When 421a Expired in January It Sent a Shiver Through a Lot of Multifamily Lenders

Last week, an investment sales team announced it was marketing a development site—4002 10th Avenue—on the border of the Borough Park and Sunset Park sections of Brooklyn. The plot was listed for $12.8 million and was approved for a seven-story, 59-unit rental building.

A lot of investors and developers might steer away from a project like this because they can’t finance a rental project without 421a, the tax break program that expired in January. Brokers Jeffrey Shalom and Aaron Warkov of Cushman & Wakefield said that the property’s potential suitors initially shake off the chance of a development site because they don’t want to hold it until they can feasibly afford to build.

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However, 4002 10th Avenue has a secret weapon: It was already approved for the coveted 421a tax abatement. 

“We explain to them whatever had to be done to secure that has been done already,” Mr. Shalom said, adding that not having the break is “a deal breaker for a lot of people, because they don’t see the viability of these projects without 421a.”

But this instance is essentially a unicorn with many originators and brokers believing that financing new multifamily projects is dead in New York City until 421a is back. Plans for most new rental projects that didn’t get clearance from the New York City Department of Buildings by mid-January will have to sit on the drawing boards collecting dust.  

The rationale from developers is simple: Property taxes and the cost of land and construction are so high that it’s impossible to make returns on rental projects without some sort of tax incentive. Affordable housing advocates, while not crazy about the exact terms of the tax break, have argued that setting aside 20 percent of a building’s units below market rate (a key component of 421a) was critical to creating homes for working New Yorkers.

The blip in the new building application process for multifamily projects formerly covered by 421a will lead to a gap in development down the road, and thus a slowdown for both acquisition funding and construction financing. While many agree that developers will be hurt most by the expiration right now, the jury is still out on what long-term impacts it will have on the lending market. But until a new form of tax break is enacted, multifamily financing is at a standstill.

“Unless [lawmakers, the construction union and the Real Estate Board of New York] come to terms, development is going to be stymied in New York,” said Michael Stoler, a managing director at Madison Realty Capital. “Lenders are not going to put money out unless it’s a good deal for both [sides].”


Stakeholders in 421a are digging their heels in for what could be a long wait for a new tax program. Like many of the Big Apple’s taxes, Albany writes the law on who pays what. Mayor Bill de Blasio, who has made affordable housing his legacy policy since taking office in 2014, and REBNY initially agreed to reforming the package: Extend the break to landlords for anywhere from an additional decade to 35 years in exchange for allocating a higher percentage of apartments below market rate.

But last year was a tumultuous one for the State Senate (whose leader, Dean Skelos, was arrested on corruption charges) and the Assembly (ditto for its chief, Sheldon Silver). New heads of each body found themselves last spring negotiating not just the tax break but renewing rent regulation and enacting a $142 billion state budget. The 421a program expired for about a week last June before Gov. Andrew Cuomo announced it would be renewed under its current terms for another six months. Mr. Cuomo, however, wanted developers to get the break only if they agreed to use union construction and compromise on a prevailing wage for those workers.

So REBNY and the Building and Construction Trades Council of Greater New York had from the June 2015 renewal to Jan. 15 of this year to agree on salaries. Talks broke down, and the tax break came to an end. Thus, any project not approved by the DOB by that Friday deadline would not be covered under the plan.

New York City isn’t expected to see the impact in the lapse of 421a for another two years because a slew of projects across the five boroughs were grandfathered in before the expiration, such as the on-the-market site at 4002 10th Avenue in Brooklyn. In December 2015 alone, when negotiations between REBNY and labor were going south, the DOB approved 334 new buildings. That’s well above the average 175 approvals (many of which were for 421a) in the three months before. By January, when the break expired, the number of new buildings that got the green light dropped down to 131.

Halletts Point developer Durst Organization has said the later phases of the Astoria project are uneconomical without 421a (Photo: CoStar Group).
Halletts Point developer Durst Organization has said the later phases of the Astoria project are uneconomical without 421a (Photo: CoStar Group).

The Durst Organization broke ground on Jan. 14 for the first phase of its Halletts Point development in Astoria—a 2.4-million-square-foot Queens project coordinated with the city, which was approved for 2,400 apartments to be built over several phases. Of those, 483 units will be designated as affordable. But shortly after the expiration of 421a, the developer announced it would not be able to complete the subsequent phases of the project because they would not be covered under the tax break.

“Besides creating affordable housing, 421a corrects the city’s regressive property tax system,” a spokesman for the Durst Organization said in an email to CO. “Without 421a, renters pay 30 percent of their rent in taxes. This is almost three times the rate of the next highest city. Without 421a, the city’s property tax system crushes the economic viability of new rental housing construction.”

The cost is particularly ineffective in these projects because a developer has to invest in infrastructure for the site, said Alan Wiener, the group head of Wells Fargo Multifamily Capital. Since Halletts Point is in an outer borough with rents that could be 20 to 30 percent lower than across the river in Manhattan, a developer could hardly make the money back that’s put into the project.

Building rentals is a long-term investment in which money is made back over time, as opposed to the quick buck obtained in condominium sales. Costs surge for rentals because demand for housing in New York is so high, increasing the value of land that can be developed, according to industry veterans. Paying for construction materials and labor has also ticked up as a result of the demand. Add in property taxes and you’ve essentially got an outlay that most developers want nothing to do with.

“Without a program like 421a, one can’t build multifamily rental housing with a significant below-market, or affordable, component on a scale necessary to address the city’s needs,” REBNY President John Banks said in a Jan. 15 statement as 421a expired. 

And even the condo market is slowing with lenders also concerned about the viability of building for-sale units, Mr. Wiener said.


The slowdown in multifamily lending has already begun, according to developers, lenders and debt brokers.

Losing the tax break impacts just about every type of affordable housing project out there. That includes the ones which might only have a couple of units earmarked as affordable, to the ones in which half are designated for middle- and low-income renters, said Drew Fletcher, the president of real estate advisory firm Greystone Bassuk Group.

“It’s fundamentally no longer a financially feasible project if it has to pay full taxes,” Mr. Fletcher said. “I don’t want to speculate, but what I will say is that I think everyone in the industry would agree that New York is already facing a tremendous affordability crisis. There is a need for a significant amount of new rental housing and a particular rental housing for low- and middle-income housing.”

The volume of acquisition and construction financing is expected to slow now, too, and already has.

“That could depress land values. It depends on whether people anticipate that 421a or something like it will be passed this legislative session,” said Vicki Been, the commissioner of the New York City Department of Housing, Preservation and Development. “Certainly people can hold off for six months on an acquisition, but if it goes into next year then you’re going to start to see a real effect on acquisition and presumably then on land prices.”

But as builders of new product might be pulling their hair out, one expert said it’s not necessarily a big loss to lenders who specialize in multifamily financing. Yes, in the recovery years, the residential sector of the industry has been king. If you walk around the Far West Side, Queens’ Long Island City or Downtown Brooklyn, there are plenty of cranes in the air. So originators might find it a relief if there’s a short-term cooling in the lending market, said Andrew Singer, the chairman and chief executive officer of The Singer & Bassuk Organization, a New York City debt brokerage.

“I don’t think it’ll break anybody’s heart,” he said. “From the lender’s perspective they’re all happy to take a deep breath at the moment.

Although construction and acquisition financing might decrease, lenders and debt brokers will instead focus on refinancing, Mr. Singer said. “There always seems to be somebody who needs or wants money,” he said. “Sometimes it’s construction, other times it’s refinance.”

But this lull in the lending market can’t last forever, Mr. Singer said. Sooner or later something has to be enacted before the construction pipeline eventually runs out.


The concern now is how much longer the delay could go on.

For now, developers such as Manhattan-based TF Cornerstone are looking at other East Coast cities in which to build rental housing. After creating thousands of units in LIC the company is considering other mid-Atlantic metropolitan areas because a 421a-free New York City can’t sustain rental development.

“Our traditional pipeline is essentially shut off without 421a,” said Jeremy Shell, the head of finance and acquisitions for the developer. “We have to think creatively about how to continue to grow our business. That will include looking at other markets, taking our capital and investing in other markets and continuing to grow our commercial portfolio here in New York City and Washington, D.C.”

Difficulties still lie ahead even if the abatement is renewed because of the increased costs to build in New York with augmented union wages. The city’s nonpartisan Independent Budget Office in February released updated estimates on the impacts of a prevailing wage, estimating it would increase housing construction costs by $4.2 billion. Price tags are 14 percent higher when 80 percent of a project is market rate compared to 100 percent affordable buildings.

“Policymakers have a clear choice,” Jamie McShane, a spokesman for REBNY, said in a statement. “They can choose to pay ironworkers more than

The tax break expired the day after ground broke on Halletts Point, leaving lending on later parts of this project and many others at a standstill (Photo Courtesy: NYC Mayors Office/Flickr).
The tax break expired the day after ground broke on Halletts Point, leaving lending on later parts of this project and many others at a standstill (Photo Courtesy: NYC Mayors Office/Flickr).

$235,000 per year and carpenters more than $195,000 each year to build affordable housing. If so, there will be less affordable housing built or taxpayers will be asked to pay an exponentially larger tab.”

More recently, it’s led to some heated temper in the industry. REBNY Chairman and CEO of Tishman Speyer Robert Speyer and Related Companies Chairman Stephen Ross came to blows in a meeting at REBNY early last month over renegotiating with the unions, as Crain’s New York Business reported. Mr. Speyer asked if top members of the organization supported going back to the unions, to which Mr. Ross protested the idea of tying the break to a prevailing wage, as the paper reported.

“Imposing a requirement that new rental projects in exchange for receiving 421a benefits have to agree to building their projects with prevailing wage just imposes another potential challenge on the project, therefore making it [difficult] to get financed,” said Mr. Fletcher, who has taken over as president of Greystone Bassuk Group. “That’s where the tension is. These projects are already on the margin [with land and construction charges], and imposing additional costs could simply make them no longer viable.”

Ms. Been, who headed NYU’s Furman Center for Real Estate and Urban Policy before joining HPD, said a long-term lapse of 421a or something like it will affect market housing more than new affordable housing, some of which can be created through other tax breaks and subsidies. While both are necessary for renters, they’re also co-dependent on getting financed and built in New York.   

“Just the fact that we can keep building affordable doesn’t solve the problem. We’ve got to have market-rate rentals as well,” Ms. Been said. “It’s the housing shortage that’s half of the cause of the affordable housing crisis. If we continue to not produce enough [market-rate] supply then the affordability crisis is going to continue.”

At this point many want some sort of tax break in place to spur the development of housing, no matter what name it goes by.

“Everyone loses, then hopefully someone will see the light, and we’ll have a new 421a,” said Jonathan Mechanic, the head of the real estate group at Fried, Frank, Harris, Shriver & Jacobson. “We can call it 421b, we can call it 421c. We can call it a rose; I don’t care what we call it. I don’t think there’s any dispute that we need more affordable housing in the city of New York.”