Property owners seeking or benefiting from residential tax exemption programs like 421-a, 485-x, or 467-m often assume that their assessed values are inconsequential since their tax liabilities are largely offset. However, even with these exemptions in place, actively managing assessed values remains critical. Owners should engage experienced tax incentive counsel and real estate tax certiorari counsel to optimize the likelihood of receiving and the amount of such tax exemption benefits and also to review and challenge assessments annually. Here’s why.
Impact on Refinancing and Sale Transactions
Even when exemptions minimize immediate tax obligations, assessed values significantly influence refinancing and sales. Lenders and prospective buyers factor future tax burdens into their financial models, often extrapolating projected liabilities from the current assessed value. Appraisers typically model future tax exposure based on assumed AV growth, regardless of exemptions. Lowering the assessed value in advance of refinancing or a sale can enhance financial feasibility by reducing projected unexempt tax liability, thereby improving loan terms and asset valuation.
In transactions where the seller is a tax-exempt entity, such as a not-for-profit, the purchase and sale agreement should address property tax protests. A seller’s exemption may obscure an inflated AV that becomes a costly liability for the buyer post-transfer. Including provisions requiring the seller to file tax protests or allowing the contract-vendee to do so can ensure a more accurate and favorable baseline assessment moving forward.
Taxable Portions of Exempt Properties
While tax exemptions shield substantial portions of a property’s value, some components remain taxable. For instance, under the residential tax incentives 421-a, 485-x and 467-m, commercial space (and other space ineligible for the tax exemption) exceeding program thresholds (typically 12%) or other ineligible portions trigger a reduction in tax exemption benefits. Actively challenging AVs ensures that the tax burden on these portions remains as low as possible.
Managing Phase-Outs to Mitigate Future Tax Increases
Many exemptions phase out gradually. As the transition from full to partial exemption occurs, the property’s billable AV and/or property taxes increase. Since tax bills are based on the lesser of actual or transitional AV, securing a lower actual AV today can result in significant tax savings once the exemption diminishes or expires.
Non-Compliance Risks and Retroactive Tax Liabilities
Owners should also be mindful of compliance risks associated with these tax exemption programs. Violations—such as failure to maintain affordable housing requirements, labor wage standards, or rent stabilization compliance—can trigger revocation of benefits, exposing properties to full taxation, often retroactively. A lower assessed value at the time of revocation can mitigate this exposure.
Errors in Exemption Administration
The Department of Finance’s administration of exemptions is not infallible. Miscalculations of exempted and taxable portions frequently occur, potentially leading to overpayment. Annual assessment reviews and timely Tax Commission filings (due March 1st each year) serve as essential safeguards against such errors.
Construction-Period Assessments and Cash Flow Considerations
For properties under development, reducing AV can be particularly beneficial. Some programs require property taxes to be paid during construction, with exemptions applied retroactively upon completion. Keeping AV low during this interim period reduces tax expenditures, improving cash flow. Moreover, if construction extends beyond the standard three-year exemption period, any taxable period between commencement and benefit implementation becomes a direct financial concern.
Impact on Future Lot Apportionments
For developments anticipating subdivision or lot apportionment, proactive AV management is crucial. Higher pre-apportionment assessments can result in disproportionate allocations to newly created lots, increasing long-term tax burdens.
Strategic Reduction of Base Year Assessed Values
For properties under 421-a and 485-x, the exemption is calculated based on the difference between the current taxable AV and a designated base year AV. The lower the base year AV, the greater the future exemption. Owners should take strategic actions, such as demolishing pre-existing improvements before the January 5th tax status date, to ensure a minimized base year AV. Additionally, buyers of development sites should consider acquiring the seller’s interest in any ongoing tax protests, as these can influence the base year assessment and, consequently, future exemption amounts.
Unlike 421-a and 485-x, the 467-m benefit is not linked to a base year assessment. Instead, it exempts a percentage of the current year’s AV. This means reductions in AV—except in years where a 100% exemption applies—directly lower tax liability. For example, if a property has an AV of $100 per square foot, with a tax rate of 12% and an exemption of 90%, the effective tax liability is $1.20 per square foot. A successful AV reduction of 10% to $90 per square foot would proportionally reduce the tax to $1.08 per square foot. Owners must actively contest assessments to realize such savings.
The Role of Tax Incentives & Tax Certiorari Counsel in Proactive AV Management
We recommend using experienced tax incentive counsel such as Daniel M. Bernstein to optimize your property’s available tax exemptions and abatements and to align a project’s ownership, affordability and other details with tax incentive and regulatory agreements. Engaging experienced tax certiorari counsel such as Benjamin M. Williams ensures that assessments and other property details are scrutinized and challenged effectively each year. Counsel can analyze market conditions, comparables, and valuation methodologies to support appeals, helping owners avoid excessive assessments that could impact future tax liabilities. Beyond immediate tax savings, proactive AV management protects owners from long-term financial risks tied to exemption expiration, compliance failures, and transitional AV recalculations.
Rosenberg & Estis uniquely benefits from a multi-disciplinary legal practice that offers both tax incentive and tax certiorari legal services. This integrated approach allows clients to navigate the complexities of property tax assessments while maximizing available tax benefits.
Conclusion
While tax exemption programs like 421-a, 485-x, and 467-m offer substantial tax relief, they do not eliminate the need for strategic assessment management. Owners should remain vigilant, filing annual tax protests to correct inflated valuations and avoid unnecessary tax liabilities both during and after the exemption period.
For further insights into these programs, visit Rosenberg & Estis’s articles. Contact Benjamin Williams, leader of the firm’s Property Tax Certiorari Department, and Daniel Bernstein, leader of the firm’s Tax Incentives & Affordable Housing Department.
This article is for informational purposes only and does not constitute legal advice. Property owners should consult qualified legal professionals regarding their specific circumstances.