Are NYC Properties Falling in Protected Tax Classes 2A/2B on The Chopping Block

Like many things, it starts with a whisper before morphing into a collective roar and this author fears that protected tax class 2A and 2B buildings in New York City may become Albany’s next target. The evidence of a legislative backlash involving the cancellation of protected tax classes is anecdotal at this point but the private equity behemoth, Carlyle Group’s, recent moves into this “mom and pop” space may have put the issue front and center for legislators. Over the past year, Carlyle has spent more than $500 million buying smaller apartment buildings in bite-sized $2 and $3 million checks.

Small potatoes for a group like Carlyle so what’s going on? Protected 2A/2B buildings enjoy the benefit of limited tax increases to no more than 8% annually and 30% over a five year period. And in a city with ever growing expenses, the 2A/2B  properties provide predictability to an owner’s net income and serve as an inflationary hedge against other operating expenses. The end game is to amass a portfolio of these properties and sell them at a premium. Take Highpoint Property Group, led by Drew Popkin, who caught on to the 2A/2B game early and recently put 20 such buildings on the market at an asking price of nearly $300 million. 

In 2018, Michael Shah of Delshah Capital purchased 28 2A/2B properties from Silvershore Properties that had done the heavy lifting of assembling the properties. To be clear, there isn’t anything illegal about this (nor should there be); in fact, it is quite savvy and, put simply, just an example of capitalism at work. But in current times, City Council members and NY senators are bound to start asking whether multi-million and multi-billion dollar owner/investors like the Carlyle Group should be benefitting from the 2A/2B tax class designations.  In a nation of laws, the rules that benefit the “little guy” should and must also benefit the larger players as well.    

Rebong, Kevin. “Carlyle Group Builds Empire of Small Brooklyn Apartment Buildings.” The Real Deal, 28 July 2022, therealdeal.com/new-york/2022/07/28/carlyle-goes-big-on-small-brooklyn-buildings/. Accessed 24 May 2023.