Real Estate Developers Already Worrying About 421a Expiring Next Year
It’s been five years since the last fight over New York City’s most controversial development tax break — 421a — and developers are already preparing for the worst when the current version of the tax exemption expires in June 2022.
No one in the real estate industry knows what the state legislature will do. Will it repeal the 421a program entirely, or replace it with a new version that requires more apartments for lower-income New Yorkers in new buildings than the current iteration?
The uncertainty has kicked off a rush of new building applications, zoning applications, and harried calls to real estate lawyers. Although the current 421a expiration is nearly a year away, it can take 18 to 24 months to design and construct a new building in New York City — if not longer. In order for a property to qualify for the current 421a tax exemption, workers must have laid foundation footings at the site by June 15, 2022.
“Nobody is really looking past that date. It’s like the apocalypse in some ways,” said Jim Power, a real estate attorney and partner in the land use group at law firm Kramer Levin. “People don’t want to think about what comes after, because it’s very difficult to build in a financially feasible way without 421a.”
He added that investors, facing what they deem an impossible deadline next summer, are already starting to change their minds about residential development deals. “When you tell them they have to be in the ground in less than a year to get the 421a benefits,” Power said, “I’ve had clients say, ‘I can’t do that deal — I’m not buying that site since I don’t know if I can meet that [June 2022] deadline and the project’s not feasible without it.’”
The last time that 421a expired, in January 2016, developers rushed through 7,781 New York City permits for 299 projects the month before. That December permit total was, at the time, the highest monthly number of permits issued since 2008. Then, for the next 16 months, the real estate world waited with bated breath.
Gov. Andrew Cuomo had sent the Real Estate Board of New York and the building trades unions back to the drawing board with an assignment: Come up with a new 421a program that includes wage requirements and meshes well with New York City’s then-new Mandatory Inclusionary Housing program [MIH].
The result was “Affordable New York,” a policy that required specific minimum wages ($45 to $60 an hour) for larger projects in Manhattan, and along the Brooklyn and Queens waterfronts, and three tiers of potential affordability options for rental developers looking to build low- and middle-income housing, as well as “workforce housing” for people earning around $106,000 or more. And that is the 421a program that New Yorkers have lived with for the past four years.
The previous versions of 421a required that developers set aside 20 percent of the units in a project as affordable in exchange for a tax abatement that ranged from 20 to 25 years, depending on where the building was located and how affordable the housing was.
The most recent iteration of the policy made the tax break more expensive for the public, by extending the tax exemption to 25 years and then abating taxes for another 10 years. Developers of large projects (300 units or more) in certain parts of the city can pay no taxes for 35 years and get a tax exemption of up to three years during the building’s construction, as long as they prove that they met the wage requirements for their construction workers.
James Davidson, a partner at architecture firm SLCE Architects, said that he and his partners have been turning down developers who have come to him with new 421a projects in the past few months.
“We’ve been working for a year or two on many projects, and then there was a last-minute flurry of projects up to about February of this year,” said Davidson. “We haven’t had many requests since then, just because many developers are realizing the amount of work necessary to be done wouldn’t be completed by the 421a deadline. If we get a request, we have to tell them that by the time you understand what you’re going to be building, it’s really going to be too late.”
Developers and real estate lawyers argue that if 421a isn’t replaced with a similar tax break, the below-market units that it currently requires simply won’t be built.
“In the 421a buildings, it’s not subsidized by city capital funding,” said David Schwartz, a principal of Slate Property Group. “If you do the numbers, those units wouldn’t be built. If we’re in an affordable housing crisis now, stopping production of any housing now isn’t a good thing.”
He added that if 421a disappears, “in stronger areas, [the project] becomes condos. In other places, it just doesn’t happen. A lot of things would just remain in the one- to two-story range.”
Schwartz predicted that if the legislature extends 421a, “there’s going to be some lowering the [area median income threshold] or increasing the percentage of affordability, and that’s a good thing.”
Mitchell Hochberg, president of Lightstone Group, is working on a multi-building rental development in the Mott Haven section of the South Bronx. The initial phase of his project, which will bring 710 apartments to 355 Exterior Street, will get its first building permit soon. Once the Department of Buildings awards the permit, Lightstone can start foundation work and get footings in the ground in order to qualify for the current version of 421a. He has even considered selling the site, because it will be one of the last development sites available that will get the tax exemption before it expires.
“The uniqueness of it is that it’s shovel-ready, and that’s why we got so many incoming inquiries about it unsolicited,” Hochberg explained. “Because of the sunsetting of 421a, people felt it would be one of the last projects that would be built at this point in the cycle.”
He believes the tax break might not be renewed at all, or extended with even stricter requirements for developers.
“There’s a lot of noise in Albany that it could be extended on terms that are not appealing to a developer,” said Hochberg. “If things go as we expect, people are not going to build, and there’s going to be an even worse housing shortage. In three years or five years, the politicians are going to wake up and realize that if they want housing built, they’re going to have to incentivize it.”
He added that “it is not economical to build without 421a in its current format. We already went from 80/20 to 70/30 [market-rate to affordable units]. It appears that there may be an appetite for a new 421a program, but it wouldn’t have the same incentives that the current program has.”
Mitch Korbey, chair of law firm Herrick Feinstein’s land use and zoning group, said that the June expiration is “a major source of anxiety. A lot of people look at the expiration of the program as no longer making rental housing viable in the city.” Without the tax exemption, “what people will do is switch to ownership and do condos, or other uses that are available [under the zoning]. Or, you may pause and wait for a different climate when the program might be renewed some day.”
He pointed out that the de Blasio administration’s Mandatory Inclusionary Housing program — which requires developers to set aside 25 to 30 percent of their units as affordable if they build on rezoned land — hinges on the existence of 421a.
“Lots of folks look at the de Blasio administration somewhat negatively, but a major accomplishment of his first term was the implementation of MIH,” said Korbey. “It’s produced thousands of units of potential housing. And what about the survival of that in light of the expiration of 421a?”
If the tax break expires without a replacement, the city’s housing development pipeline will likely slow to a crawl, he argued.
“There will certainly be a slowdown, if not a halt, in new rental housing,” said Korbey. He noted that the expiration always “creates a lot of tumult in the market and in communities. The same thing happened last time when the program was threatened with not being renewed. You had a lot of speculation and hyper-concern in terms of what the implications are.”
The uptick in applications for development also causes “a significant backlog” at the Department of Buildings and “elsewhere with folks who will be very, very anxious to vest [under the current program]. And I think it does place a burden on agencies that are significantly burdened,” he said.
Meanwhile, housing activists have their own ideas of what they hope will happen when 421a expires.
Emily Goldstein, director of organizing and advocacy at the nonprofit Association for Neighborhood Housing and Development, argued that the program is “a terrible waste of public resources and a terrible waste of a public housing program. It was designed as a housing market stimulator program, but that’s not what New York City needs right now, and it hasn’t been what New York City has needed for a while. It doesn’t make any sense now. We would like to see 421a, as it currently exists, end.”
While ANHD has not yet developed a legislative strategy for the June expiration, Goldstein explained that the organization wouldn’t support a new iteration of 421a without significant changes.
“We’re not going to be looking for tweaks or adjusting the AMI level within the existing program,” she said. “We’re either looking to end 421a completely or really revamp it, starting from an assessment of what are our needs for affordability and how you could use what is essentially a $1 billion-dollar-a-year program to address those needs. One option would be to repeal the program and dedicate those tax revenues to other existing or new housing programs. One option would be to remake it into something different from what it has been. I don’t believe just adjusting the AMI levels would solve the essential flaw in the program.”
The tax exemption was originally developed by the city and state in 1971, when New York City’s economy was inching toward collapse, and both real estate development and tax revenues were falling. However, housing advocates have long felt that 421a was overly generous to developers, and that it generates the wrong kind of housing.
“There’s just no need to incentivize luxury housing in New York City,” said Goldstein. “It’s problematic how much high-end luxury housing that we have essentially sitting vacant, while on the other end of the housing market, the availability of housing that’s affordable to low-income people only gets worse and our homelessness crisis persists.”
She added that she felt optimistic about real 421a reform, because the political climate now is quite different than it was in 2016. The state legislature is more progressive than it was five years ago, and the pandemic has magnified many of the economic inequalities that have always existed in New York City. The new rent laws passed in 2019 also marked a sea change for housing and tenant activists, who felt that they scored a significant victory against the real estate industry by strengthening tenant protections.
“I definitely think that the statewide housing movement is in a much stronger position than it was at that time [in 2016],” Goldstein explained. “And the level of legislator engagement and, sort of, where state senators and assembly members stand, and what that landscape looks like, does make me hopeful. I think the housing movement is in a stronger position than the last time this fight was fought.”
“The world is different; the pandemic and the economic and housing crisis we’re in, and the depth of the way these decades of inequality have played out over the past year, mean we’re in a different landscape,” she added. “I hope we’re going to be able to accomplish more change than we could last time.”