It's time to repair that leaky roof, the board has decided. The wheels have begun turning, a committee is casting about for bids on the job, and everyone's trying to figure out what the best way is to pay for the work. Now is the time that your board should start thinking about J-51, the city's tax incentive program that can give your building an annual real estate tax abatement when the work is finished. For self-managed boards more accustomed to spending money than receiving it, a J-51 abatement can be a useful tool for financial planning throughout the life of a capital project and beyond.
But J-51s are a tricky business. There are stringent eligibility requirements that must be met for the building and the project, including unit valuations and sales price restrictions that disqualify luxury condos and co-ops. The building can't be in arrears or have any code violations. And the contractor must document and itemize the work done in such a way so as to meet the Department of Housing Preservation and Development's (HPD) standards for J-51 approval. And that's just the beginning.
What that could mean for your co-op is a potential annual reduction of your real estate taxes by thousands of dollars. "We did some major work on the parapet walls, a variety of capital improvements," says Bob Cancellari of Robert Cancellari Realty, the property manager for a 24-unit Greenwich Village co-op that receives an annual J-51 abatement. "It's helped keep the maintenance very moderate."
Ed Tristram, president of Ed Tristram Associates, handled the J-51 application for the co-op and put together a loan package to cover the work. He says the J-51 benefit was crucial for many of the buildings' residents, some of whom had been in the building for many years and would have trouble covering a special assessment to pay for the work. "The J-51 enabled them to make payments on the loan and spread out the cost of the capital improvements," he says.
Can a J-51 be used upfront, when your building is working with a lender? Tristram says J-51s have an indirect effect. "[The J-51] doesn't persuade the lender, [but] it makes them like the project a little bit more," he says. "Obviously a lender likes the idea that the collateral is being improved by a nice, well-funded project and that cash flow is expected."
When considering a loan, lenders will ask what the projected J-51 benefit is expected to be, but typically they will not include that in their underwriting. The real benefit, he says is for the borrowers who are receiving the benefit. "They can feel pretty darn confident that they're going to be receiving cash flow from the J-51. It will help them pay back the loan. It will help them keep the maintenance lower. If you're doing a project that will give you a $5,000 tax abatement every year for 10.8 years, that's money you'd have to raise from maintenance that you're not going to have to raise."
You can't use a J-51 to pay for a capital project, but you can use the savings in real estate taxes to offset other expenditures. Knowing the projected benefits from a J-51 can help your building with overall financial planning. If your building has to borrow money to pay for a project, then the money saved by the abatement can be applied towards paying off the loan. If your building is paying for the work out of the reserve fund, then the savings should be directed towards refilling the reserves.
Tony Wolf is the board president and co-treasurer in his Chelsea co-op, and also works as the building's property manager. He says his building follows a strict fiscal policy regarding J-51s. "When we get a J-51 situation, we do not use that offset or abatement to decrease maintenance," he notes. "We set the maintenance to pay the full real estate tax. The part that is abated because of J-51 becomes a contribution to reserves." This keeps the co-op's budgets in balance and prepares the building for J-51's expiration. "When the J-51 expires, not only do your real estate taxes go up immediately, but also your improvement now becomes vulnerable to assessment." Lowering your maintenance may only mean raising it later, he says.
How can you figure out what your potential J-51 savings will be? For the first step in this process, you should check out this link: http://www.nyc.gov/html/hpd/html/for-developers/j51.html. There, you can download the city's hefty J-51 Guidebook that lists all the limitations, guidelines, and exemptions, plus an itemized cost breakdown appendix of all the work items that are covered.
This list is the key to understanding J-51 benefits. The J-51 abatement reduces taxes by a percentage of the "Certified Reasonable Cost" (CRC) of the work that's done. That CRC is computed by taking the city's allowance per item (as listed in the guidebook's appendix A) and multiplying it with the number of items included in the work. Then a percentage of that CRC is deducted from the assessed real estate taxes each year for about 12 years, or until 90 percent of the CRC is reached (typically the J-51 runs for 10.8 years). Special exemptions apply for landmarked buildings, in which case the CRC equals the full amount of the work. Keep in mind that you will not be getting an abatement based on the cost that you paid, only on the city's maximum allowance per item; if you paid less than the city's allowance, then that's what your taxes will be abated.
Windows, for example, provide a clear way of understanding this formula. The city's allowance for windows under J-51 is $175 per window. If your building replaces 100 windows, then the CRC for the work done is $17,500. Divide that by 12, and your annual abatement comes out to around $1,458.33. What you actually get is a little less, says J-51 consultant Meir Mishkoff of Mishkoff Associates. "In this $17,500 benefit, normally, you only get to use 90 percent of that amount of money," he says. "You'll be given a certificate of eligibility for $17,500. In reality you'll only be able to use 90 percent of that money. When you've hit 90 percent, the benefits are exhausted." That's the amount of money that your real estate taxes will be abated each year under J-51.
Because a J-51 can translate into a savings of thousands of dollars on real estate taxes every year, it is worthwhile to enlist the services of a J-51 consultant. This specialist will make sure your building doesn't miss any important pre-filing procedures and can supply you with an opinion letter, estimating whether they think your project will be eligible for a J-51 and how much of a benefit you'll be receiving.
Organization is the key for making the J-51 process as smooth as possible. Management consultant Rebecca Poole says keeping all the necessary forms and paperwork together is the biggest pitfall for self-managed buildings on the way towards receiving a J-51 certificate. Self-managed boards often begin projects without a checklist of the items they'll need to provide for the J-51 application, she says. When it's time to get everything together for the application after the project has been completed, then tracking down copies of permits, contracts and cancelled checks can be a hassle. She recommends that boards set up a J-51 file before a project has begun and make sure that they put a copy of every relevant document and piece of paperwork in there as they come in.
Violations are another hazard that have to be cleared before a J-51 application can be processed. Self-managed boards might not even be aware that there are any outstanding violations on a building. Check with the city's web sites to find if there are any outstanding violations and begin the process of curing them as soon as possible. It can be a time-consuming process and significantly postpone the approval of your J-51.
Getting a J-51 abatement can be a long, sometimes arduous process, but it's one that no self-managed building should miss out on. It's a chance to improve your building and at the same time keep your budgets in check, paying for a sizable project without having to raise maintenance. And in a cost-conscious self-managed building, that's certainly worth doing.