly litigation.
Nothing changes with the tax exemption schedule, so this remains a lucrative tool in the box for developers working to convert buildings into true mixed use properties. The exemption base is considered the increase in the assessed value after the improvements to the property.
What the changes will do is put parameters around what constitutes mixed use for the purpose of the tax exemption eligibility:
- At least fifty percent of the building’s or structure’s square footage is devoted to residential purposes or use and at least fifteen percent of the building’s or structure’s square footage is devoted to commercial purposes or use. Only square footage existing in a story above grade shall be used in the determination of the building’s percentage of residential purposes or use and commercial purposes or use.
- Land which was vacant prior to the residential or commercial construction work for which a tax exemption is sought, shall not be eligible to receive benefits pursuant to this section.
- At least seventy-five percent of the floor area of the mixed-use property consists of the pre-existing building or structure.
The property owner will also be required to certify compliance with these rules each of the 12 years the property is eligible for tax exemption:
- During the period of exemption pursuant to this section, the owner shall submit an annual certification to the assessor attesting that the property complies with the provisions or requirements of this section and any additional provisions or requirements as may be provided by local law. Failure to submit such certification shall result in revocation of benefits.
These adjustments the State is making to the 485-a do not seem overly burdensome for the developer, and seem unlikely to keep the exemptions from being used on projects the state and municipalities desire. These common sense measures should make the tax exemptions more palatable for the communities that are providing the incentives. As with any regulations, it can be a cat and mouse game. Will a savvy developer desperate to close a funding gap find a loophole? Perhaps, but it’s more likely these changes preserve a critical means to help redevelop properties into great spaces, and help invigorate our Upstate cities.