Why 99 Could Be The New Magic Number For NYC Apartment Projects

When state lawmakers introduced a replacement for the expired 421-a tax abatement this spring, developers breathed a sigh of relief.

But over the last month, as the final rules for the new incentive were solidified, that relief has morphed into tension as developers have come to grips with what they think they’ll actually be able to build. The answer: less than they hoped.

“Finding an extension for and a replacement of 421-a was critically important,” Jessica Sherman, senior vice president of affordable development at Douglaston Development, said Tuesday at Bisnow’s New York City State of the Market event. “I hope that it’s not the policy in its final form, because for many of us, finding deals that work with 485-x is still difficult.”

The new incentive, put in place by Albany lawmakers this spring, grants property tax exemptions in exchange for setting aside a portion of the units as affordable housing. The hope is that the tax break can stimulate housing production in the same way 421-a did for decades.

Developers using 485-x to develop buildings with 150 units or more can claim a 40-year tax break if 25% of units are kept affordable for renters making no more than 60% of the area median income. A second option is a 35-year break for buildings with 100 or more units as long as a quarter of units are kept at 80% AMI.

But a third option, available for buildings between six and 99 units, is likely to be most popular with developers. That’s because that option, which involves setting aside 20% of units at 80% of AMI, allows developers to skirt construction wage minimums that were also put in place by 485-x, developers said onstage.

“The issue is really the labor,” Sergey Rybak, founder and principal of Rybak Development said onstage at 3 Times Square. “You're going to see 99-unit buildings all over the place, which don't have the labor requirements until somebody builds two of them next together.”

The new tax incentive puts minimum construction wages in place for large rental projects — anything 100 units or up — below 96th Street in Manhattan or in Brooklyn and Queens neighborhoods close to the East River, from Astoria all the way down to Red Hook and Park Slope, per a document obtained by Bisnow mapping the areas referenced in the legislation for 485-x.

For projects with 150 units anywhere in those neighborhoods, developers must pay construction workers $72.45 an hour with annual increases of 2.5%, or 65% of prevailing wages, per guidance from the New York City Department of Housing Preservation and Development.

In developments with 100 units or more, specifically in Manhattan, Long Island City, Greenpoint and Williamsburg, that becomes $63 an hour, with the same annual increases, or 60% of prevailing wages. Outside of those neighborhoods, that requirement becomes $40 an hour.

But those construction wage requirements don’t apply to proposals that have between six and 99 units. The result, developers said, is that the incentive won’t yield anywhere near as much housing as the city needs to fix its supply crisis.

In order to build anything in the first place, developers must battle to bring expenses down in a city where land is scarce and expensive, Alchemy Properties founder Kenneth Horn said at the event. Higher labor costs are an obstacle that many may not be able to get past, he said.

“If you do locate a site, and you’re able to corral the purchase price, and you’re able to corral the hard costs and the soft costs, the point that you’re trying to cap labor is essential,” he said. “When we’re looking at a project now, we’d rather build something that’s 91, 92 units than build something that’s perhaps larger, because the pay scale is going to hurt the yield on the return.”

Construction costs were already a significant expense for developers, but the new requirements may even make it harder to drum up lender interest, Djurkovic Investment Properties founder and CEO Jennifer Djurkovic said.

“It's not penciling out,” she said. “Construction is already at 40% above what it was before. Now you're adding another 30%, which is adding to the expense of these projects. You have to sell it to the bank at the end of the day.”

Developers have been critical of 485-x since almost immediately after its passage, saying at a Bisnow event last month that the program doesn’t help them build housing and that its architects don’t understand the development industry.

HPD Assistant Commissioner for Housing Incentives Tricia Dietz pushed back on the notion that the law was crafted without input from people who understand how development works. 

“It did go through a lot of negotiation and I know that there were many parties involved in that,” Dietz said, pointing out that it is a state-level incentive that the Adams administration had no official say in. “I think that it's important that voices are heard in a negotiation process, such as putting together a proposal like that one.”

While HPD can’t change the law passed in Albany, Dietz said developers should look at city-level incentives, like the billions of dollars in place for developers committing to building affordable housing.

Coupled with the City of Yes for Housing Opportunity — a citywide zoning text amendment currently working its way to a City Council vote in December — 485-x could help with the city’s housing crisis. But the wage requirements could still undermine that potential altogether, Horn said.

“Although 485-x is great, and City of Yes, of course, is wonderful, the hard part in terms of the analysis is: When do you curtail the amount of units you're building because the cost to build just becomes too expensive?” he said.

Some developers, like Douglaston’s Sherman, see opportunities outside of the designated zones where the state’s construction wage requirements for 485-x apply.

“Between the wage requirements, it's hard to find sites in prime areas that need affordable housing that pencil out, and looking at smaller buildings that don't have the same wage requirement make it difficult to pay what you need to pay to acquire that land,” Sherman said. “There are some opportunities in the outer boroughs where the wage requirement doesn't apply that will be easier to execute on.”