LOIS WEISS: Developers Starting Projects Under New 421-a Should Take A History Lesson

The lack of clarity on new rules for the 421-a replacement program, the past actions by the lawmakers who passed it and the wave of new construction permits and residential buildings already in progress should give pause to New York City’s multifamily developers.

Even if builders revved up the bulldozer engines tomorrow, the next wave of units coming to market under the new program are still at least a year or two away.

The New York Building Congress tracks all permits, including everything from single-family homes to giant towers. In 2015, as those facing the end of 421-a rushed to get in foundation work to qualify, the city issued 56,000 construction permits.

But in 2016, without the program, just 16,300 permits were issued, half of the NYBC’s projections. Without a replacement program in place, but negotiating continuing among the unions, the Real Estate Board of New York, the governor’s office and others, “No one wanted to be the chump that built without it,” as one broker put it.

Last fall, as passage of the new law, dubbed Affordable New York, became more assured, the Building Congress forecast 27,000 new units and $13.1B in residential spending in 2017. In March alone, NYBC says the city issued permits for 4,500 units. It predicts another 25,000 units and $12.7B for 2018.

In the meantime, there are some 16,000 to 17,000 units on their way in Long Island City alone.

“By neighborhood, it’s startling,” Associated Builders & Owners executive director Dan Margulies said. “Because of the expiration of the law, everybody rushed to meet deadlines at the end of 2015, and now there is so much in the pipeline people are worried about renting [them] and there are not a lot of projects waiting to get started.”

While the land sales market has been in the doldrums for the same reasons, the passage of the new program may jump-start those sales.

“The positive reaction has snowballed,” Cushman & Wakefield investment sales chairman Bob Knakal said. “We are doing more valuations in the last three to four weeks than in years, and that tells me the second half of the year will be very robust.”

Eastern Consolidated chairman Peter Hauspurg said his company has had several sites on hold for the last 16 months, but will start the sales process again this week. Hauspurg said pricing, however, is the same or a bit lower than in the past.

“This may be due to the fact that there is a lot of new rental product, and concession packages have been growing,” he said.

Some new wrinkles have been added to the next iteration of the tax exemption program. Construction wages are now tied into project and vary by location. While more affordable apartments are required, the tax breaks are longer and the period of rent stabilization is also longer. Affordable apartments must be interspersed throughout the building. The mayor has also admitted that homeless families may have first dibs on some of the more affordable units.

There are now seven different, confusing options for 421-a, depending on the location, how many apartments can be constructed and the ranges of affordability. Some choices allow the use of tax-exempt bonds and low income housing tax credits, some do not.

One option will allow condominiums, but projects must be seven to 34 units and cannot be south of 96th Street in Manhattan or have an assessed value higher than $65K/unit. This is difficult to predict and somewhat out of a developer’s control. It almost forces developers to target cheap materials. Small buildings also have the most likelihood of financial difficulties should one unit stop paying common charges.

In some locations, those developing over 300 units can obtain a property tax exemption for 35 years, but only if 25% to 30% of the apartments go to those with lower incomes. Two of the choices require 10% of the units be set aside for the lowest income tier, which is 40% of AMI, equating to $36K a year for a family of four.

If over 300 units, construction workers must be paid an average of $60 an hour in Manhattan and $45 per hour in Brooklyn and Queens.

While the longest tax break is 35 years, the units must remain affordable for 40 years. This scheme also favors family developers who build to own long term and have the staying power to outlast mayoral regimes that freeze rents (like the current one).

“The best part of the old 421-a was that it wasn’t bureaucratic, other than getting the incentive approved,” Margulies said. “In the outer boroughs, you could build for whatever the neighborhood could afford.”

Now, tenants need to be screened and divided into income tiers.

“There’s a whole new bureaucratic layer,” Margulies said.

“You can sharpen your pencil and, in some locations, make [the new program] work,” Alexico founder Izak Senbahar said.

Senbahar has developed several ritzy condominiums using the program, including his latest success at 56 Leonard St. Critics have focused on high-net-worth individuals, such as those who bought at 56 Leonard, getting tax breaks. Senbahar said without 421-a, few developers would have even started construction.

There are many rules for the new Affordable New York program that still must be clarified by the housing agencies, which do not have a great track record for setting rules that jibe with legislative intent, thus setting up owners for failure in the courts.

State courts have previously tossed out rent stabilization regulations and practices going back over 15 years in favor of tenants, and more court cases are even now challenging rules owners previously relied on to calculate rents. Who can you trust to stick with any program as it was intended?

For instance, the first 421-a program did not require a notice in the lease that, upon the end of the tax break, the rent could go to market and the rent stabilization would end. Although the notice requirement was added later, the courts still ruled in favor of all tenants keeping their apartments rent stabilized.

In 2015, the city and New York State Attorney General’s office pursued almost 200 building owners who had obtained 421-a benefits as condominiums and did not participate in rent stabilization. Some had to repay incentives while some are still fighting over the outcome.

The Roberts v. Tishman Speyer case, a class-action victory for tenants after the owners of Stuyvesant Town and Peter Cooper Village were found to have not followed affordable restrictions from a different tax abatement, is also instructive.

Worried about the chaos a ruling for the tenants would bring, the owner organizations asked the court to state how rents would be reset. Instead, the court said the agencies and the legislature should do it.

“The agency hasn’t given a clear interpretation, so now cases are going back to the Court of Appeals,” Margulies said. 

Owners should have their fingers crossed that the agencies making the new 421-a rules have them set in stone.

Lois Weiss is a Bisnow featured columnist as well as a real estate reporter for the New York Post. She has covered New York City real estate for more than two decades and is a past president of the National Association of Real Estate Editors.