New York’s 485x Incentive Has Developers Settling on a Magic Number

Three thousand years from now when archaeologists are excavating New York City, they are going to wonder about the number 99 and why it was so significant in the development of housing across the five boroughs. 

Imagine what they’ll think when they finally figure out the reason they’ve unearthed so many multifamily buildings with 99 or fewer units. The archaeologists might be surprised that it was a way for 21st-century developers to avoid paying higher construction wages, but still reap some tax benefits.

In early 2024, New York State lawmakers passed a real estate tax abatement program known as Real Property Tax Law Section 485x. The goal was to incentivize the development of more multifamily projects by offering partial property tax exemptions and replacing the incentive policy 421a, which expired in June 2022. 

The tax exemptions last 35 years for projects with at least 100 units and 40 years for projects with at least 150 units provided that 20 to 25 percent of those apartments are designated as affordable housing. While the tax incentives have an expiration date, the affordability aspect does not. 

With 485x still in its infancy, some developers — especially those planning larger projects — appear to be taking a slow approach to utilizing the new tax incentive. There are some challenges that come with 485x, most notably the minimum wage requirement for construction workers on projects with 100 or more units.

“It’s early, but I don’t see so many of the very large rental projects moving forward yet,” said Daniel Bernstein, a lawyer with Rosenberg & Estis and leader of the law firm’s tax incentive and affordable housing department. “My understanding is that the construction wage requirements under 485x for very large rental projects could add in the neighborhood of 15 to 20 percent to construction wage costs at least, maybe more. It is a much more challenging underwriting exercise.” 

But smaller projects have already gotten underway, with 2025 looking to be the year of the 99 (or fewer) units. 

“We’re already getting a glimpse of what [485x will bring in 2025], and it’s going to be a lot of 99-unit projects,” said YuhTyng Patka, chair of the New York City real estate tax and incentive practice with the law firm Adler & Stachenfeld. “And it is exactly because of the construction wage requirement. It seems like every other day we’re seeing another 99-unit project filed.”

JSAF Capital recently submitted a new building construction plan for a 99-unit residential building in Gowanus, Brooklyn, and Madigan Development filed plans for a building with 98 apartments in SoHo. Watermark Capital also wants to build a 99-unit residential building in Boerum Hill, Brooklyn.

There have also been filings for buildings with significantly fewer than 99 units, including Ben-Josef Group’s eight-unit residential walkup building in Bedford Stuyvesant, Brooklyn, and Verdevelopment Group’s 19-unit plan at 246 West 18th Street in Chelsea. 

(It is unclear if the projects mentioned above are utilizing 485x.)

The 100-unit wage requirement under 485x doesn’t benefit anyone involved, Patka said, noting that construction unions could likely see less work and New Yorkers will still be dealing with a housing shortage. 

“There’s a lot of projects that are actively avoiding trying to pay those wages, and it’s not benefiting the developers nor New York City residents for the same reasons,” she said. “Developers are now artificially fitting 99 units into a project that could otherwise more efficiently house over 100 units, but for the construction wage requirements.”  

Patka said she is seeing projects from some of her clients where they are designing what she described as one “abnormally large” apartment that could be multiple units that aid in the housing shortage. 

“They’re inefficient because they’re trying to stay under that 100-unit threshold,” Patka said. “So both developers and prospective tenants are losing out because there’s literally housing units being left on the cutting-room floor.”

The lack of affordable housing has been a years-long persistent issue for New York City residents, with 130,438 people sleeping in city shelters as of October 2024, according to The Coalition for the Homeless. In 2022, some 985,000 New Yorkers — about one out of eight city residents — were supported by subsidies provided through the U.S. Department of Housing and Urban Development, according to the state comptroller’s office. 

In an effort to combat this issue in addition to 485x, New York City Mayor Eric Adams launched the City of Yes initiative in 2022, a set of changes to the city’s zoning designed to help stimulate housing production through policies such as easing parking requirements to allow for denser housing development. The City Council passed the zoning changes on Dec. 5 and it goes hand in hand with 485x when it comes to the development of affordable housing, according to David Rosenberg, also a lawyer with Rosenberg & Estis.

“Clearly, adopting 485x earlier in the year was absolutely essential to getting new residential construction going. But in a lot of cases we saw the complications of 485x, and some of the affordability requirements, the wage requirements, made it more difficult for some projects under the old zoning, which is really where City of Yes, especially the universal affordability preference, comes in,” Rosenberg said. 

To get residential construction up and running, the city has basically told developers they can have the floor area they’ll need across the entire city, rather than in designated or rezoned areas, to build the affordable housing 485x is encouraging.

“So that’s been very encouraging in getting people to really look at [developing affordable housing],” he said. “The other change in City of Yes is the broad, virtually citywide, significant reduction in parking requirements that significantly brings down the cost of construction. 

“A lot of projects that were on the edge of canceling out, or just to the point where it was too difficult to do in the interest rate environment, are now actually able to move forward,” Rosenberg added. “And we are having very serious conversations heading into 2025.”

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