The Real Deal New York

Cuomo offers path to 421a resurrection — but will the real estate industry walk it?

Development experts sound off on governor’s plan to save tax abatement

August 18, 2016 06:05PM
By Kathryn Brenzel

Andrew Cuomo (illustration by Lexi Pilgrim for The Real Deal)

Andrew Cuomo (illustration by Lexi Pilgrim for The Real Deal)

After eight months without 421a, and relative silence from Albany on how to revive it, Gov. Andrew Cuomo emerged Wednesday with a possible solution.

The proposal echoed past plans for the tax break, but put forward a new wage subsidy for large projects in Brooklyn and Queens. Some industry players regard the proposal as a significant step forward in what has been a stalemate between the Real Estate Board of New York and the Building Construction Trades Council of Greater New York. But the proposal, quietly delivered in the form of a one-page memo to a select group of developers and revealed by the New York Times, leaves several major questions unanswered — including how the state will pay for it.

Still, some take heart in the fact that the unions and developers seem to finally be back at the table with a plan that neither side, at least publicly, is denouncing.

“If the governor is announcing this, if the governor is behind it, which appears to be the case, I think it’s a high likelihood that it will be adopted,” said Alvin Schein, a partner at Seiden & Schein P.C who has represented the likes of Rockrose Development TRData LogoTINY, Eliot Spitzer and Toll Brothers . “Of course the devil’s in the details, but I think this is an important first step.”

The proposal axes the most controversial component of previously suggested 421a programs — a prevailing wage requirement that developers had dismissed as a non-starter. Cuomo instead set a minimum of $65 an hour in wages and benefits for Manhattan projects south of 96th Street with over 300 units, and a minimum of $50 an hour in wages and benefits for similarly-sized projects in Brooklyn and Queens. For the latter, the state would have to shell out $15 per hour. Developers would be required to set aside 25 to 30 percent of a project’s units for affordable housing.

In June 2015, Cuomo and state legislators put the burden of figuring out the abatement’s future on REBNY and labor groups, a move sources described as an extraordinary abdication of governmental responsibility. REBNY and BCTC hit a deadlock on the prevailing wage requirement, and the resulting expiration of 421a has been cited as a major factor in the market slowdown.

The memo is the first time the governor has proposed his own solution to the 421a debate, though LaBarbera had repeatedly hinted that Cuomo was drafting his own plan, one that would stand up for the unions.

Cuomo’s new proposal echoes a last-minute bill submitted by the State Senate’s Rules Committee just days before the end of the last legislative session. The failed bill, dubbed 421aa, called for an average minimum wage of $55 per hour for construction workers, but only at Manhattan projects south of 96th Street with more than 300 apartment units. That bill, however, did not include a wage subsidy, and went nowhere.

Those involved in the discussions that led up to the latest proposal are keeping quiet. A spokesperson for Cuomo, Dani Lever, would only reiterate that they are working on “new and various proposals” and that nothing has yet been agreed upon. A spokesperson for BCTC wouldn’t say anything beyond a statement given to the Times, which said the organization supports the proposal and that the “ball is in REBNY’s court.” Jamie McShane, a spokesperson for REBNY, didn’t address the proposal directly but said the organization is “committed to engaging in dialogue.”

David Pfeffer, chair of the construction practice at Tarter Krinsky & Drogin, said the fact that REBNY hasn’t publicly blasted the proposal signals the trade group’s assent and that the plan will likely move forward. One major Brooklyn-based developer who requested anonymity said it was a significant step that Cuomo’s office and labor representatives now agree that a prevailing wage requirement couldn’t be “seamlessly and painlessly” folded into 421a due to the financial burden it would impose on developers. He said, however, that there is still cause to be skeptical: Financing the subsidy may prove politically untenable, and the wage requirement for 300-plus unit projects could discourage builders from embarking on larger developments, he said.
“Any time that you set an arbitrary threshold that has nothing to do with the developer’s economics, you are going to create perverse conditions that might skew the market toward building something other than the highest and best use,” he said. “If the government wants to encourage more affordable housing development, then you don’t want to give private-sector developers perverse incentive to build smaller buildings.”

Schein and Pfeffer said these larger projects are a small share of New York City development and that they are generally done by union contractors anyway, who tend to command higher wages.

The point, Schein said, is that new construction will pick up pace. Through May of this year, developers had filed permits for only 2,700 new apartments, an 87 percent year-over-year drop, according to an analysis by The Real Deal. On at least one point, developers and labor leaders agree: That the abatement is needed for new construction to pick up.

“Developers and owners will want to better understand how the 421a program will work and how the wage subsidy program will be financed,” said Ross Moskowitz, a partner at Stroock & Stroock & Lavan. “But this is a very good sign that the major stakeholders who are at the forefront of the discussion have found common ground.”