421-a certificates add to developers' woes
March 17, 2009 02:40PM By Adam Pincus
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Some market-rate apartment developers who abandoned projects recently collectively gave up millions of dollars in down payments after signing contracts to buy tax abatement certificates, real estate experts said.
The handful of developers had signed contracts to buy 421-a negotiable certificates, which provide a property tax break for 10 to 25 years, but backed out after they could not get financing for their residential condominium projects.
"I had several buyers -- who usually contracted under 100 units -- who decided to walk away and lose their 50 percent collateral," said Kenneth Lowenstein, an attorney who specializes in real estate at business and litigation firm Bryan Cave.
Another attorney, Paul Korngold, a partner at law firm Tuchman Korngold Weiss Lippman & Gelles, said among several clients who lost 421-a certificate deposits there was one who left $525,000 on the table.
The client signed a contract last summer to buy 50 certificates at $35,000 each, and had put down a 30 percent deposit.
"By December 2008, the market had crashed and the financing disappeared. We got an extension from the [certificate] sellers, but in February defaulted" on the purchase, losing the down payment, he said.
The lost down payment is only part of the trouble developers using 421-a negotiable certificates are experiencing. In addition, developers who have halted or abandoned their construction projects are left holding thousands of the 421-a negotiable certificates that have lost value over the past year, some by more than half, as land prices have fallen, real estate experts said.
The negotiable certificate program allows affordable housing developers to sell the tax abatement certificates to market-rate developers, netting the affordable developer about five certificates for each unit of housing produced.
The 421-a negotiable certificates, which were purchased at prices close to $40,000 last year, have dropped to as low as $12,000, brokers said.
James Nelson, a broker and partner with investment sales firm Massey Knakal Realty Services, said last summer he was selling one class of certificates for about $38,500.
"The last deal I closed [for 421-a certificates] was at $16,000 in January," he said. "The landscape has changed since last year."
However, adding to the complexity of the program is that certificates created before December 28, 2006, informally known as 2006 certificates, give a full tax abatement while those created after that date only cover up to the first $65,000 in assessed value. The newer ones are known as 2007 certificates.
Sources said Extell Development has as many as 1,000 certificates and Witkoff Group has dozens that they were not using. Extell reportedly bought about 3,000 certificates over four years from affordable developer Atlantic Development Group, which Extell used for developments such as the Avery, Lucida and Rushmore. Extell and Witkoff declined to comment.
The city's Department of Housing Preservation and Development said it had granted 3,586 certificates through nine agreements with affordable housing developers between January 1 and December 27, 2006. There were an additional 10,585 certificates created through 20 agreements signed between December 28, 2006 and December 27, 2007. By law, no more certificates could be created after December 27, 2007.
Steven Spinola, president of the Real Estate Board of New York, estimated through an informal survey of his members, that there are about 5,000 existing certificates controlled by either affordable housing or market-rate developers.
In part to aid market-rate developers who already bought certificates but whose projects have stalled, REBNY is asking city and state officials to revamp 421-a rules.
One option is an administrative change by HPD to extend the time that the market-rate developer has to complete its project, from the current three years to four years.
"There seems to be interest in extending that to around 48 months. There has been a more favorable response, although it has not been done yet," he said.
HPD declined to comment on the request to change that rule.
The other option, that requires legislation in Albany, would re-start the 421-a negotiable certificate program, frozen since the end of 2007.
This is the first in a two-part Web series on the effects of 421-a certificates on the development community.
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Comments
Anonymous
City officials need to address this immediately and make sure that this program and programs like it can be extended in this climate. They need to move fast. This is no time to oppress business.
Comment #1 Posted By: Anonymous 03/17/09
Anonymous
How does this effect those that are in contract with one of these extell bldg and are expected to close in short order?
Comment #2 Posted By: Anonymous 03/17/09
Anonymous
I hope that no more 421-A certificates get issued. Dumbass tax incentives like this hurt the people who already own apartments with no abatements in place. The re-sale market is dead and will be deader with more tax abated apartments to compete against!
Comment #3 Posted By: Anonymous 03/17/09
Anonymous
Number 4 is a moron without 421a, the city of new york will lose valuable new developments You are program a socialist or communist, who is involved with Brad lander
Comment #4 Posted By: Anonymous 03/17/09
Anonymous
The politicians always kill good programs that work because someone might make a profit.
Comment #5 Posted By: Anonymous 03/17/09
Anonymous
I think that people who own new buildings should have to pay property tax, just like people who own old buildings. That makes me a communist?
Comment #6 Posted By: Anonymous 03/18/09
Anonymous
The point of 421-a is to spur construction of housing. With 421-a, supply is created which brings down the prices for everyone. It is simply the law of supply and demand. Now that the market has crashed, we see that all these extra units are bringing down the prices of condos and rentals to a more realistic level. The city now collects taxes from new residents and taxes from the construction workers who built the property. In Manhattan after 2 years of 421-a, the property taxes from the new building are greater than the taxes that were being paid on the previously existing underutilized building or vacant land. In Manhattan, where developers had to buy negotiable Certificates from low incoem housing developers, the effect of buying these certficates was to cause the construction of off-site affordable housing at a fraction of what it would cost if the city were to build the housing. 421-a has a bad rep because politicians cater to so call "good government" groups that want to stop development and don't understand economics or the mechanics of the 421-a program.
Comment #7 Posted By: Anonymous 03/21/09
Anonymous
No one talks about how landlords are finding any loophole to have people move out of 421-a apartments. How can the ordinary citizen get help to fight against this new policy?
Comment #8 Posted By: Anonymous 06/22/09
ugznako
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Comment #9 Posted By: ugznako 08/20/09
ugznako
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Comment #10 Posted By: ugznako 08/20/09
auciones
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ohatru
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Comment #12 Posted By: ohatru 09/07/09
ohatru
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Comment #13 Posted By: ohatru 09/07/09
etdosk
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etdosk
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Comment #15 Posted By: etdosk 09/19/09
luxrus
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edomen
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Comment #17 Posted By: edomen 09/27/09
Nissentee
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Comment #18 Posted By: Nissentee 10/27/09