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Recent Changes to Real Estate Tax Assessment Deferral Program Impact Developers and Owners of New Haven Properties

January 6, 2020

On Monday, December 2, 2019, the New Haven Board of Alders passed a five-year extension to its real estate tax assessment deferral program with some important modifications. The existing program, which has been in place since 1975, encourages development and provides property tax relief to owners of eligible properties by freezing the tax assessment for a particular property at its pre-rehabilitation or pre-construction value for a period of time, then phasing in the full assessment over a period of five years. The recently approved changes, however, generally reduce the property tax benefit to real estate developers by reducing the amount of time permitted to complete the rehabilitation or construction before the phasing-in begins, speeding up the phased-in assessment and disallowing the transfer of the benefits of the program to a subsequent owner of the property. An alternative path to the old phase-in levels exists so long as 10% of newly-constructed apartments are committed and declared as affordable housing -- but the burdens of restricting the property for 20 years likely outweigh the benefits in light of the non-transferability of the assessment deferral and the likelihood of a general revaluation of property in New Haven during the deferral period.

For eligible residential and mixed-use properties with five or more units, commercial properties and industrial properties, the program allows for a freezing of assessments pursuant to an agreement between the property owner and the City which freezes the assessment during the period of rehabilitation or construction until the earliest of the issuance of a final certificate of occupancy, one year following the date of the agreement (down from two years previously) or the date on which work is sufficiently complete so that the property can be used as intended (as determined by the City). Following the period of rehabilitation or construction, any increase in assessment due to such work is deferred and phased in over a period of five years so long as the property continues in its agreed-to use, meets eligibility requirements and the property owner does not sell or transfer any equitable interest in the property in excess of 50%. The entire increase in assessment is then deferred for the first year following completion of the work, and then begins phasing in the following year at 25% of the increase (speeding up the phase-in by 5% more than was previously allowed) with 20% increases each subsequent year during the deferral period until the property is assessed at its full value. The work must commence within 180 days from the effective date of the agreement and, following the rehabilitation or construction period, tax revenues from 5% of the increase assessed against the property each year will be deposited into a fund established by the City to support affordable housing until the property is assessed at its full value. The program is much more favorable to owners of eligible residential properties with fewer than five units, allowing for up to two years to complete the work with the entire increase being deferred for the first year following such work, and then being phased in at annual increases of only 20% during the deferral period, and further permitting the transfer of the benefits of the program along with the transfer of the property.

If a general revaluation is conducted by the City of New Haven in the year in which the rehabilitation or construction is completed resulting in an increase in the tax assessment on a property, only that portion of the increase resulting from the rehabilitation or construction is able to be deferred. If a general revaluation is conducted by the City of New Haven in any year after the rehabilitation or construction is completed, the deferred assessment will be increased or decreased in proportion to the increase or decrease in the total assessment of the property as a result of the revaluation. Given that revaluations are required by statute to be conducted every five years, a change in value resulting in an increase (or decrease) to the amounts paid pursuant to the agreement is likely to occur during any deferral period.

Alternatively, for eligible residential and mixed-use properties with five or more units, so long as at least 10% of the units that are newly constructed are committed and declared as “affordable” (which is defined as not more than 60% of the “Area Median Income”) for a period of not less than 20 years from the date of the final certificate of occupancy, then the same requirements for eligible residential and mixed-use properties with five or more units will apply, except that, while the entire increase is deferred for the first year following rehabilitation or construction, the increase for each subsequent year during the deferral period is then phased in at annual increases of only 20% as opposed to the accelerated rate referenced above. “Area Median Income” does not appear to be defined and does not specifically reference to what this requirement applies (e.g. the annual income of families and persons or, less likely, the rental amount), and further it is unclear how the City plans to require the owner to commit and declare the affordable units -- though this will likely be achieved through a recorded declaration of restrictive covenants governing affordability requirements. In addition, it is unknown whether certain units within a particular project will be required to be permanently restricted or whether the restriction may “float” among units within the project. Given, however, the lack of transferability of the benefits of the program to a subsequent owner of the property and likelihood of a general revaluation of the property during the five year deferral period as required by statute, in light of the uncertainties (and certainties) of the required affordability requirements this alternative path should be evaluated closely with respect to projects planned to generate rental income.

For a property to be eligible, it must fail to comply with certain state and/or local codes, must include a structure to be rehabilitated or new construction of residential rental or cooperative housing which results in an increase in the assessed value of the property of not less than 35%, must correct the aforementioned code compliance issues and must result in a structure that conforms applicable law. Properties which contain a “Certified Historic Structure” or other structures designated by the Historic District Commission of the City of New Haven may qualify in certain circumstances as well. Exceptions to the program exist, such as properties that are already participating in other assessment deferral or tax abatement programs, and properties already receiving tax relief through certain state subsidies. Importantly, any application to the program must be filed with the appropriate City agency prior to filing any application for a building permit (other than for any exploratory demolition permits).

For more information on the City of New Haven’s tax assessment deferral program, please contact Greg Muccilli at gmuccilli@goodwin.com or at (203) 836-2806.

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