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What You Need to Know About the New 421-A Tax Break for Developers

By Amy Zimmer | May 1, 2017 8:37am
 This Bushwick rental took advantage of 421-a tax breaks.
This Bushwick rental took advantage of 421-a tax breaks.
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DNAinfo/Gwynne Hogan

MANHATTAN — The state’s controversial 421-a tax break for real estate developers is back after a two-year limbo, delighting developers and concerning some housing advocates who say it's going to deprive the city of much-needed revenue.

The program, which now goes by the moniker Affordable New York Housing, was passed with the support of Gov. Andrew Cuomo — who tied the state's release of $2.5 billion in funding to build affordable and supportive housing to the tax break deal. He said the program will help build 2,500 “affordable” units a year.

Many developers exhaled when the agreement was signed, saying their ability to build a mix of market-rate and affordable housing will be more financially feasible with the tax break, and some projects that had been on hold because they were banking on the break, such as Astoria’s massive Hallets Point, are now moving forward again.

Many in the affordable housing development community were pleased that Cuomo's long-awaited money can finally be released to the city, especially as the industry braces for expected cuts from the federal government.

But other housing advocates lamented the new 421-a deal, saying it's even more generous to developers than the much-criticized previous incarnation, and they fear the loss in tax revenue will hurt the city even more as it will need to plug other funding gaps. In addition, housing advocates worry that a new element of the deal might weaken rent regulation laws.

Here’s what you need to know about the new program:

What Projects Can Qualify?

New projects as well as projects underway may be able to qualify in exchange for setting aside a certain percentage of affordable units.

The program now covers developments that began construction Jan. 1, 2016, through those starting by June 15, 2022.

Also, projects that began construction in 2015 and before can also opt in and may be able to qualify retroactively if they meet certain requirements, explained Daniel Bernstein, an attorney with real estate law firm Rosenberg & Estis who will be co-moderating a May 4 panel at the New York City Bar Association on the new program.

“The program reaches backwards and forward,” Bernstein said. “I’m getting multiple calls a day for projects underway and new, potential projects.”

He added that projects falling under the city’s Mandatory Inclusionary Housing program — which are part of rezoned areas or need zoning changes and are required to have a certain percentage of affordable units — will be back on the table.

“It’s also allowing projects that would need a rezoning to become viable,” Bernstein said.

The deal was largely what was passed by Albany in 2015 but never enacted — after Cuomo asked the Real Estate Board of New York and the Building and Construction Trades Council of Greater New York to hash out some form of prevailing wage requirements for construction workers. 

Many watchdogs criticized the move to have trade groups with a vested interest in development craft a deal rather than local elected officials.

How Does The City Define "Affordable?"

Developers will need to set aside 25 percent to 30 percent of units targeting people earning between 40 percent of the Area Median Income (which is $36,240 for a family of three) to 130 percent of the Area Median Income (which is $117,780 for a three-person household).

► What is AMI?

For condos, the tax break will only be allowed in buildings outside of Manhattan with fewer than 35 units, and all units must be affordable.

“The city needs market-rate and affordable housing,” Bernstein said. “The definition of affordable housing is going to be more nuanced. This doesn’t just encourage low income housing but also moderate housing,” Bernstein said. “There will be units available at different incomes, some lower and some higher and generally more of them. So, more people are going to qualify based on income.”

But a recent City Limits analysis of affordable housing lottery data found that the majority of applicants were lower-income New Yorkers vying for the units targeting the less expensive units as opposed to those aimed at moderate-income tenants.

Delsenia Glover, of Tenants & Neighbors, which is part of the Alliance for Tenant Power coalition of housing, community and legal service groups, criticized the program for calling apartments starting at $2,600 a month for a family of four “affordable.”

“Even teachers can’t pay $2,600 a month, unless they pay half of what they take home on rent,” she said. “So to say it’s necessary to create affordable housing that’s not even affordable is ridiculous. It's nothing about keeping rents low or truly affordable for most of the people who need affordability.”

What Does This Mean for Developers?

The lapsed 421-a program cost the city roughly $1.4 billion in forgone taxes a year, according to an analysis from the Independent Budget Office, which estimates the new program will cost an additional $1.2 billion over 10 years, or about $120 million a year, on average.

These buildings would get a 100 percent tax exemption benefit for 35 years in exchange for keeping income limits for renters in place for 40 years, which is a slightly longer length of required affordability.

Other buildings would also get a 35-year tax break, but the exemption rate changes over time.

An analysis from the Association for Neighborhood and Community Development found that for every $1 spent on the program, only 11 cents supports affordable units while 79 cents subsidizes luxury units.

“The 421-a exemption is considerably more valuable everywhere even with the increased wages,” Benjamin Dulchin, of ANHD said. “Right now 421-a costs $1.4 billion a year and that price tag will grow even more rapidly. It’s pretty hard to see what the public is getting back in terms of benefits.”

The deal calls for buildings in Manhattan with 300 rental units or more south of 96th Street to pay, on average, an hourly wage of $60, including benefits.

Buildings with 300 units in Brooklyn and Queens in Community Boards 1 and 2 within a mile of the nearest waterfront bulkhead will pay construction workers on average, an hourly wage of $45, and 300-unit buildings elsewhere in the city can opt-in to this program.

Will This Trigger More Construction?

It remains to be seen whether the city will get a flurry of new construction because of the program.

Before 421-a expired, a surge of developers rushed to file construction permits, with the Department of Buildings authorizing permits for more than 56,500 new residential units in nearly 2,000 buildings in 2015 — an almost 180 percent increase from the year before, according to a recent analysis from the New York Building Congress.

While permits plummeted in 2016 to roughly 15,700, that number was actually in line with the average number of new units approved each year between 2012 and 2014, according to ANHD, which contends that the tax break artificially inflated land costs, creating a big barrier to development.  

Dulchin expects to see another burst of development now that the break is back, but other experts aren’t as sure since the rental market, particularly for luxury housing, is softening.

What Will This Do To Rent Regulation?

Previously, 421-a and rent regulation laws were up for review in Albany at the same time, but with 421-a expiring in 2022 and rent regulation expiring in 2019, those cycles are now off, which may hurt tenants.

“Albany is a pretty cold place for people who care about affordable housing,” Dulchin said.

Dulchin explained that previously, when 421-a tax breaks and rent regulation laws came up for vote simultaneously, lobbyists for rent-regulated tenants were leaning on the same lawmakers at the same time as the powerful real estate lobby.

However, he said, now that the laws' expiration dates are staggered, the real estate lobby will likely have more sway over Albany.

“The one piece of leverage that allies had has been linking the developers’ interest in 421-a and tenant interest in rent regulation. By not aligning sunset dates, that leaves tenants out in the cold.”

Glover echoed the sentiment.

“That was the only time we have leverage to get something good for tenants in terms of rent laws, which cover about 1 million units and 2.5 million residents,” she said.