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Tax Incentives: When Does Their Use Fall Into the Laws of Diminishing Returns

Newly constructed Bergen Village Town Home In Tremont From what I have read, most of the 50 States offer some form of tax incentive to build. Some do it to encourage farmers to get into the 'clean energy' business with solar power. Some do it to encourage building in areas the city would like to see revitalized. Some do it to keep up the properties on their main streets.

Cleveland got into the tax abatement issue in 1991 when The City authorized a Tax Abatement Program. That authority is coming up for discussion because in June of 2007 that autority runs out....City Council has been holding hearings to see what community response is and builders showed up for the Hearing held last Monday.

What is your experience with buyers and Tax Abatement? I find buyers frequently decide to purchase one property over another - all other things similar - because one offers 100% abatement for a 15 year period and the other does not. Builders use the tax abatement policy to tell prospective buyers they have the buying power to 'buy more house.' Cities, Cleveland included, have set up Enterprise Zones that include tax abatement. Cleveland also has a really good Storefront Abatement Program.

The issue is not whether Tax Abatement encourages growth, but whether or not it's time the City stop losing money through abatement programs. Clearly, in 1991, areas that needed revitalization were helped by abatement programs. While Tremont was once in this category, now it is one of THE designation places to live in the City, so should abatement still be practiced in it's same form there now? I would argue that special types of construction should get the 100%/fifteen year abatement and not others. Why not reserve it for builders who are working on Transit Oriented Development, or Energy/Green homes, or building in areas that are still in need of new building vibrancy. And btw, I am working with a developer in Tremont whose properties would still fit into this category because of his focus on EnergyStar ratings.

In any case, the City is being encouraged by the developers at last Monday's hearing to sign tax abatement authority for one more year 'as is' while more creative thinking occurs. For more on this story, keep reading at my other blog, Cleveland Real Estate and News.

Do you have any examples of Tax Programs that have worked in your area? That have not? Any creative ideas to offer? Inquiring minds want to know.

Peace Out - 3C

Posted by Carole Cohen Realtor®, ePRO on 02/03/2007 05:21 PM

Comments (11)

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11 Comments on Tax Incentives: When Does Their Use Fall Into the Laws of Diminishing Returns

FEB

2007

Carole, I am not aware of any Tax Abatements being given for Housing Development around here. The only Tax Abatements that I have heard of has been to major businesses who will bring jobs into the area. Cleveland and Tremont must have more tax dollars to give away then we do here in Middletown.

Hi George, so Middletown is using incentives for jobs soley as opposed to new housing. That is probably true in other places too. Trust me, we can't afford to let tax dollars get away LOL

FEB

2007

I've never really been a big supporter of tax abatements of any type. If the City is bent on doing it anyway, they should reserve it for TOD as you suggest and homes that meet high performance green building standards (more than just Energy Star).

Hi Ed, thanks - I also think the City could focus on entire neighborhoods that need revitalization and use the tax abatements there.

All that money they lose could be used for improved RTA service!

FEB

2007

Carole! Holy Cow! There is a lot of information packed in here... I do not know of any Tax Abatement in my neck of the woods, but I will now look into it.

FEB

2007

Hi Carole,

Almost every new condo in Manhattan gets tax abatements. 421-A is probably the most common. It usually lasts 10 years, the 11th year it goes to regular tax. Sometimes it has incremental increases every two years. It is great for buyers particularly if they flip before the 11th year.

It is also abused by developers. The idea behind it was to revitalize a fringe neighborhood or the developer is also supposed to build or include in the project moderate or low income housing. Unfortunately 98% of the builders that get the tax abatements build only luxury housing with prices starting above $1million.

Often during the project they change plans that were to include moderate priced units and only build luxury housing and build the moderate housing someplace else. Someone can buy a $2million apartment and pay $10. a month in real estate tax. Mayor Bloomberg is cracking down on tax abatement abuse here and developers getting the abatements might actually have to build affordable housing in order to get the tax abatements.

Real estate taxes here are very strange. RET is based on what the building would generate in income if it were a rental building and is based on when it was built. So modern buildings pay much higher taxes than say a pre-war building on Park Avenue that was built in 1930.

The good thing is Manhattan real estate taxes are considered very low compared to other places. For the last couple of years the mayor has sent a check for $400. to every homeowner in NYC. I think my first blog was about NYC $6.1 billion surplus

FEB

2007

Hi Mariana, thanks for stopping by! And it would be great to hear the results of your search, meaning what kind of abatement policy exists in your area.

Hey Mitchell: you wrote 'Often during the project they change plans that were to include moderate priced units and only build luxury housing and build the moderate housing someplace else.'

When I read this, I thought to myself how could the City Planners let this happen? I'm glad the tax rates are lower there, and I'm also glad Bloomberg is forcing everyone to pay attention.

Oddly enough, the same 'how could you not know' situation happened here. Remember my Steelyard Commons post about the new Steel Mill Museum, tow paths, Walmart etc in Cleveland? It turns out City powers that be somehow overlooked, ignored or just did not investigate (which I find unlikely) the possibility that Developers and merchants in Steelyard would not be paying taxes after all...at least not for ten years. They performed brownfield remediation and that allowed then to receive tax abatement through State laws that provide for this. I did a new blog post on this here. I think about how fiscally responsible and aware we all have to be in our personal lives and get frustrated that local governments do not take the same 'care' with our tax monies and our collective economic futures.

Carole, sometimes it's just old fashioned politics, the developers build a park or something for the city, the developer of my building built a new subway entrance in order to get 3 more stories and be the tallest building in the neighborhood and my coop was stuck with managing the subway for several years, the same developer built another building that was too tall and was forced to take down the tower. The developer goes bankrupt but really it was only the LLC they set up for a particular project that is Bankrupt and they then go down the block and build something else under a new LLC

FEB

2007

Did you think I disappeared? I was WAITING for a tax post. Tax abatements can serve as a useful tool for rezoning a neighborhood. The challenge is always attracting businesses or certain types of buildings to those areas. Jack Kemp did this with Empowerment zones and the results were tepid at best.

I think the best use of abatements is to encourage companies to relocate to impoverished areas as a incentive to create local jobs. Professional sports teams are the epitome of abuse of the abatement concept.

All in all, I'm going to agree with you Carole. Abatements have turned into welfare for the indutries that need them the least and have outlived their usefulness.

Mitchell, do you think the IRS would mind if I turned myself into a different LLC depending on the year? LOL I heard stories about housing developments being too tall in Maryland as well. Politics always was a 'you wash my hand I wash yours' adventure. You had to manage the subway?? I can only imagine the stories there!

Brian, I am glad you did not disappear! We call them Enterprise Zones here, be they for attraction of businesses or residential development. I think we agree more than we don't on this issue but I reserve the thought that they can still be useful for targeted endeavors. Here, we really need to start focusing on TODs for example, it solves a lot of problems once that idea takes hold. I would be in favor of TOD tax abatement.

FEB

2007

I think the TIF funding districts in Chicago and other cities I have worked in have been overall a fantastic success. That said, they work for things on the fringe, to encourage as a catalyst what is already in line to happen, if on an accelerated time line. Most enterprise zone designations I have seen are in areas too blighted to make the designation make a whole lot of difference, but they can still help. There is no question to me that with economics and a free market driving the bulk of development, the only way to make that work in blighted or underdeveloped areas is to offer municipal incentives to supplement the free market economics already in place. When that has accomplished its goal, it's time to move those to a new area.

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