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NEW YORK CITY- Active negotiations for storage developments have come to a screeching halt, and existing contracts are in threat of default due to an updated amendment in the New York State 2021 budget bill moving up the deadline for qualifiable self-storage facilities to earn tax abatements, DJ Johnston, partner and senior managing director at B6 Real Estate Advisors, tells GlobeSt.com.
In the state's fiscal year 2020-2021 budget bill, also known as S7506B, storage developers now have up until July 1, 2020, instead of June 2022 to get approved for a New York Department of Buildings permit to enter into the city's Industrial & Commercial Abatement Program. ICAP grants tax exemptions for ground-up, renovated or redeveloped industrial commercial properties. " [It's] only two months from now, and two years ahead of when it was supposed to sunset," Johnston said. "That makes it impossible for any pending storage site to secure the abatement."
The average time to file a building permit and get DOB approved plans is usually one year from start to finish. Any new projects started between now and a year ago will be at risk of not qualifying, despite the entire project depending on the ICAP abatement financially, according to Johnston.
Developers with private capital on hand have long touted storage facilities as the highest and best-use of land in high density industrial zones. Storage facilities can generate the same amount of income on the third floor as on the first floor, which allows them to justify construction costs. "It simply comes down to the cost of building, compared to the net income the space can garner once complete," Johnston said.
Without the abatement, Johnston foresees that net income for some projects will get drastically reduced due to greater tax exposure, making them economically unfeasible to justify respective development costs. "It would reduce the value of a finished project by roughly 35 percent, which leaves no margin for the developer after land and construction costs," he said.
In response to the updated budget bill, developers are arguing that while eliminating abatements will increase the state's tax revenue in the short term, it will prevent the collection of taxes on non-existent projects, missing out on transfer taxes, income taxes, mortgage taxes and construction taxes, according to Johnston.
Another concern about the current budget bill stipulation, is the message it sends to the broader real estate community about the susceptibility of other abatements to similar legislation, eliminating the tax exemptions for other asset types such as multifamily and office properties, Johnston said. "One of the great benefits of building in NYC is the "as of right" zoning framework," he said. "If developers don't trust the policy makers, it will ultimately lead to drawn out and risky closing periods, or serious adjustments to land values."
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Mariah Brown
Mariah Brown is the New York Bureau Chief and Real Estate Reporter for GlobeSt.com, covering the New York Metro area, Northeast region and national real estate trends. She is responsible for producing multi-media content, including articles, podcasts and video. Before joining the GlobeSt team, she served as a New York Times fellow, reported for the Associated Press in New York and Philadelphia and several other New York City-based outlets.
