Gowanus Developers Have Plenty of Questions on 421a Replacement as Deadline Nears
By Aaron Short August 16, 2023 1:50 pm
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Gov. Kathy Hochul’s plan to offer tax benefits for multifamily projects in Gowanus, Brooklyn that missed an expired property tax incentive has developers concerned that the plan’s requirements could limit its effectiveness.
Last month, the governor issued an executive order that would allow real estate owners to transfer the titles of their half-completed South Brooklyn projects to Empire State Development (ESD), which would then lease the properties back to developers at a reduced tax rate.
The measure was meant to help replace the expired 421a tax incentive and spur housing development in the recently rezoned neighborhood. But with the application deadline looming on Sept. 29, Gowanus developers worry about following the state’s shortened timeline, meeting minority- and women-owned business hiring provisions and being able to raise rents on market-rate units.
“The Empire State Development folks seem genuinely committed to trying to work out issues that they may not have anticipated when they put the program together, [but] that doesn’t mean it will work for everyone,” one land use attorney, who asked to remain anonymous as their clients sort through the application process, said. “This was a program put together in just a couple of months. They didn’t fully appreciate the wide range of status of different projects.”
The Hochul administration decided to act on its own and create a new tax benefit program after the state legislature chose not to renew the controversial 421a property tax abatement that cost the city $1.7 billion in tax revenue. Critics said the abatement did not create enough affordable apartments.
The new program is limited to the 82-block rezoned area in Gowanus and designed to match the state’s 421a program, since only projects that finish construction by June 2026 can reap 421a’s tax benefits.
But Empire State Development is requiring developers to make a “good faith effort” to hire firms owned by women and people of color. That could be a challenge for some developers to adhere to since many construction jobs for their projects have already been contracted out.
“There are a lot of strings attached, which are no joke,” YuhTyng Patka, chair of the New York City real estate tax and incentives practice group at Adler & Stachenfeld, said. “Good faith efforts need to be made by the developer to award MWBE contracts, and you basically have to bend over backwards, like cutting up a scope into smaller chunks, to award MWBEs.”
Herrick Feinstein partner Brett Gottlieb also wondered whether ESD’s program requirements would only apply to new trades that have not been awarded, or cover existing jobs. That could force developers to sever contracts even if work on a site is well underway.
“It’s hard to retroactively require someone to do something when they have contracts already, and put it in force on a retroactive basis,” Gottlieb, a land use attorney who represents clients exploring the state’s program, said. “When these jobs are already awarded and people are already on the job site, you’d have to pay penalties to cancel the contract.”
Developers also wanted more clarity from the state about what prices they can set for market-rate units and how high they can later raise rents.
The governor pledged during her executive order announcement that affordable units built through the Gowanus program would remain permanently affordable and would be rent-stabilized. But developers did not know whether their market-rate units would be exempt from rent stabilization similar to the way the 421a abatement allowed if rents were above the state’s threshold of $2,951.54 a month when first leased to a tenant.
That threshold would likely apply to the majority of one-, two- and three-bedroom market-rate units, since the average rental price in Cobble Hill in June was $3,347 for a one-bedroom and $4,894 for a two-bedroom apartment, according to a 2023 MNS Brooklyn rental report.
Yet if all market-rate units in the governor’s Gowanus program were rent-stabilized, developers may not even bother applying for it.
“All Gowanus projects were underwritten assuming rent stabilization would not be required for such market-rate units, so having the governor’s program follow this provision under the 421a law is vital to the economics of such projects,” Patka said.
A spokesperson for ESD said that the agency held an information session for applicants on Aug. 9 and set up a dedicated email address to field questions on the program.
Still, property owners want the governor’s program to succeed and expand beyond Gowanus, despite some initial kinks in the rollout.
“There needs to be some rationale that goes beyond an end run on the legislature. That could be transit-oriented development, or advanced income inequality in the neighborhood, or some kind of public investment,” the land use attorney said. “My hope is when the legislature sees that this program for these developers is working, maybe they’ll find a way to come to a solution that won’t require work-arounds.”
