Here’s how developers move affordable units out of condos under MIH

The mandatory inclusionary housing measure offers a detour for condo developers looking to keep units market-rate: Just move affordable housing into a different building.

The program, which the City Council passed late last month, allows developers to shift required affordable housing units to different buildings within MIH areas or within half a mile of the area. In exchange, the developer must increase the amount of affordable housing units in that building by five percent. East New York is expected to be the first area rezoned under MIH, and the City Council is expected to vote on the rezoning plan soon.

“The marketing of a condo is different than marketing in a mixed-income building,” Daniel Bernstein, an attorney at Venable LLP, said when asked why condo developers may gravitate toward the off-site option. “It’s not the city’s goal, but it’s allowed.”

The off-site option is likely to appeal to condo developers concerned about the financially feasibility of mixed-income projects, Spencer Orkus, development director at L+M Development Partners, said during a panel at Venable on Monday. He said that shifting the affordable units from one site to a cheaper one, for example, allows the developer to charge market-rate rents at the more valuable property. He said the option also allows developers to avoid the technical challenges of mixing rentals and condos into a single building. Orkus noted that this isn’t L+M’s strategy and builds mixed-income rentals whenever possible.

Workarounds aside, the lack of 421-a throws a wrench into the overall effectiveness of MIH, which was intended to work in tandem with the tax abatement. The panelists said they expect the abatement to be restored or replaced sometime this year, but it’s up to state officials to take the lead.

Bernstein said that without 421a, developers can expect to pay 25 to 30 percent of their rent toward property taxes. This, combined with the high price of land and construction in the city, makes mixed-income projects and market rate rentals less economically tenable. Developers may instead turn to 100 percent affordable buildings, which are eligible for property tax exemptions under the 420c program or under Article XI of the Private Housing Finance Law. But Anita Laremont, general counsel for the Department of City Planning, said that something must be done for MIH to be effective in the long-term.

“It’s so important that we believe the governor and the legislature will address it this year because without 421a market-rate development, other than for the very wealthy, will come to a halt,” she said.