Developocalypse: The Day After

Real estate industry confronts expiration of 421a

TRD New York /
Jan.January 19, 2016 08:00 AM

As the city’s real estate industry comes to terms with Friday’s expiration of the 421a tax abatement program, there remain questions over what the development landscape will look like without the abatement, and whether industry interests and construction unions can agree on terms to extend or replace a tax break many consider essential for building multifamily housing in New York.

While the industry remained hopeful as of a few weeks ago that the Real Estate Board of New York and the unions could arrive at some sort of compromise, many players were wary of the unions’ demand for a “prevailing wage” mandate on 421a projects that developers say would render would make construction prohibitively expensive.

“I think we were very skeptical from the beginning that there was going to be a deal,” said David Schwartz, a principal at Slate Property Group who was among a group of developers who lobbied for the abatement in Albany in June.

“From the developer side, you’re adding more affordable housing [requirements from the city] and then on top of that, [additional construction] costs on top of it,” Schwartz said. “We also don’t control land prices, which are high. If you’re adding more affordable units and more cost, it’s not going to work.”

The numbers are tight to begin with to produce affordable housing,” he said. “These rental deals are not like condo deals, where the profits are huge.”

Some observers noted that a 421a deal was doomed from the start, given how the issue “was portrayed as a tax break for developers,” according to political strategist Hank Sheinkopf.

“It was set up for conflict from the beginning,” Sheinkopf noted. “The mayor [Bill de Blasio] set the discussion on affordable housing, and therefore it became almost impossible to have a discussion about tax incentives for developers. That’s the way the conversation was framed.”

The de Blasio administration’s goal of creating and preserving 200,000 affordable housing units in the city over the next decade could take a hit if the abatement is no longer around, sources said.

“Most of the developers I’m speaking to, they just want to make money” said Shaun Riney, the top-producing broker in Marcus & Millichap’s Brooklyn office “They embrace diversity of tenants and different income streams, as long as the city can properly structure the incentives to promote [affordable housing] requirements. They have to create a pathway where a developer can make a profit by doing so.”

Without 421a, the most popular pathway for such developers is now gone. While many builders sought to get projects in the ground before the end of the year to be eligible for the abatement, Riney noted “there has been a pause” in recent months in the market for development sites – “especially larger sites” where the viability of the project could rest on whether or not a tax abatement is in place.

421a also helped developers deal with what many in the industry consider a broken property tax code — with Riney citing “an insane amount of uncertainty as to what [property owners’] taxes are going to be every year” and Schwartz bemoaning the fact that, for all the discussion around 421a, “nobody’s examined the fact that the tax rate on rental housing doesn’t work.”

Unless a new 421a agreement is put in place, Schwartz said he anticipates seeing “a bunch of legacy projects over the next year or two that were grandfathered in” under the tax abatement prior to the Dec. 31 sunset. Otherwise, “the only answer now is to do condos,” he said.

The NYU Furman Center recently released a study that said the expiration of 421a could lead to a drop in land prices in areas where the tax abatement is most popular. But Schwartz said it “was already hard enough to find sites that work as rentals, and now it’s just become impossible. Regulation doesn’t control land prices, the market does. The reason land prices were going up were condos, not rentals.”

Instead of land values declining, Schwartz predicted more condo development across the city as well as more hotel, retail and even office development in lieu of rental housing.

Under such circumstances, the question for most is when – not if – the relevant principals in New York and Albany get together and decide on a resolution that they see is necessary to get developers to build rental units.

“It’ll come down to the [Assembly] speaker, the majority leader of the [state] senate and the governor, ultimately,” Sheinkopf said. “The pressure will be on them from the real estate community and the development world… Unless legislators figure out the means to turn this into an affordable housing [issue], it’ll be very hard to get a tax break passed.”

Riney said investment sales could potentially slow down.

“Uncertainty creates paralysis,” he noted. “That’s why they can’t afford to not do anything. You want commerce to continue.”

Schwartz said he remains hopeful for a deal.

“I don’t know what it will look like,” he said, “but I know there needs to be a solution.”

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