Important points
- The Housing Preservation Opportunities Program (the Program) provides attractive property tax exemptions for multi-family projects in New York City, including those that may face economic difficulties or where existing real estate tax breaks are about to expire (e.g. 421). a) or J51 tax benefits).
- The program provides a 40-year property tax exemption, which sets property tax on residential sections of apartment buildings at a percentage of the gross potential income for residential and commercial property.
- New York City Housing Preservation and Development (HPD) divides the amount of benefits available to a project into two broad affordability groups, each with different real estate tax benefits. The program requires that all residential units be subject to rent stabilization during the term of the program, whether through currently rent stabilized units or through the registration of units that are currently not rent stabilized as a prerequisite for inclusion in the program.
introduction
The program, which offers apartment buildings with partial property tax exemption under Article XI of the New York State Financing of Private Housing Act (Article XI), is an attractive benefit for apartment buildings in New York City, especially those that are Either due to the Housing Stability and Tenant Protection Act of 2019, COVID-19 or otherwise, faced with financial challenges and legal restrictions on deregulation, or when other real estate tax benefits are about to expire (such as the existing 421 (a) or J51 tax benefits ). The program generally provides for Article XI property tax exemptions for apartment buildings over a 40-year period in order to achieve HPD’s stated goal of “ensuring the long-term affordability and serviceability of quality housing”. The benefits granted under Article XI were used to maintain the affordability of existing apartment buildings and to extend affordability to unregulated real estate.
In order to provide clarity to the owners about the examination of the program, HPD recently released a term sheet detailing the requirements, terms and benefits of the program. This term sheet provides more clarity and guidance to the owners who will evaluate the program. While we have summarized the main terms of the Term Sheet, it is important to recognize that HPD is given a wide discretion to determine the final terms of the real estate tax benefit granted to any particular project under the program. Therefore, an owner seeking real estate tax benefits under the program is in a negotiation with HPD about the scope of those benefits and the scope of the various affordability restrictions placed on project attorneys at Katten’s ability to negotiate with HPD and is available to owners to help them navigate the Article XI process.
Authorized owners / real estate
The program requires the property to be owned by a Housing Development Fund Company or Corporation (HDFC) established with the consent of HPD. Current owners of existing projects are eligible provided they enter into a nomination agreement with an HPD-approved, existing HDFC or a new HDFC. Beneficial ownership may be maintained by for-profit or not-for-profit companies under a nominee agreement approved by HDFC (these beneficial owners are collectively referred to as the “owners” with the HDFC). Eligible properties are rent stabilized, rent or income restricted, or unregulated multi-family rentals that are in good physical condition or where physical improvements can be made without the use of HPD subsidies.
HPD’s management of the program also enables HPD to prioritize projects for inclusion in the program based on the specific characteristics described in the term sheet and the attributes defined by HPD that serve “other significant housing policy benefits”. Specific characteristics listed in the term sheet include whether (1) a significant portion of the shares are limited to or below 50% and 30% of Area Median Income (AMI), (2) a significant portion of the free shares are reserved for previously homeless households (known as “the homeless put aside”). (3) Housing conditions are improved by completing pending immediate refurbishments or repairs that require tax exemption to facilitate funding. (4) The property currently has operational problems. This is evidenced by the inability to meet standard debt service coverage ratios or income-to-expense ratios, and (4) a significant portion of the units will have rents for existing tenants reduced as a result of their inclusion in the program.
Article XI Tax Exemption Benefits
The program provides Article XI benefits in the form of a 40 year partial exemption from the project’s estimated residential value through a gross rental tax (GRT) calculated as a percentage of the project’s gross potential residential and commercial income. Essentially, property taxes payable on the residential portion of the project are set at the percentage of GRT set by HPD (unless property taxes are otherwise below the GRT-adjusted exemption). The HPD determines the size of this exception in one of two ways:
Method 1 – projects currently rent stabilized:
- Projects where the average current rents are below 60% of the area median income (AMI) and where a significant proportion of the units are rent stabilized and where there is no or only a limited difference between preferential and statutory rents have their advantages through size HPD according to method 1.
- Method 1 projects may be considered for inclusion in the program by HPD for an exemption with a GRT of 5% (note that projects with average current rents above 60% AMI have an exemption with a GRT of 15% % can get).
- The GRT could be revised upwards by HPD if the present value of the exemption exceeds $ 50,000 per unit.
- The BRT could be revised downwards by HPD to meet (1) a minimum income-to-expense ratio of 1.05 and a debt service-to-cover ratio of 1.25 for senior debt, (2) fund immediate physical needs, or (3) achieve additional policy objectives as directed by HPD, e.g. B. Funding transitional reserves for substantial immediate housing for the homeless.
Method 2 – Projects with parts that are not rent stabilized or run the risk of losing rent stabilization protection:
- Projects for which there are currently no rent restrictions or for which there is the possibility of a rent increase or a loss of rent stabilization (e.g. projects with rent stabilization protection that are to expire in connection with the expiry of tax advantages according to 421 (a) or J51), projects with one part For units that are not rent-stabilized, or for projects with a gap between existing preferential and statutory rents, the advantages are assessed according to method 2 by HPD.
- Method 2 projects may be considered by HPD for inclusion in the program for an exemption (1) with a GRT of 10% for years one through five and (2) with a GRT during years six through 40, which is calculated based on a cost-benefit analysis that compares the value of the regulations with the cost of the exemption. The term sheet describes the assumptions that have to be made when carrying out such a cost-benefit analysis.
- The BRT for years one through five could be revised down by HPD to achieve a minimum income-to-cost ratio of 1.05 and a debt service coverage ratio of 1.25 for senior debt.
- If the eligible GRT for the years six to 40 exceeds 10%, the higher GRT applies for every 40 years.
Regulatory restrictions
The program envisages that projects enter into a regulatory agreement with a term of 40 years, ending with the duration of the tax benefits granted under the program. Such an official agreement is recorded against the project. In addition to the affordability restrictions outlined above, at least two-thirds of the units must be rented and income limited below 165% AMI. Such a regulatory agreement limits all residential units and must contain the following restrictions (in addition to the other restrictions described here):
- Rent stabilization: All housing units must be rent stabilized (including the registration of the units that are not currently rent stabilized) and these restrictions will extend beyond the duration of the exemption.
- Rental restrictions:
- The rents for all units must be limited to one or more levels of regulation that averages at least 10% of the AMI below the current market rent for the neighborhood and where the restricted average rents are no more than 10% above current rents.
- Method 2 projects must either (1) limit rents for at least 30% of the units to or below 60% of the AMI, with at least 15% of all units limited to rents below 30% of the AMI and below 50% of the AMI or (1) 2) agree to a minimum quota of 20% for homeless people.
- Income restrictions:
- Units with rents capped at or below 80% of the AMI can be rented to households earning up to 10% of the AMI above the regulated rent cap (unless otherwise limited).
- Units with rents capped at over 80% of the AMI can be rented to households earning up to 20% of the AMI above the regulated rent cap (unless otherwise limited).
- Shutdown of the homeless: Unless the option described above to shut down the homeless to 20% is used in a project of Method 2, all projects must contain at least 10% to shut down the homeless, those with current vacancies and / or units that are vacant first must be met after closing.
- Debt, Encumbrances, and Promotions: All project transfers (including economic interest transfers) and any debts or other liens on the project require HPD approval.
Graduation requirements
Closing requirements for projects admitted to the program are listed on the Term Sheet and include: (1) reviewing and approving the benefits of Article XI through a resolution of the New York City Council containing a letter of support from City Councilor (s), in whose district the project is located, (2) Completion of an integrated assessment of the physical needs by an approved company and completion of the immediate and short-term physical needs, (3) Compliance with the “Aging in Place” initiative of the city, (2) 4) subject to applicable wage requirements if located in a city-initiated zone area, (5) notifying all tenants of the project’s inclusion in the program and regulatory restrictions and exemptions, and (6) submitting owner disclosure statements and documents for review and approval by HPD sponsors.