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.
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).