New York City Article XI Property Tax Exemption Program

Key points

• The Housing Preservation Opportunity Program (the Program) provides attractive property tax exemptions for multi-family projects located in New York City, including those that may be experiencing economic hardship or have existing property tax benefits expiring soon ( such as the existing 421 (a) or J51 tax benefits).

• The program offers a 40-year property tax exemption that sets property taxes on residential portions of multi-family properties at a percentage of gross potential 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 real estate tax benefits. The program requires that all residential units be subject to rent stabilization for the duration of the program, either through currently rent-stabilized units or registered units that are not currently rent-stabilized, as a condition inclusion in the program).

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introduction

The program, which provides multifamily properties with a partial property tax exemption under Section XI of the New York State Private Housing Finance Act (Section XI), is an attractive benefit for New York City multifamily properties, especially those that are either facing financial hardship and legal strain on deregulation resulting from the Housing Stability and Tenant Protection Act of 2019, COVID-19 or other, or who have other real estate tax benefits expiring soon (such as existing tax 421(a) or J51 benefits). The program generally provides 40-year Article XI property tax exemptions for multi-family dwellings in an effort to achieve the HPD’s stated goal of “ensuring long-term affordability and the operational viability of quality housing”. 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.

To provide clarity to owners considering the program, HPD recently released a term sheet outlining the program’s requirements, terms and benefits. This term sheet provides greater clarity and guidance to owners evaluating the program. Although we have summarized the main terms of the list of terms, it is important to recognize that HPD has broad discretion in determining the final terms of any land tax benefits granted to a particular project under the program. Therefore, a property owner seeking to avail of the land tax benefits granted under the program will find themselves in a negotiation with HPD over the extent of those benefits and the scope of the various affordability restrictions that will be imposed on the project – lawyers at Katten is adept at assisting in such negotiations with HPD and is available to guide owners through the Article XI process.

Eligible Owners/Properties

The program requires the property to be owned by a corporation or housing development fund corporation (HDFC) formed with the consent of the HPD. Current owners of existing projects are eligible, provided they enter into a nominating agreement with an existing HPD-approved HDFC or a new HDFC. Beneficial ownership may be retained by for-profit or not-for-profit entities pursuant to an agent agreement approved by HDFC (such beneficial owners, together with HDFC, being referred to as “Owner”). Eligible properties consist of rent-stabilized, rent-stabilized, or income-limited or unregulated multi-family rental properties that are in good physical condition or where physical improvements can be made without using an HPD grant.

HPD’s administration of the program also allows HPD to prioritize projects for inclusion in the program based on specific characteristics described in the condition sheet, as well as attributes that HPD believes serve “other significant benefits of the housing policy. Specific characteristics outlined in the condition sheet include whether (1) a significant portion of units are restricted to or below 50% and 30% of the Area Median Income (AMI), (2) a significant portion of vacant units is reserved for formerly homeless households (referred to as “homeless reserves”), (3) housing conditions will be improved by carrying out rehabilitation works or immediate repairs remaining to be carried out which require a tax exemption to facilitate financing , (4) the property is currently experiencing operational issues, as evidenced by an inability to meet standard debt service coverage ratios or income to expense ratios, and (4) a significant portion of units will see rents reduced for existing tenants due to inclusion in the program.

Benefits of Article XI Tax Exemption

The program provides Article XI benefits in the form of a 40-year partial exemption of 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 with respect to the residential portion of the project are set at the GRT percentage determined by HPD (unless the property taxes are otherwise less than the GRT Adjusted Exemption). Sizing for this exemption is determined by HPD using one of two methods:

Method 1 – Projects currently at stabilized rent:

• Projects where average current rents are less than 60% of the area’s median income (AMI) and for which a significant majority of units are rent-stabilized, and where there is little or no difference between prime rents and legal, will have their advantages sized by HPD according to method 1.

• Method 1 projects may be considered by HPD for inclusion in the program to receive an exemption with a GRT set at 5% (note that projects with average current rents above 60% AMI may qualify for an exemption with a GRT set at 15%).

  • The GRT could 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 to (1) satisfy a minimum income to expense 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 the HPD, such as funding transitional reserves for significant immediate homelessness placements.

Method 2 – Projects with unstabilized portions of rents or at risk of losing rent stabilization protections:

• Projects for which there are no current rent restrictions or for which there is potential for rent increases or loss of rent stabilization (for example, projects with rent stabilization protections set to expire in relation with the expiration of the 421(a) or J51 tax benefits), projects with a portion of the units whose rents are not stabilized or projects with a gap between the existing preferential and legal rents will see their benefits dimensioned by HPD according to the method 2.

• Method 2 projects may be considered by the HPD for inclusion in the program to receive an exemption (1) having a GRT set at 10% for years one through five, and (2) having a GRT for years six to 40 which will be calculated on the basis of a cost-benefit analysis comparing the value of regulation to the cost of exemption. The condition sheet describes the assumptions to be used to perform such a cost-benefit analysis.

• The TSO for years 1-5 could be adjusted downward by HPD to satisfy a minimum income to 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%, then the higher GRT will apply for the 40 years.

Regulatory restrictions

The program requires projects to enter into a 40-year regulatory agreement that coincides with the duration of the tax benefits granted under the program. This regulatory agreement is registered against the project. In addition to the affordability restrictions outlined above, at least two-thirds of units must have limited rent and income below 165% of the AMI. Such regulatory agreement will restrict all residential units and must contain the following restrictions (in addition to the other restrictions described herein):

• Stabilization of rents: All residential units must be rent stabilized (including registration of units that are not currently rent stabilized) and these restrictions will extend beyond the duration of the exemption.

• Rental Restrictions:

  • Rents for all units must be capped at one or more regulatory levels that average at least 10% of the AMI below the current market rent for the neighborhood and where the capped average rents are no more higher 10% to current rents.

  • Method 2 projects must either (1) restrict rents for at least 30% of units at or below 60% of the AMI, with at least 15% of all units restricted to rents below 30% of AMI and less than 50% of AMI, or (2) accept a minimum of 20% of SDF set aside.

• Income Restrictions:

  • Units with rents restricted to 80% or less of the AMI can be rented to households earning up to 10% of the AMI above the regulated rent restriction (unless otherwise restricted).

  • Units with rents capped at more than 80% of the AMI can be rented to households earning up to 20% of the AMI above the regulated rent restriction (unless otherwise restricted).

• Homeless put aside: Unless a Method 2 project adopts the 20% homeless set-aside option described above, all projects must include a minimum of 10% homeless set-aside. shelter, which must be filled using current vacant dwellings and/or units that become vacant after closure.

• Debts, charges and disposals: HPD approval is required for all project transfers (including transfers of any beneficial interest) and any debt or other project lien charges.

Closing requirements

The closing conditions for projects admitted to the program are outlined in the condition sheet and include: (1) review and approval of Article XI benefits through a resolution of the New York City Council, which must include a letter of support from the city council member(s) in whose district the project is located, (2) completion of an Integrated Physical Needs Assessment by an approved firm and completion of physical needs immediate and short-term, (3) compliance with the City’s Aging at Home initiative, (4) be subject to prevailing wage requirements if located in a City-initiated zoning area, (5) notification to all tenants of the project’s inclusion in the program and regulatory restrictions and exemption conditions, and (6) submission of landlord disclosure statements and documents for review and approval of the HPD sponsor.