In news reports about new developments, there is often discussion about the tax abatements being awarded to a project. Often there is a quote from some spokesperson for the developer quoted as saying these tax abatements were needed to make the project "feasible."I'm talking about a property tax abatement that scales down over time (100% for a year, then 90% then 80%) or some similar structure.
Does anyone know what typically defines feasibility in this case? Does it make it easier to attract investment with a higher cash on cash return? Does it allow you to get construction financing because the project can now support more debt? are there other reasons? If anyone has experience with the tax abatements, what do you see as the reason it was needed in the first place?
Not having to pay taxes is pretty rad... particularly while your deal is not generating any income. The abatement makes the project more profitable and therefore attracts investors that would otherwise be placing their capital into higher yielding projects.
There is a concept called NOI, which can be generalized as the profit you make after paying off all the expenses on a property. The higher it is, the better. Since taxes are one of the expenses, a lower tax bill means a higher NOI.
And as for feasibility, everyone has different return thresholds they need to hit. No one would invest $10mm into a site if they were only going to get $10 back every year.
Right, but all the abatements I see are not in perpetuity, and don't actually raise the value of the property except for the present value of the remaining tax abatements. Additionally, I have not seen evidence that lenders are willing to offer larger loan amounts based on a temporary enhanced ability to service debt, but I could be wrong. So to me you are saying that tax abatements make a project feasible by increasing its cash yield during the holding period?
If you have a RET abatement you are making more cash for the length of that abatement (10, 15, 20, 30 years). If you have a 25 year PILOT program how does that not create value over having to pay market taxes for 25 years?
If the abatement is statutory like a TIF then the lender will sure as shit underwrite the abatement. The abatement can decrease over time because it is expected that the property's cash flow will increase over time and can therefor handle a slight bump in taxes each year.
Hell yes it does. If your company or your investors have a return threshold (like "we don't do deals under a 6.5% yield") it most definitely can make the difference between project feasibility or not.
It most definitely raises the value of the property as well, since properties are valued by NOI/Cap Rate and the abatement makes the NOI larger.
What does a lender offering a larger loan have to do with anything? More income means higher returns, a.k.a. "greater feasibility".
Lets say you take out a 60% LTV mortgage on a million dollar building ($600,000), one with $10,000/yr in taxes.
Lets say I buy the identical building next door for all the same conditions, except I get an abatement for 30 years and only pay $1,000 in taxes. Are you honestly saying you don't understand how I have a better deal? It's literal arithmetic. You can do this on your fingers.
so to value a building that received a 10 year Tax Abatement that's in the 8th year, you take the PV of the cash flows of the remaining two years and add it to the capped value of 10th year once the abatement runs off?
I typically underwrote the NOI with unabated/market taxes and capped that to get stabilized value, then added the NPV of the estimated value of the remaining abatement to get to the PP.
Important point to keep in mind, if there are stabilized units and you are allowed to roll them to market after the abatement expires, you should u/w market rents for those units when valuing the building in the fully tax adjusted scenario. There are many different types of abatements, just make sure you don't forget to value the factors that provide upside as well as the downside (i.e. higher tax bill, but higher top line).
Thanks Stalin,
Makes sense. Basically you also have to run a 5-7 year DCF ideally with new income stream from RS turning into FM right? It isn’t complete to cap stabilized tax NOI and PV of remaining cash streams. Thoughts?
My ex boss said that you just take the NPV of the cash steams of holding period as the value? Guess both are correct
If you're selling the property at the end of Year 8, based on 12-month forward NOI, then you'd cap the value for Year 9 without the value of the tax abatement. Then, yes, take the PV of the value of the tax abatement for Years 9-10, and add it to the capped value.
As I mentioned above this isn’t a complete picture of the value since increased tax base might result in units achieving more rent once the abatement ends. Thoughts on this?
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