Wage Rules Under New York’s 485x Incentive Could Delay Development

So, after several failed attempts, state lawmakers passed a real estate tax abatement program earlier this year called Real Property Tax Law Section 485x that could make at least some of the city’s housing stock more affordable.

The new section offers partial property tax exemptions for new rental buildings. The tax exemptions last 35 years for projects with at least 100 units and 40 years for those with 150 units provided that 20 to 25 percent of those units are designated as affordable housing. For developments of at least 150 units, the developer also doesn’t have to pay land taxes during construction. 

“Having a tax abatement will foster the production of housing,” Sean Kelly, partner at Ariel Property Advisors, said. “New York City has historically had a perpetual shortage of housing, both free market and affordable housing. So with 485x you will produce both free market and affordable housing.” 

Some experts in the commercial real estate space say having 485x on the books is better than the void that was left when the previous program — 421a — expired in June 2022. 

Construction of new housing units in the city dropped following 421a’s expiration, with new housing construction falling by 5 percent annually in the third quarter of 2024, according to data from the Real Estate Board of New York (REBNY). In 2023, REBNY found that developers proposed only 9,909 residential units, compared to 45,593 proposed units for all of 2022.

However, there is concern that one detail setting 485x apart from 421a could be just the thing that hinders future project development: wage requirements. 

Approved in April, 485x comes with stricter wage requirements than 421a for construction workers. Developments with at least 100 units are required to offer a minimum wage of $40 per hour, which will increase by 2.5 percent annually, according to the New York City Department of  Housing Preservation and Development (HPD), which released the proposed rules for the program last month. (They have yet to be finalized.) Sites with at least 150 units will require a minimum construction worker wage that is the lesser of $72.45 per hour, or 65 percent of the greatest prevailing rate of wages and supplements within a classification.

Under 421a, developers were required to pay construction workers an average hourly wage of $60 in Manhattan, and $45 per hour in Brooklyn or Queens for projects with 300 units or more, according to law firm Holland & Knight. 

“The [wage] guidelines that 485x comes with make it financially infeasible for a lot of projects to move forward,” Rick Gropper, co-founder of Camber Property Group, said. “Anything 100 units or greater will have a wage requirement that really adds cost onto an already strapped project. The additional expense that 485x places on the project by setting a wage floor of $40 makes a lot of projects infeasible, and that’s why you’re seeing some developers splitting buildings into two.” 

Such subdivision could become the new norm if the wage requirements of 485x prove too costly for those developing larger properties, since projects below 100 units — or what is known as middle-market developments — have no prevailing wage requirements, said Kelly. 

“There’s always been a deep buyer pull for the middle-market size projects,” Kelly said. “What is happening now, based on 485x is … the developer is going to subdivide, reapportion the larger site, and create smaller sites in order to build multiple buildings with less than 100 units to avoid those wage requirements.” 

REBNY is also critical of the wage requirements that come along with 425x. In testimony given at an HPD hearing for the rules, REBNY noted that it is a “challenging program” due to “significantly higher labor costs” and that “the proposed rules make challenging math even harder by imposing the 3 percent reduction per [area median income] band.”

As developers try to figure out if the wage requirements for larger projects are feasible, others might opt to utilize the extended time frame of the old 421a regulations instead, which now allow projects to be completed by 2031 rather than the original deadline of 2026.

“What I’m hearing is that people are still trying to figure out if the construction wages are workable,” Patrick Sullivan, a real estate lawyer with Kramer Levin, said. “I haven’t actually seen any projects moving forward under the new law, except for smaller projects. That’s not to say there will not be [larger projects], but one of the things the legislature did in the spring is they allowed for an extended period to use the old 421a. So I’m sure developers will use it.”

While the wage requirements will almost certainly cause developers to re-evaluate how they’ll design their projects, it isn’t the only initiative taken on by the city that is on their minds. Zoning changes will also play a part in future projects. 

“There’s a lot of uncertainty because of the ‘City of Yes’ zoning changes,” Sullivan said. “There are these city zoning changes that are probably going to be adopted by the end of the year.”

City of Yes is Mayor Eric Adams’s ambitious plan to modernize the city’s 1960s-era zoning laws in an effort to create more housing, as well as other initiatives. A component of the City of Yes involves relaxing some zoning rules to make it easier for developers to convert office buildings into residential housing.  

City of Yes has already passed through the Department of City Planning and is now in the hands of the City Council, which already released “City For All,” a counter-plan that calls for boosting voucher programs and putting more funding in public transportation.

“Those proposals would significantly change the residential zoning laws within New York City, in ways that relate to 485x,” Daniel Bernstein, a real estate lawyer with Rosenberg & Estis, said.

City of Yes could impact projects under 485x by allowing additional residential floor area, Bernstein said. It also could encourage the construction of apartments priced to be affordable for renters earning 60 percent of the area median income, he said.

Additionally, City of Yes eliminates or reduces parking requirements, which Bernstein said his clients feel is a huge waste of time and money because nobody uses them much in a city where only about 45 percent of residents own a car and the sinews of public transit stretch far and wide. City of Yes would also change the minimum size of residential units, creating more density. 

“A number of my clients who are looking at building construction and 485x projects are also kind of in a holding pattern while the City of Yes zoning amendments are considered by the City Council,” Bernstein said. “When that is resolved, they’ll be able to make business decisions about what to build on sites they own, or whether to buy additional sites.”

While 485x has been heralded by its creators as part of the answer to New York City’s housing problem, that doesn’t mean there aren’t critics. Advocacy groups argue that the program’s affordability benchmarks do little to help low-income New Yorkers. 

“Rental properties are really over-taxed, and they’re over-taxed so that wealthy homeowners are under-taxed,” said Cea Weaver, coalition director for Housing Justice for All, a statewide coalition of over 80 grassroots groups representing tenants and homeless New Yorkers. “It is just one of the many, many public policies that prioritizes owners over renters, and 485x is an attempt to correct for that by giving property owners a tax exemption to build housing that is for renters.” 

Weaver called 485x a “Band-Aid” for a broken property tax system and something that isn’t going to get at the root causes of the housing crisis since it won’t result in housing that is actually affordable. 

“The real term that [we] would want to use is ‘income targeted,’” she said. “Those units are targeted to people who make a certain amount of money, and the person who lives in them is going to be paying a maximum of 30 percent of their income in rent. So that’s what people mean when they say affordable.” 

The U.S. Department of Housing and Urban Development created the definition of affordable in the 1980s, Weaver said. At the time, the agency said it would be expected that people pay 30 percent of their income in all federally subsidized programs. But a lot has changed since the 1980s and Weaver says that definition doesn’t cut it anymore. 

“The cost of groceries has gone up, the cost of health care has gone up, wages have been basically stagnant,” she said. “So it’s actually no longer a very useful number, and I personally think it really needs to be revisited.”

With 485x still in its infancy, the commercial real estate space appears to be taking a wait-and-see approach as it weighs the potential impacts of the wage requirements and the looming City of Yes vote on future projects. Residents will also have to do the same to find out if 485x does anything to move the needle on housing affordability. (There were record high rents under 421a, after all.) 

“[485x] is never going to make everybody happy,” Kelly said. “But it’s always a step in the right direction to add supply to the market and reduce the rent burden on consumers.”

Amanda Schiavo can be reached at aschiavo@commercialobserver.com.