How does tax abatement affect a property's value? I'm looking at an apartment in Brooklyn, New York with a tax abatement for 15 years so will that force me to overpay for the property because it has a tax abatement and once the tax abatement is up, will the property's value go down? How does it work?
I would think that the abatement would only be worth what its present value is. Yes the seller is viewing it as a valuable asset for the property however its only worth what someone is willing to pay for it based upon the same ROI they're factoring in for the property. In this case though you're only factoring it based upon a 15 year time frame and not longer as you would with the property.
And no one is forcing you to overpay for the property. Someone will pay for it what they think its worth to them.
Look at the abatement as an increase of income over the term to its present value. Buying, I'd justify the discount rate in the analysis at a higher rate, such as at loan rates. Selling, I'd use a low rate, such as the after tax rate of a bond by the taxing authority, might be 3 or 4%, Using a higher rate will yield a lower present value. The present value may be taken into consideration of the property as to its value today. :)
@Bill Gulley makes a valid point here. Looking at this from an appraisal viewpoint, if the property could be considered an income property, a competent appraiser will include the additional income gained by not paying real estate taxes. This could factor in the Capitalization equation or a Discount to Present Value (discounting a future income stream to a present monetary value).
The reality of the situation for a SFR and typically educated buyers, there may be an impact to value, but it should not amount to thousands of dollars. If you have an appraiser friend in the area, call him up and ask him if he knows the typical value change for this factor.
Also, will the abatement continue if there is a transfer of ownership?
When I finance buildings with tax abatements the cap rate is applied to NOI using the full tax burden to come up with a base value and then the present value of the tax savings is added to come up with total value. This is the same way that an appraiser will do it. For a rough estimate you can use a discount rate of 2 points higher than the cap rate when doing your present value analysis.
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