‘You Made It Worse’: Developers Say They Can't Build Housing Under 485-x

When New York lawmakers came together this spring to pass a new tax incentive program for the development of affordable housing, there was initially hope that it would kick-start a new building boom.

But when the final rules for the program, dubbed 485-x, were released last week, it cemented to many in the development community that those charged with crafting real estate policy in the city and state don't understand the industry. 

“It's kind of sad for me when I spend time with [politicians] and they really just don't understand our business, and I don't understand how to achieve their goals,” GFP Real Estate co-CEO and principal Brian Steinwurtzel said last week at Bisnow’s New York Multifamily Development and Asset Management conference. “Unless we can figure that out, we won't really create a lot of housing.”

More than a year after the expiration of 421-a, a tax incentive for housing creation that had been around in some form for almost 50 years and was beloved by developers, lawmakers in the state’s capital passed new incentives in late April. 

The incentives passed against a backdrop of a severe housing crisis in New York City, with rents reaching all-time highs in the postpandemic years, vacancy rates at historic lows, a scant housing pipeline and developers unsure where to turn. 

The successor program to 421-a, 485-x, requires developers to set aside a portion of the units as permanently affordable housing, has lower rent caps than its predecessor and mandates higher wages for construction workers on major projects. 

The changes mean the program won't do what it was meant to do, developers say, which is incentivize the development of large housing projects.

“It’s not penciling,” BRP Cos. co-founder and principal Meredith Marshall said onstage at 1221 Sixth Ave. “You're going to have a greater mismatch between demand and supply.”

Under 485-x, developers building projects with 150 units or more don’t have to pay property taxes for 40 years if they permanently set aside 25% of their units for renters earning up to 60% of the area median income, according to an analysis by law firm Adler & Stachenfeld.

For projects with 100 or more units, developers can skip the property tax bill for the first 35 years if a quarter of the units are set at 80% of AMI. Meanwhile, buildings with between six and 99 units would be able to avoid paying property taxes for the first 25 years and pay a reduced amount for the decade following if they set aside 20% of the units at 80% of AMI.

There is also an option for smaller developments that would deliver between six and 10 units outside of Manhattan: If developers agree to set aside 50% of the units as rent-stabilized, they won’t have to pay property taxes for the first decade. 

Lawmakers had bashed the 421-a program as a giveaway for developers who used it to build housing that was unaffordable for the majority of New Yorkers. But with a growing gap between housing demand and supply, their replacement is going to exacerbate the issue, developers said.  

“We have people that are making policies who I really don't think understand the dynamics of how these deals are capitalized and how they pencil,” Rockefeller Group Senior Managing Director Meg Brod said. “Capital demands certain returns, and if we can't get capital, we can't build.”

There are other elements besides the affordable requirements that developers need to comply with to claim 485-x. Those include filing for the exemption within six months of starting construction for most projects, no option to opt in later in construction, and a commitment to use women- and minority-owned businesses for 25% of design and construction costs.

“You said it wasn't working, and you made it worse. You made it more expensive,” Marshall said. “We have a supply issue, and the treatment should be, ‘How do you reduce the cost curve?’ They increased the cost curve, so we're going in the wrong direction.”

The rules were also finalized last week for the new 467-m tax incentive, aimed at lightening the cost burden of converting underutilized commercial buildings to rental residential use.

That program also requires developers to preserve 30% of all units as affordable in perpetuity in exchange for tax breaks between 25 and 35 years, but it comes with a lower prevailing wage requirement and, depending on the project, could nearly eliminate property taxes for a period.

“The prospect of, when we go to investors and we try to raise capital and we have to explain to them that on 25% of the building, they will lose money forever, the incentive given back to them to make that worthwhile has to be very high,” Steinwurtzel said. “I think that trade will work.”

GFP is pursuing several office-to-residential conversions, and Steinwurtzel called the 467-m tax break “lucrative” with the potential to spur the 20,000 units hoped for by policymakers.

The conversion incentive is more generous to developers than 485-x because it doesn’t contain the same onerous construction wage requirements, STO Building Group Senior Vice President for Building Repositioning Brooks McDaniel said.

“You can just use cheaper, open shop labor, whereas 485-x, you need the more expensive prevailing wage labor,” he said. “That distinction helps some of these conversion projects go forward, maybe a little better than the 485-x new construction projects.”

While developers are more excited about the conversion incentive than the program for new developments, they note that it won't come close to solving the issues at the root of the housing crisis.

“The product that's going to get delivered under any of these new programs in Manhattan and then in prime areas of Brooklyn and Queens is going to be $100 in up rent, which most people cannot afford in the city,” Midwood Investment & Development Chief Investment Officer Teodora Zobel said.

Without more options for working-class New Yorkers, developers expressed broad concerns about the city's economic picture moving forward. 

“We all, the population of New York, will suffer with these rents that keep increasing,” Brod said. “It’s really not sustainable. I am concerned about that.”