Tax Subsidies for Downtown Office Conversions are Lavish Compared to Public Benefits
A new report by City Comptroller Brad Lander indicates that the 467-m tax incentive program, which aims to spur conversions of obsolete office properties to residential use while requiring that some of the new apartments be set aside as affordable units, gives developers generous support. According to the report, this is particularly true in Lower Manhattan.
The analysis, “Office-to-Residential Conversions in NYC: Economics and Fiscal Estimates,” uses as a case in point the recent conversion of 25 Water Street (the largest such project to date, which has created 1,320 new dwellings). To parse this example, it is necessary to reckon with two financial concepts: “opportunity cost” and “present value.” The first is defined as the difference between the higher amount of tax that would have been collected without the 467-m subsidy, versus the lower rate levied on buildings converted using this incentive. (The 467-m program allows for tax “abatements” of 100 percent during construction, followed by 90 percent for up to 35 years.) The second term refers to the value today of income expected in the future, with the “present value” necessarily discounted by an annual rate (in Mr. Lander’s calculations, 4.5 percent) over a fixed number of years.
Mr. Lander notes, “assuming 25 Water Street receives two years of construction benefits… and that taxes grow at a constant annual rate of 3.5 percent (a standard assumption in long-term projections by the NYC Office of Management and Budget), the 37-year present value of 467-m tax benefits is $434 million while the present value of taxes [that will be] paid is $67 million.” He adds, “as a full market-rate building, 25 Water Street could have instead paid taxes totaling $605 million in present value, $538 million more than as a 467-m building.” (As noted above, these discounted “present values” are a fraction of the absolute dollar amounts projected over the next 35 years.) Mr. Lander concludes, “25 Water Street plainly proves that the tax benefits exceed the rent discounts on income-restricted units.”
The reports also notes that 25 Water Street is emblematic of more generous subsidies in Lower Manhattan than anywhere else in the City, showing that “the opportunity cost… is $3.8 billion in Lower Manhattan. The opportunity cost outside of Lower Manhattan is $1.4 billion.” That is to say, out of a projected total of $5.1 billion in property taxes that will never be collected as a result of 467-m, some 75 percent of these benefits will go to developers in Lower Manhattan. The report also states, “the opportunity cost per income-restricted unit in Lower Manhattan is $1.8 million,” while “outside of Lower Manhattan, the opportunity cost per unit is $0.9 million.” In this context, the City is “paying” (in the form of taxes forgiven) twice as much in Lower Manhattan for each affordable unit created under 467-m, compared to the same costs elsewhere.
Mr. Lander concludes by noting that “post-pandemic conversion activity already appears on track to exceed the totals subsidized… in the Financial District in the 1990’s and 2000’s,” but that the 467-m program is “likely too generous in Lower Manhattan.”