New York’s 485x Development Incentive Stumbles Out of the Gate
By Joshua Stein October 16, 2024 9:30 am
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In April 2024, the New York legislature approved a real estate tax abatement program called Real Property Tax Law Section 485x. It’s supposed to spur residential development, while requiring affordability and minimum wages. Now that the program has existed for a while, how does it look?
Under 485x, a project with at least 100 units gets a 100 percent real estate tax exemption for 35 years on the incremental assessment from the new construction. For a project with at least 150 units, the exemption lasts 40 years, and the developer doesn’t even have to pay land tax during construction. The present value of these savings can cover much of the cost of the building. But the legislation requires minimum wage rates higher than what the developer might otherwise pay, driving up construction costs by $50 to $100 a square foot, and certain levels of affordability.
In response, many developers have avoided projects with 100 units or more. Instead, they try to gain the net benefits of 485x for smaller projects: a lower percentage of units that must be affordable (only 20 percent) and no increase in labor costs in exchange for a shorter exemption period (25 years, plus 10 years of partial exemption).
Some developers have already tried to break larger projects into smaller ones. If a couple of those are linked, does it become a larger project? If three smaller buildings share a base or amenities, does that make them one big building, subject to the more onerous requirements? Developers and their architects and lawyers will have fun answering questions like these.
Buildings below 100 units have some meaningful limitations for developers and the city at large.
First, buildings of this size are often less efficient to build and to operate than larger buildings.
Second, the rental market will often drive developers to build smaller units to keep down the gross dollar rents for individual units, though this can vary by market. To keep the unit count below 100, the developer will construct less absolute square footage. That’s because there’s a limit to how many 99-unit buildings can fit into a development site, given zoning requirements for setbacks, space between buildings, and the like. In the worst case, that wastes development potential and land cost, unless the developer can profitably use extra development potential to build other things on the same site.
Third, if the government wanted developers to create lots of new housing, which is what New York City in particular needs, one might expect tax incentives to favor buildings with more units rather than fewer. Instead, 485x incentivizes fewer units in smaller (less than 100 unit) buildings. That’s hardly “thinking big” to solve our housing crisis.
If a developer tries but fails to comply with 485x, the project may lose its tax exemption but still remain subject to affordability and wage requirements — a financial disaster. Lenders will shift these risks to the principals of development companies who sign guaranties of construction loans. That creates a potentially terrifying exposure.
Developers must weigh what they save by building multiple smaller buildings without wage requirements against the extra cost to build multiple individual smaller buildings, each with its own foundation, staircases, elevators and HVAC equipment. The arrival of 485x discourages residential skyscrapers because even with six “efficiently” sized apartments per floor, that still yields a building of only 17 floors plus lobby, parking and amenities.
Preliminary reports indicate that 485x has caused some stirring of the slumbering market for development sites. The program seems to have induced at least some developers to offer more for development sites than before. That dynamic — the creation of higher land value for development sites driven by a meaningful tax abatement — will bring more sites to market.
Considered as a whole, 485x, with all its compromises and complexities, hardly seems likely to do much about the city’s 1.4 percent multifamily vacancy rate, which keeps rents high and makes it almost impossible to find an apartment. The 485x program does, however, let the legislators say they are “doing something” about the housing crisis. As a result, 485x may actually worsen the problem it was intended to solve, by shifting development from large buildings to smaller and less efficient ones.
If the new incentive program actually discourages large-scale development, what comes next? The next step will most likely involve the construction unions, which might eventually relax wage requirements to stimulate construction. That won’t happen fast. But it might become unavoidable. The unions might eventually see that the 485x wage requirements don’t create more union jobs (by forcing developers to hire union labor) as the unions mistakenly expected.
Let’s look again in a year.
Joshua Stein practices commercial real estate law in New York City.
