While many Americans are struggling to stay above water with their mortgages, the mega-rich are moving into a new condo building under construction are getting massive tax breaks, reports CNBC's Robert Frank.
The billionaires paying more than $90 million for top apartments at the new One57 tower in New York have some very special amenities. They get more than 10,000 square feet, 75 floors above Manhattan. They get VIP concierge and doorman services, along with some of the best views in the city.
But they may also get a less publicized benefit: tax breaks of more than $150,000 a year from a program aimed at low-income housing.
According to financial documents obtained by CNBC, One57 may receive a tax abatement under a long-existing city program designed to provide more low-income housing. The program, known as 421-a, gives developers tax breaks for 10 to 20 years, which are then passed on to buyers. At One57, those savings may be substantial.
Take the “penthouse” on the 75th and 76th floor. The apartment, at 13,554 square feet, reportedly sold for more than $90 million to an unknown billionaire. (The building is still under construction and will open next year). Normally, the annual real-estate taxes on the apartment would be around $230,000 a year. With the special abatements, however, the taxes are projected to be only be $20,000 a year – saving the owner $210,000 a year in real-estate taxes.
The penthouse on the 89th and 90th floor gets similar-sized savings. The unit, which also reportedly sold for $90 million or more, would normally be assessed real-estate taxes of $205,000 a year. The tax abatements, however, allow the owner to pay only $18,400 a year, providing a savings of more than $186,000 a year.
The tax savings for the units on floors 75 through 90 add up to more than $1.5 million a year, according to the documents. The tax savings are in effect for two years, then are reduced by 20 percent every two years for 10 years, according to people familiar with the building.
Although the building has applied for the tax benefits, they have yet to receive final approval, according to city records.
"This is an outrageous giveaway," said Brad Lander, a New York City councilman who has worked to end tax breaks for luxury condos. "We can't afford to be giving away millions of dollars in tax breaks for nothing."
The tax-reduction program has come under fierce criticism over the years. According to the city’s Independent Budget Office, 421-a cost the city more than $1 billion in revenue in the latest budget year.
As originally designed, the program requires to allocate at least 20 percent of their units to low-income families, in return for tax breaks of up to 80 percent. It's a badly kept secret in Manhattan that the program is often used by luxury developers.
One57 used a popular loophole in the law that allowed the developers to take the tax benefit for the building overlooking the park, but fund the affordable housing units in another location. One57 bought credits or "certificates" that helped fund those affordable housing units in outer bouroughs, according to city records.
Gary Barnett, founder of Extell Development, which built One57, said that his building has followed all the guidelines for the program, and that through the 421-a program, One57 has helped build "countless" affordable housing units in the Bronx, Brooklyn and elsewhere. The benefits, he added, would mainly flow to Extell rather than the buyers. While the buyers would reap the tax savings, those lower taxes have allowed him to charge more for the units, he said.
"We've had some benefit because of the abatements, but the real benefits have been to affordable housing," he said. "We've done exactly what the program was intended to do, which is to create affordable housing."
He added that the tax breaks have also lowered his cost basis and given him more confidence to launch the project, "which creates more construction jobs, brokers' jobs and all the knock-on effects."
Since the loophole allowing certificates has largely been closed, he said, "affordable housing has really slowed down in the city."
The tax breaks for One57 are likely to cause a larger firestorm, however, since the building has become a symbol of hyper-priced real estate sales in Manhattan. The news also comes at a time of financial austerity in New York, with the mayor threatening layoffs to help cut $2 billion in spending.
Media reports say that two of the buyers for some of the top floor units include Silas Chou, the billionaire who took Michael Kors public, and Lawrence Stroll, a Canadian billionaire.
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