It is hard to imagine that 14,300 new apartments are now under construction or in the pipeline for downtown Brooklyn. Business leaders who have made a positive commitment to this area are bullish on the future of the area, but others worry that a number of the planned developments there will be delayed because of the turmoil in the credit market, as well as the tightening of underwriting standards by financial institutions and the recent changes in the 421-a tax abatement program.

On the bullish side, real estate experts point to a combination of apartments, offices, and retail that will finally populate the area 24 hours a day, seven days a week. “For the first time, we have a full-scale view of downtown Brooklyn’s future as a thriving neighborhood, supported by a revitalized commercial core and made possible by the financial commitments from the city and the private sector, which further enhances the environment for continued growth,” a co-chairman of the board of directors of the Downtown Brooklyn Partnership, Robert Catell, said.

“The residential development is what is sparking a whole new set of demand and activity in downtown Brooklyn,” the chairman of Thor Equities, Joseph Sitt, said. “These many new residences are creating a new residential consumer base, igniting demand for retail services, restaurants, hotels, and even businesses that feel that relocating to downtown Brooklyn will allow them to draw on a strong base of talented and educated employees in the Brooklyn market.”

The president of the Downtown Brooklyn Partnership, Joe Chan, said: “In the pipeline there are 56 projects which will develop a total of 14,300 residential units, including the Atlantic Yards project. Forty percent are slated to be condominiums, and the balance will be residential rentals. Today we are seeing some developers hedging their bets between condominiums and rentals. Of the 5,600 rental projects, approximately 3,200 will have an affordable component, the majority of which will be located in the Atlantic Yards.”

The new apartments, Mr. Chan said, will “create a 24/7 environment and will help to diversify the retail environment and strengthen the local economy. In the long term, this will help the commercial market, and people’s perception of downtown Brooklyn will change for the positive.”

Still, changes in the credit market and the drying up of the long-fruitful 421-a subsidy program loom large, even for Mr. Chan. “Brooklyn will not be immune to the credit crunch,” he said. “Prices will have to be adjusted for developments to take place and units to be sold. Perhaps the biggest effect on new residential developments in Brooklyn and the other boroughs is the change in the 421-a legislation, which provides tax abatements for projects which have their foundations in the ground prior to June 30, 2008.”

After December 28, no written agreement for 421-a negotiable certificates projects will be issued by the city, but existing certificates will not expire and can still be used, with some limitations. If construction commences after June 30, 2008, only buildings receiving substantial government assistance under an affordable housing program, those that set aside at least 20% of their units as affordable, and projects that purchase negotiable certificates from agreements executed prior to December 28 are eligible for 421-a benefits in the geographical exemption area, which includes downtown Brooklyn.

A former City Council member and a partner at the law firm WolfBlock, Kenneth Fisher, said recent revisions to the 421-a program could be devastating to downtown Brooklyn’s residential market.

“Given the credit crisis and problems on Wall Street, they picked exactly the wrong moment to choke the golden goose,” Mr. Fisher said. “Even the biggest developers are worried that there is simply not enough subsidy to meet the need. The 421-a requirement for affordable housing is already skewing the market. Projects are being accelerated to meet the deadline, creating a glut just as the demand might soften.”

“Home ownership is at risk as developers switch to rentals because there are no meaningful subsidy programs for condos,” he said. “The biggest losers will be the smaller projects, which can’t possibly qualify or navigate the subsidy program.”

The president of the Brody Group, Eric Brody, said: “In the short term, there is a scramble for landowners to develop their existing property before the deadline of the 421-a tax abatement. Bankers are not interested in giving new developers money to develop, so the landowner has two options: put up another year of interest reserve or partner up with a proven developer ASAP. This creates a high demand for developers because there are only so many people who have the credibility to obtain financing. This will decrease the amount of projects that occur before the deadline.”

“After the deadline, many projects in downtown Brooklyn’s most insulated neighborhoods will still move forward because sellout prices still make the jobs feasible,” Mr. Brody said. “Developments on fringe areas but still in the exclusion zone will be most affected. All of those planned new developments in Prospect Heights are examples of this type of development. The neighborhoods are ‘rising stars,’ but they are still a bit fringe. They will be unable to survive without the abatement to attract buyers.”

Another residential developer in Brooklyn, who asked to remain anonymous, called the market in downtown Brooklyn “lukewarm.” “Last week at some new development open houses, very few or no one even showed up,” the developer said. “Nevertheless, developments in good locations with priced-right products will move and be sold, especially since they are offering 421-a tax abatement. Developments in fringe areas in towers being built at prices of $700 to $800 a square foot, located on streets with three lanes of heavy traffic, will have difficulty selling.”

There remain an extraordinary number of new apartments at some stage of construction, and developers are reporting strong sales. The developer Dean Palin, president of Palin Enterprises and a co-developer of the 309-unit Oro condominium on Gold Street and Flatbush Avenue, said apartments are selling well, with some units selling for close to $800 a square foot. Directly adjacent to the Oro, Mr. Palin’s partner in the project, Ron Herscho of United Homes, is creating a mixed-use building with a Hilton Hotel on the lower half of the building and 10 stories of condominium units above.

Nearby, construction is under way on an affordable and market rate condominium development by BFC Partners at 225 Flatbush Ave. Extension. When completed, the 310,000-square-foot development will have 240 condominium units.

Construction has begun on Lalezarian Properties’ new $200 million luxury rental complex, which will comprise three high-rise towers encompassing nearly a full city block on Gold Street, between Tillary and Concord streets. The 512-unit building will have an attended parking garage, as well as 40,000 square feet of retail space.

The developer of Avalon Chrystie Place on the Lower East Side, AvalonBay Communities, is also bullish on downtown Brooklyn and is now building a rental property there. The senior vice president for development at the company, Fred Harris, said: “Our tower will be 42 stories with over 625 market-rent rental apartment homes on the site at Myrtle and Flatbush avenues. We are very excited by the magnitude of the investment that is being made in downtown Brooklyn, where we plan to spend over $300 million, which would be the largest single investment by our company.”

United American Land is planning to build a $208 million development a block from Fulton Street Mall and MetroTech. The development site occupies approximately half a square block along Willoughby Street, between Bridge and Duffield streets. The 594,000-square-foot development would include retail stores on the base with housing on top.

A real estate investment fund, Glory Capital — a subsidiary of an international company in the apparel and licensing business, Faded Glory Group — has been active in acquiring properties in downtown Brooklyn. Since the beginning of the year, it has acquired a 43-unit apartment building at 6-10 Clark St., as well as a 30-story, 50,000-square-foot, 76-unit luxury apartment building at 67 Livingston St.

A joint venture of SDS Procida Development and the real estate investment fund Jamestown Properties has retained Cushman & Wakefield as the broker for 189 Schermerhorn St. The site is currently under development as a mixed-use property consisting of two buildings with 246 luxury apartment units, 13,700 square feet of retail space, and a 150-car parking garage.

The Clarett Group is also quite active in developing downtown Brooklyn. It is completing a 30-story, 108-unit condominium tower, the Forte, at 230 Ashland Place in the Brooklyn Academy of Music cultural district. In addition, the company has recently acquired a prime development site in Carroll Gardens. The site, on Court Street, between Union and Sackett streets, was recently acquired from Long Island College Hospital’s School of Nursing. The developer plans to build a residential project that would include 91,000 square feet of residential condominiums on Court Street and 40,000 square feet of single-family townhouses.

A joint venture of Clarett Capital and Equity Residential is planning a large rental apartment development called 111 Lawrence Street, between Willoughby Street and Myrtle Avenue on the MetroTech campus. When completed in June 2010, the 52-story tower will contain 493 rental apartments and a 202-space parking garage.

As reported last week, Acadia Realty Trust is developing City Point, a mixed-use 1.5 million square-foot tower adjacent to the Fulton Mall. The complex will house approximately 500,000 square feet of retail, 120,000 square feet of office space, and 900,000 square feet of rental apartments. The rental component will be developed by MacFarlane Partners and Rose Associates and will have 20% reserved for affordable housing.

One of the largest residential developments is by the Red Apple Group, which is owned by a mayoral candidate, John Catsimatidis, on Myrtle Avenue, between Prince Street and Ashland Place. The development contains 660 condominium apartments in a 37-story tower and 415 mixed-income rental apartments in mid-rise buildings. The development will include approximately 290,000 square feet of commercial space and subgrade parking. One of the most prominent condominium developments near downtown is known as One Brooklyn Bridge, a project by the RAL Companies. The 450-unit project is the conversion of the industrial buildings on the waterfront, once owned by the Jehovah’s Witnesses, who sold the property in 2004 for $200 million. According to real estate sources, many of the units that have extraordinary views of the East River and the lower Manhattan skyline are selling for more than $1,000 a square foot. With seven universities in downtown Brooklyn, a number of new dormitories have been built and are planned.

In September, New York University opened a new graduate residence hall at 67 Livingston St. that is home to 115 NYU graduate students. The university is making a van available at night to take students to the Brooklyn dormitory from NYU’s Manhattan campus.

Mr. Chan said: “You are seeing in downtown Brooklyn a growing college community. Polytechnic is building on Johnson Street, and Long Island University recently built a dormitory at One Hoyt Street and is converting a couple of hundred dorm rooms, a joint venture of the Chera Family and Long Island University. Downtown Brooklyn is going to be a 24/7 campus for students. As residential grows, college students will feel happy, and this will add to the retail environment.” One thing is certain: The landscape of downtown Brooklyn will change dramatically over the next decade, with commercial, retail, office, and residential development. Expect to see thousands of new residents joining the ranks as residents of this dynamic urban community.

http://www.nysun.com/article/66516

http://www.realtytaxconsultant.com/

Overview of the Tax Changes in the Recently Passed
Jobs and Growth Tax Relief Reconciliation Act of 2003

As a real estate investor, you know that income taxes have an impact on not only cash flow and profitability, but your ultimate rate of return. Understanding how the new tax law may affect you will be critical as you make future investment decisions.

As you probably know, Congress recently passed the “Jobs and Growth Tax Relief Reconciliation Act of 2003,” which contains significant tax cuts for stockholders, individual taxpayers, couples, and businesses. Here’s what you need to know right now about this important new legislation:

Reductions in taxes on dividends and capital gains.

An important component of the 2003 Jobs and Growth Act, particularly if you are an investor, is a reduction in the taxes on dividends and capital gains. These lower rates can mean considerable tax savings for taxpayers, although they are not permanent, since they will cease to apply after 2008, barring additional Congressional action to extend them. Here are more details regarding dividends and capital gains under the Act.

Under the 2003 Jobs and Growth Act, effective for sales and exchanges (and installment payments received) after May 5, 2003, and before Ian. I, 2009, the 10% and 20% rates on adjusted net capital gain are reduced to 5% (zero, in 2008) and 15% respectively, for both regular tax and the alternative minimum tax (AMT). The lower rates apply to sales of capital assets held more than one year. Because this 5% drop in the capital gains rate is more than the 3.6% drop in the top individual rate under the 2003 Jobs and Growth Act and the 2% drop in other individual rates, the advantage of long-term capital gains over other types of taxable income is even greater for high earners than it was before.

Note, however, that there is no cut in the 28% capital gains rate affecting collectibles and certain small business stock and the 25% rate affecting gains representing depreciation claimed on MACRS realty.

For dividends received in tax years beginning after 2002 and before 2009, dividends received by an individual shareholder from domestic corporations are taxed at rates of 5% (zero, in 2008) and 15% for both regular tax and AMT purposes. This results in substantial tax savings for dividend recipients given the fact that, under pre-2003 Jobs and Growth Act law, the dividends were taxed as ordinary income at rates up to 38.6%.

Acceleration of certain previously enacted tax benefits and reductions for individuals.

An important component of the 2003 Jobs and Growth Act speeds up previously enacted tax benefits and reductions that were scheduled to be phased in over the next several years. These acceleration provisions include:

…Acceleration of 10% individual income tax rate bracket expansion. The expansion in the width of the 10% rate bracket for single and joint filers is accelerated from 2008 to 2003. Thus, under the 2003 Jobs and Growth Act, the 10% tax bracket for 2003 ends at $14,000 (up from $12,000) of taxable income for joint filers and $7,000 (up from $6,000) for single filers and marrieds filing separately, and for 2004, both these figures will be indexed for inflation. The endpoint of the 10% bracket for heads of household re- mains unchanged at $12,000. From 2005 through 2007, the end point of the 10% bracket will revert to the $12,000/$6,000 levels (and under 2001 EGTRRA, will go up to $14,000/$7,000 for 2008 through 2010).

…Acceleration of reduction in individual income tax rates. The 2003 Jobs and Growth Act change that will affect the widest number of taxpayers is an immediate reduction of the marginal tax brackets paid by all but the lowest earners. Under the change, the tax rates above 15% for 2003 and later years are 25%, 28%, 33%, and 35% (previously, rates for 2003 above 15% were 27%, 30%, 35%, and 38.6% ). These rate reductions were scheduled to go into effect in 2006 under 2001 EGTRRA. After 2010, rates above 15% will revert to the pre-2001 EGTRRA levels (i.e., to 28%, 31 %, 36%, and 39.6%).

…Acceleration of marriage-penalty relief The 2003 Jobs and Growth Act reduces so-called marriage penalties (i.e., tax-law provisions that force two- income couples to pay more in taxes each year than single individuals merely because they are married). The basic standard deduction amount for joint returns will be double ($9,500 for 2003) the basic standard deduction amount for single returns. (Under the Economic Growth and Tax Relief Reconciliation Act of 2001 (2001 EGTRRA), this wasn’t scheduled to be fully phased in until 2009.) However, for tax years beginning after 2004, a joint return filer’s basic standard deduction will revert to pre-2003 Jobs and Growth Act levels (e.g., for 2005, to 174% of a single return filer’s basic standard deduction). Furthermore, in 2003 and 2004, the end point of the 15% tax bracket for joint returns will be twice the end point of the 15% tax bracket for single returns. (Under 2001 EGTRRA, this wasn’t scheduled to happen until 2008.) In other words, for 2003, the 15% tax bracket for joint filers applies to taxable income over $14,000 (up from $12,000) but not over $56,800 (up from $47,450). However, for tax years beginning after 2004, the end point will, like the basic standard deduction amount, revert to pre-2003 Jobs and Growth Act (e.g., for 2005, 180% of the end point of the 15% tax bracket for single returns).

…Acceleration of increase in child tax credit. For 2003, 2004 and 2005, the child tax credit will increase to $1,000 per qualifying dependent child under 17 (up from the $600 per qualifying child for 2003-2004 and $700 for 2005 that was provided for under pre-2003 Jobs and Growth Act law), but after 2005 the child tax credit will fall back to $700 for 2006-2008. What’s more, for 2003, the increased amount of the child tax credit will be paid in advance beginning in mid-July over a period of three weeks. Thus, a typical qualifying family will receive an advance payment check for up to $400 per qualifying child who is under age 17 as of the end of 2003. Note that the in- come limits related to the child tax credit are unchanged by the 2003 Jobs and Growth Act, which means that the amount of the credit allowable is reduced or eliminated for taxpayers with adjusted gross income (AGI) over certain levels: $75,000 for singles and $110,000 for married couples. However, taxpayers who didn’t qualify in the past for the child tax credit because of AGI limitations may now qualify for a portion because of the in- creased credit (even though they won’t get an advance payment).

…Minimum tax relief to individuals. The 2003 Jobs and Growth Act also includes some relief from the alternative minimum tax, or AMT. For 2003 and 2004, the maximum AMT exemption for joint filers and surviving spouses is increased to $58,000 (up from $49,000 under pre-2003 Jobs and Growth Act law) and for unmarried taxpayers is increased to $40,250 (up from $35,750) for joint filers and surviving spouses and $40,250 for un- married taxpayers, reverting to $45,000 and $33,750 after 2004. Under pre- Jobs and Growth Act law, the AMT exemption amount for 2003-2004 was $49,000 for joint filers and surviving spouses and $35,750 for unmarried taxpayers, reverting to $45,000 and $33,750 for 2005 and later tax years.

Tax changes for businesses and corporations.

The 2003 Jobs and Growth Act includes two temporary tax breaks designed to encourage immediate investments. Under the first of these breaks, small companies can expense up to $100,000 in new equipment investments through 2005. Under a second provision, businesses can depreciate more of their assets sooner through 2004. Another change for corporations affects the estimated tax payment rules for 2003.

The 2003 Jobs and Growth Act vastly liberalizes the expensing election, which permits small businesses to expense (i.e., deduct immediately rather than depreciate over several years) a certain amount of the cost of tangible depreciable personal property purchased and placed in service during the tax year in an active trade or business. All of the following expensing changes are effective for tax years beginning after 2002 and before 2006:

…The maximum annual expensing amount is $100,000 (it was $25,000 before).

…The maximum annual expensing amount is reduced (but not below zero) by the amount by which the cost of qualifying property placed in service during the tax year exceeds a specified dollar level. This dollar level is in- creased to $400,000 (from $200,000).

…The above increased dollar amounts will be inflation-indexed for tax years beginning after 2003.

…Off-the-shelf computer software is made eligible for expensing.

…Taxpayer revocation of expensing elections will no longer require IRS consent.

A second major change affecting businesses is an increase and extension of bonus first-year depreciation. In general, before the 2003 Jobs and Growth Act, a 30% additional first-year depreciation allowance applied to the non-expensed portion of qualified property (which included most new MACRS property) if: (1) its original use commenced with the taxpayer after Sept. 10, 2001; (2) the asset was acquired by the taxpayer after Sept. 10, 2001 and before Sept. 11, 2004; and (3) it was placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).

The 2003 Jobs and Growth Act makes the following changes:

…For 30% bonus first-year depreciation purposes, property can be acquired before 2005.

…50% bonus first-year depreciation applies to qualified property if (1) its original use commences with the taxpayer after May 5, 2003; (2) the asset is acquired by the taxpayer after May 5, 2003 and before 2005 (there can’t be a written binding contract for acquisition in effect before May 6, 2003); and (3) it is placed in service by the taxpayer before 2005 (before 2006 for certain property with longer production periods).

…Taxpayers can elect on a class-by-class basis to claim 30% instead of 50% bonus first-year depreciation for qualifying property, or elect not to claim bonus first-year depreciation at all. Two situations in which a tax- payer would likely consider making an election to claim smaller bonus first-year depreciation (or to elect out of it entirely) are where the taxpayer (1) has about-to-expire net operating losses, or (2) anticipates being in a higher tax bracket in future years.

Note that there still is no AMT depreciation adjustment for the entire recovery period of qualified property recovered under the bonus first-year depreciation rules (50% or 30%).

Another change for corporations affects only the estimated tax payment rules for 2003. Despite the general rule that estimated tax payment installments must be made no later than Apr. 15, June 15, September 15 and December 15, 25% of the amount of any required installment of corporate estimated tax which is otherwise due in Sept. 2003 will not be due until October 1, 2003. This change affects corporations using (1) the calendar year (third installment of estimated tax would have been due on Sept. 15, 2003); (2) a fiscal year ending Mar. 31, 2004 (second installment would have been due on Sept. 15, 2003); (3) a fiscal year ending May 31, 2004 (first installment would have been due on Sept. 15, 2003); and (4) a fiscal year ending Sept. 30, 2003 (last installment would have been due Sept. 15, 2003). The due dates for all other corporate estimated tax payments aren’t changed by the 2003 Jobs and Growth Act provision.

Please keep in mind that the above described are only highlights of the most important changes in the new law. Please be sure to consult your tax advisor if you have specific questions regarding the new law.

By: Douglas Rutherford

About the Author:

Douglas Rutherford, CPA is the founder and CEO of RentalSoftware.com LLC whose main product is the Landlord’s Cash Flow Analyzer. The software is designed to help landlords compute cash flow, profitability and the rate-of-return on their rental property investments. Income taxes are a critical component of calculating cash flow in making real estate investment decisions.

http://www.landlordsoftware.com/newtaxlaw.htm

http://www.realtytaxconsultant.com/