With 421-A Gone, What’s Next?
April 12, 2016
April 12, 2016
To understand where 421-a is going, it’s best to have a short history lesson.
The 421-a Property Tax Exemption Program, established in the 1970s, was originally implemented when New York City officials were concerned that residential construction was down as a result of residents moving to suburban areas. The plan gives property tax breaks to new housing development as a way to entice residents and developers to continue developing in New York City.
As urban housing made a comeback in the 1980s, the city modified the program by beginning to apply Geographic Exclusion Areas (GEAs). Developers building in these areas – which, according to reports from the Pratt Center for Community Development as well as Curbed – stretched from 14th to 96th streets in Manhattan and later blanketed almost the entire city – would have to develop 20 percent affordable housing (80 percent market rate) in order to be eligible for the exemption.
It wasn’t until just last June that city and state legislators again, revised the program. Instead of setting aside 20 percent of units for affordable housing developers would now need to set aside 25-30 percent of units for affordable housing. To put it into perspective, some of the City’s largest planned developments exceed 2,400 units. Of those, 600 to 720 units would now need to be affordable. In return, the full tax abatement period would increase from 11 to 25 years, where it used to only be 10 years. Developers were saving a lot of money, but it wasn’t bad for the rest of New York either.
According to a recent article from The Real Deal, “when state lawmakers in June agreed to an overhaul of the 421a tax abatement program, Gov. Andrew Cuomo called the revisions the ‘best rent reform package in history.’ Mayor Bill de Blasio even called them a ‘game-changer’.” The modifications would provide additional incentive for developers to build rental properties on vacant land that otherwise would be too pricey to even consider a rental property. At the same time, it worked towards the Mayor’s goal to create 200,000 units of affordable housing. Of those, 80,000 will be new units, 120,000 will be preserved.
But it wasn’t long before the deal would expire.
The plan expired in January as the city, state, developers and unions couldn’t come to a resolve on union-level wages for construction workers on 421-a developments. A significant increase in wages would mean a significant increase in construction costs. A significant increase in construction costs, according to report by the Independent Budget Office (IBO) could increase the cost of Mayor Bill de Blasio’s 80,000-unit affordable housing goal by a shattering $2.8 billion. Cuomo sided with the unions and no resolution was ever had.
So without these tax incentives, what’s next for new real estate development in NYC?
The short answer, nobody knows.
At a recent Crain’s breakfast, John Banks, president of the Real Estate Board of New York, which represents large developers, said it was not feasible to build rental housing in New York City without the 421-a subsidies. The combination of high construction and land costs and high taxes on rentals made such construction unprofitable, he said, and the passage of mandatory inclusionary housing would not change that.
The Real Deal recently reported that Bill Mulrow, Secretary to Governor, said the administration is still looking to REBNY and the building trades union for a new property-tax exemption and that the developers, REBNY, and the construction trades will find some common ground, because they have to.
What do you think of the 421-a debate? We’re looking forward to hearing your insights at @SMCRealEstatePR.