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Property Tax Abatement For Renovation of Affordable Housing

Older buildings are often an important element in the unsubsidized affordable housing market, but without proper maintenance they can fall into disrepair, making their continued tenancy less desirable for people of all income levels. However, building renovations will usually cause a rise in the assessed value of the property, typically prompting property owners to raise rents to cover the extra cost. Real estate property tax abatements can help greatly improve the quality of the existing housing stock by making renovation financially feasible for property owners, while allowing them to maintain rents at affordable levels for people with moderate or low incomes. Typically, when a property qualifies for renovation abatement, the real estate tax assessed upon it is "frozen" at the pre-improvement level for a specified number of years (usually 10-15). To ensure properties remain affordable, some jurisdictions condition tax abatements on an agreement that the owner will rent to families with incomes below a specified level for the period of the abatement.

Case Studies

Oregon

The Oregon Single Family New Construction Limited Tax Abatement (LTA) program, authorized by state law in 1990, allows cities to abate property taxes on the improvement value of newly constructed homes in targeted neighborhoods purchased by income-eligible homebuyers. Taxes on the assessed value of the improvements are abated for a period of ten years, but the owner must still pay taxes on the land. The LTA program enables cities to promote homeownership without a reduction in tax revenue or a direct general fund allocation. The tax abatement programs provide an incentive for buyers to purchase in targeted neighborhoods, in distressed markets.

The City of Portland offers a 10-year limited tax property abatement for any increase in assessment value that results from the rehabilitation of, or conversion to, qualifying rental units. The property owner must enter into an affordability agreement, and designate a certain percentage of the units affordable (depending on the size of the property) to tenants with a household income of 60% of median family income or less. The property owner does not pay taxes on the increase in assessed value due to rehabilitation work for 10-years; however, the owner will continue to pay taxes on the current assessed value of the land.

Illinois

In 2002, Illinois created a special real estate tax classification in order to preserve the availability of rental homes made affordable through Section 8 contracts. The Class S incentive permits a lower real estate tax assessment rate to the owners of multifamily rental properties who renew project-based Section 8 contracts through HUD’s Mark Up to Market Program. Eligible units are taxed at only 16 percent of market value, in exchange for an agreement to participate in the Section 8 program for a five-year period. This constitutes a 52 percent reduction in the real estate tax assessment level ordinarily applied to multifamily residential real estate when the legislation was passed.

New York City, New York

The J51 Tax Incentive Program in New York City includes two benefits: a tax exemption benefit and a tax abatement benefit. Under the exemption benefit, property owners who have rehabilitated their multi-unit buildings or converted their property to multi-unit housing receive a 34-year (30-years full + 4-year phase out) or 14-year (10-years full + 4-year phase out) exemption from the increase in real estate taxes resulting from the renovation. Affordable housing projects generally get the 34-year exemption while other projects get the 14-year exemption. The abatement benefit reduces existing taxes by a percentage of the Certified Reasonable Cost (CRC) of the work performed for up to 20 years. Most eligible projects receive both benefits.

All rental units rehabilitated or converted as a result of the J51 tax abatement become subject to rent stabilization or rent control for the duration of the benefits. The property owner must also waive 50% of the rent increase that would otherwise be allowed under rent stabilization as a result of the work.