New York’s 485x Multifamily Development Incentive: Why It Stinks

The solution to New York’s housing crisis is squarely on the supply side. You don’t even have to be a believer in economics to reach that conclusion. 

Want proof? Look no further than the pandemic. When residential leases expired, people did not renew and moved to the suburbs. The greatly increased vacancy was tantamount to a supply increase, and the result was that rents dropped by a whopping 30 percent in Manhattan. There is not a housing policy that has been implemented anywhere in the United States that has resulted in rents dropping by 10 percent. We had a 30 percent drop. These are indisputable facts.

Why can’t policymakers get this through their heads?

To get new supply created in New York, we need real estate tax abatements based upon the costs to build that housing. For decades, we had the 421a tax abatement program. It lapsed, and we went a couple of years without one. Then the Affordable New York tax abatement program was adopted, which was a watered-down 421a. Then that lapsed, and it was replaced with 485x, a further watered-down version of Affordable New York.

To appease labor, 485x came with wage requirements that make the program unworkable. For developments of more than 99 units or more than 149 units — depending on the length of the tax exemption the developer’s shooting for — minimum wage requirements are set at $40 per hour or, in some areas, $72.45 per hour. I said to a policymaker recently, “Why not make them $240 per hour or $272.45 per hour? Labor will love you even more, and since none of those jobs are going to be created anyway, what’s the difference?” The response was nothing more than a furrowed brow and a puzzled look.

The fact is that for 99 units or less, the minimum wage requirements are not applicable. Since 485x went into effect at the start of 2024, there have been 23 applications for rental building permits in New York City. It’s not surprising that all 23 are for 99-unit buildings.

For larger rental sites we are selling, developers spend more time trying to figure out how to subdivide the site to create 99-unit pads than on anything else. This shows that 485x is misguided and is not going to incentivize the amount of housing that is needed.

Policymakers often argue that tax abatements on new construction are simply “giveaways to developers who are going to build anyway.” The facts don’t support that naive view.

In Manhattan south of 96th Street, 1.6 million buildable square feet of rental development land sold during the last year of the 421a tax abatement program. Two years later, without the program, it was 38,000 buildable square feet. In the last year of Affordable New York, 1.5 million buildable square feet of rental land was sold. Two years later, without the program, it was 68,000 buildable square feet. Those are facts, and any policymaker who says developers will build without an abatement is simply wrong.

The 467m tax abatement program, on the other hand, is a compelling program that many developers will use to convert commercial properties into residential. Under that program, you do not pay real estate taxes during the construction period (as they are refunded upon completion) and, after the conversion is done, you get a 90 percent reduction in your real estate taxes for 35 years. 

So this program makes sense and will be used to incentivize more conversions of older, obsolete office buildings to residential. And this dynamic is desperately needed. Currently, 57 Manhattan office buildings are being converted to residential with many more in the planning stages. The projects underway contain about 21.3 million square feet. Once that space is converted to residential use, it will still leave about 78 million square feet of existing office vacant. With an oversupply of office space and a 1.4 percent vacancy rate in residential, apartments are desperately needed.

This 467m type of incentive is something that will produce great results — the exact opposite of what 485x will produce.

We need new housing and need a massive amount of it, up and down the socioeconomic spectrum. The private sector can deliver as many units as we need and can do it very quickly. This would bring rents down and make New York more affordable for almost everyone. Isn’t that what all policymakers say they want? If they really want that, create an environment where it is possible.

The private sector will do anything you want it to do, provided the incentives are correct. When you try to make everyone happy, you often end up making no one happy. When trying to satisfy everyone when you are trying to address one issue, you often misfire. That’s exactly what happened with 485x. Change it. We desperately need the new supply. And, if you really want housing in New York to be affordable for everyone, which every policymaker says, do it soon!

Robert Knakal is founder, chairman and CEO of BK Real Estate Advisors.