tax abatements: overview » introduction » promote rehab

Older buildings provide affordable, unsubsidized homes for many low- and moderate-income families. Without proper maintenance and upkeep, however, the quality of these units will deteriorate, eventually to the point where they are unsuitable for habitation. This is especially true during difficult economic times when homeowners and landlords defer needed maintenance projects to cover other expenses, like the mortgage. Declining home values also limit the amount of home equity that can be tapped for home repairs and improvements. To prevent the loss of these aging homes, some communities grant tax abatements to property owners who undertake qualifying repairs and upgrades that increase the assessed value of the property.

Such tax abatements generally are used to encourage the preservation of existing rental homes. Owners who lease out moderately priced older

Photo credit: Rick Keating, courtesy of King County Housing Authority
units may not be able to earn sufficient income from the rent payments to keep up with needed repairs and modernization. By freezing real estate tax assessments at the pre-improvement level over a designated period (generally five to fifteen years), tax abatements can make completing the necessary repairs financially feasible.

Some communities apply the "but for" test as a condition for granting abatements, meaning that repairs or upgrades would not be made "but for" the tax abatement. Without this incentive necessary upgrades may be deferred indefinitely, leading to (a) continued deterioration of the property; (b) renovation of the property to a sufficiently high standard that allows higher rents to be charged; or (c) sale of the property to a buyer willing to undertake the needed rehabilitation. All of these scenarios would eventually result in the loss of affordable rental homes. Learn more about the "but for" test.

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. Supporters of these restrictions suggest that failure to impose rent limits essentially subsidizes the development of market-rate and luxury units, resulting in forgone revenue and minimal public benefit.

Since the early 1970s the 421-a program has provided tax abatements of up to 25 years to spur development of residential apartments in New York City. Introduced at a time when the residential housing market was in dire straits, this program was an extremely effective stimulus for new development and has played a part in the construction of over 100,000 new units.

In the 1980s, inclusion of a modest share of affordable apartments was introduced as a condition for program eligibility, although this requirement applied only in some parts of Manhattan and the units could be built elsewhere in the City. Changes effective in 2008, however, greatly expand the areas in which an affordable housing set-aside is required to receive the tax break. Moreover, the units must be built within the same buildings as market-rate units.
Practitioners note, however, that this increased stringency was only feasible once the market had improved and certain areas no longer required construction incentives to prompt new development.

View more examples of tax abatement programs that freeze tax assessments to promote rehabilitation
Some practitioners, however, argue that the imposition of affordability requirements limits the extent to which tax abatements will stimulate new development in desired areas and suggest that, by bringing about an increase in the overall supply of housing, tax abatements can advance affordability objectives for moderate-income families without an explicit affordability requirement.

While there are aspects of this debate that would benefit from further research, in general, jurisdictions should consider whether their principal goal is to stimulate redevelopment and revitalization or to promote housing affordability. If affordability is not a principal objective, or if market conditions are such that housing investment of any kind is needed, a tax abatement that is not linked to affordability restrictions may be more robust and less expensive for the jurisdiction to administer.

Tax abatements can help a community meet other goals as well. The Philadelphia city council is considering a bill to restrict tax abatements to developments that meet LEED (Leadership in Energy and Environmental Design) green building specifications to help the city meet both their revitalization  and environmental goals.

But if affordability is a principal objective, attaching affordability requirements will help to ensure that the abatement will succeed in advancing this goal.  In markets where housing affordability concerns are paramount, demand for housing often outstrips supply; therefore, a very powerful (and expensive) tax abatement stimulus would likely be required to increase the housing supply sufficiently to have a noticeable effect on housing affordability.

Solutions in Action
Cook County, Illinois has a special real estate tax classification, Class 9, designed to stimulate the rehabilitation of affordable rental homes. This incentive program is available to property owners who complete major rehabilitation of multifamily buildings with more than 7 units and agree to lease at least 35 percent of the units at rents affordable to low- and moderate-income households.

Properties that receive Class 9 classification are then assessed at 16 percent of market value for a ten-year period -- a substantial reduction from the market-rate multifamily assessment level. Owners may apply to renew the reduction for additional 10-year periods.

Click here for more information on the Class 9 tax classification.

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Freeze real estate tax assessments to promote rehabilitation of existing homes
To spur rehabilitation of aging residential rental units, communities can offer to abate real estate taxes for property owners who undertake substantial repairs. Freezing assessments at pre-improvement levels allows owners to recover their costs and helps prevent older housing units from deteriorating beyond repair.

Other pages in this section:

Lower tax rates or reduce assessments for eligible new development in targeted neighborhoods
Reduced tax rates or assessments can be offered as part of a community development strategy to promote new residential construction and rehabilitation of existing homes in revitalizing neighborhoods.

Limit real estate tax assessments for rent- and resale-restricted properties
Rent- and resale-restricted properties are often assessed on the basis of their "highest and best use," without regard for the affordability requirements that limit earnings on these properties. Tax abatements can help make sure valuation of these properties reflects these limitations, helping the properties serve their affordable housing missions.

Limit the rate by which real estate tax liability can increase
In areas with rapidly escalating property values, communities may wish to limit real estate tax appreciation to help low- and moderate-income homeowners and those with fixed incomes stay in their homes.

Click here to view other resources on tax abatements.