The Real Deal New York

Legal eagles doubt MIH’s effectiveness without 421a

Real estate attorneys say affordable housing measure "empty" sans tax abatement

March 23, 2016 06:45PM
By Rey Mashayekhi

New York City Hall

New York City Hall (credit: Momos via Wikipedia) (inset, from top left: Bill de Blasio and Melissa Mark-Viverito)

In the weeks leading up to the City Council vote on mandatary inclusionary housing, Mayor Bill de Blasio promised skeptical citizens that his watershed housing plan would help create and preserve 200,000 affordable units over the next decade and keep gentrification at bay.

While Tuesday’s passage of MIH, which is designed to spur the construction of permanently affordable housing at rental projects in rezoned districts of the city, as well as at individual properties benefitting from residential zoning variances, signaled that de Blasio could deliver his ambitious brand of progressivism into viable policy, there are doubts that it will be successful.

Many of those doubts revolve around the absence of the 421a tax abatement, which expired at the beginning of this year and has yet to be renewed or replaced by another program.

Real estate attorneys who work with New York City residential developers say that without 421a, MIH will have little effect, if any, on how affordable housing is built in the city.

Alvin Schein

Alvin Schein

“Mandatory inclusionary housing is empty legislation without 421a,” Alvin Schein, partner at Seiden & Schein P.C., told The Real Deal.

According to Schein, economic studies vetting the MIH measure “assumed there would be [a] 421a” abatement present to help developers underwrite the costs of rental housing developments – and that without 421a, “you won’t see any real activity” in that sector.

Schein said he has already witnessed the impact of 421a’s absence through his work with developers utilizing the city’s existing, voluntary inclusionary housing program, which operates on similar principles.

“In 2015, we filed 14 [voluntary] inclusionary housing plans with [the Department of Housing Preservation and Development,” he said. “The market is still hot, but in 2016 we’re three months in and have filed zero. We know that there are clients who are folding back deals because they can’t do it without 421a.”

It’s a sentiment shared by others in real estate law, who have seen clients drop rental ambitions – opting instead to build condos or commercial properties – in order to make the economics work in a 421a-less environment.

Daniel Bernstein

Daniel Bernstein

“I’ve seen developers walk away from sites where they were contemplating a mix-income [rental] project and say they’re going to do commercial instead, or condo,” said Daniel Bernstein of Venable LLP. “There’s not a great interest in building new rental properties.”

Only two of the four affordability options made available to developers under mandatory inclusionary housing are eligible for affordable housing subsidies from the city’s Department of Housing Preservation and Development.

And the “deep affordability” option, which calls for 20 percent of units priced at 40 percent of AMI and was not a part of the de Blasio administration’s original proposal — having been introduced during deliberations with the City Council and community groups — only permits city subsidies toward a project at HPD’s discretion.

“I think one of the questions that developers have is, if they have to give up rents on 30 percent of the apartments, are they going to get subsidies?” Bernstein said. “And are there going to be construction requirements [under a renewal of 421a] that are going to drive up construction wages? I don’t think developers are prepared for the underwriting.”

There is a sense among attorneys that the mandatory inclusionary housing program’s passage is a mere formality – an initiative that will have little impact on the way affordable housing is built in the city until 421a, or something like it, is enacted to alleviate the tax burden developers assume on rental properties.

Steven Hochberg

Steven Hochberg

“I think the legislation itself, if the concept is to create affordable housing, is a positive step,” Steven Hochberg, who oversees the tax certiorari department at Stempel Bennet Claman & Hochberg, said of the program.

“It’s still not sufficient, because without some kind of change to how new construction properties are assessed in New York City, or some statue similar to 421a, it’s not enough to get shovels into the ground because it will be economically daunting for developers without a tax abatement,” he said.

Hochberg echoed the belief that City Hall’s position on mandatory inclusionary housing, given its advocacy of 421a extension, was that “the programs would go hand-in-hand.”

“I think without 421a, it doesn’t make [affordable housing development] any easier for a developer,” he said. “I think conceptually it’s good, but without 421a it’s not going to produce a lot of housing.”

In January, the New York City Bar Association penned a letter to the City Planning Commission asking the agency to postpone its decision on mandatory inclusionary housing until the future of 421a was resolved. While that correspondence was received and acknowledged by City Planning, the body approved the proposal by a 9-to-3 vote in February.

One of the issues that has been raised by attorneys is the proposal’s legality, which they say is contingent on the plan being “economically viable” for developers. While a court challenge of the measure is feasible, attorneys told The Real Deal they had no indication such a move is in the cards yet.

But without 421a, “the whole economic plan [for mandatory inclusionary housing] gets knocked off its feet,” Schein said, adding that “would make the city very susceptible to an economic challenge.”

“I think it’s a question of time. If 421a is resolved soon, it’ll be okay,” he said. “If [the status quo] drags on, there’ll be difficulty defending [mandatory inclusionary housing] in court. I don’t think one has to be a genius litigator to show it doesn’t work.”