The Real Deal New York

Key aspects of 421a remain foggy

By Kathryn Brenzel and Will Parker | April 12, 2017 08:00AM

Late Sunday night, when the New York State Senate finally passed a revenue bill, it put in place a $163 billion budget and revived the 421a developer tax exemption, now called “Affordable New York.”

But some parts of the new 421a law, which by some estimates will subsidize New York City real estate to the tune of $2.4 billion annually, remain convoluted and unclear, and real estate attorneys and other sources said details still need to be ironed out.

The Real Deal identified three potential problem areas in the new bill that are likely to pose major headaches for developers and the city in the months to come.

One of the most contentious components of a new 421a had always been about what types of condominium projects would qualify. Brooklyn state senators Simcha Felder and Marty Golden attempted to significantly expand outer-borough condo exemptions but weren’t successful in doing so. The new law will instead enact what was proposed back in 2015: Only outer-borough condo projects of 35 units or fewer can get 421a. No more Manhattan projects, and no more glitzy large-scale Brooklyn projects.

The grey area, though, spreads from the caps on condo assessments introduced by the legislature and the governor. The new law caps the average tax assessment value for the condos at just $65,000, a limit that attorney Alvin Schein said will make it impossible for developers to promise 421a savings to condo buyers because of fluctuating city assessments they can’t predict.

“To me, it’s useless because there’s no way to ascertain what your assessed valuation will be for sure,” Schein said.

Kenneth Weissenberg, a partner in the real estate practice at EisnerAmper, said there’s concern among some in the industry that the city will target projects that could potentially receive the abatement by increasing their assessed value.

“There’s a fear that that would happen,” he said. “The assessment process is not black and white.”

There are two ways the city can assess new development condos, attorneys said. The first is to do it based on construction costs. The second is based on comparable value of rental units in the project’s immediate vicinity.

In the first scenario, developers would probably have to plan small, studio-type apartments to make 421a work. For example, a 550-square-foot apartment built at a cost of $250 per foot would, for city assessment purposes, have a market value of $137,500. Multiply that by the assessment rate of 45 percent, and you get $61,875, allowing the unit to qualify for 421a. (Note that city-assessed market value for tax purposes is, in general, far lower than the value the unit would actually trade for on the open market.)

However, the city could choose to base the assessment on the value of other properties in the neighborhood, something that developers cannot predict and plan for quite so easily.

“There will be a limited number of units that can take advantage of 421a because of the cap on assessment,” said Ross Moskowitz of Stroock, Stroock & Lavan. Schein put it thus: “Homeownership is basically dead under 421-a.”

“The strategy [for developers] that comes to mind is to build as small as possible,” said Jakub Nowak, a development site broker at Marcus & Millichap, “but I think that most of the unmet demand in the market is for larger condos which can accommodate families.”

The mayor’s office has a different take on the issue. A spokesperson for the city said they expected the true market value of condos assessed at a maximum of $65,000 to be “very roughly $500,000.”

Were that the case, condo development of a variety of types would be much more possible. If not, it could spark a hot new submarket for condo development, Jakub said.

“What that’s going to do is make developers bid up smaller development sites for projects that meet that criteria,” he said. “But I don’t think anyone really understands the mechanics just yet.”

Another area where application of the law is murky is city control over the tax break. In Gov. Cuomo’s initial “Affordable New York” proposal made in January, he included a provision that seemed to both allow and prevent the city from changing the scope of the abatement. At the beginning of the section, the bill stated that the city could enact local laws to “limit or condition the eligibility for or the scope or amount of 421a benefits in any manner.” The end of the paragraph specified that local laws enacted on or before 2015 can’t restrict the new tax abatement.

The newly approved tax break doesn’t include any of this language. One could interpret this as either the city having no authority to tinker with it or that previously approved city legislation might be applied to how the program operates. Either way, the absence of the language leaves the door open to interpretation.

Schein said the deletion could allow the city to further restrict the abatement, and speculated that Assembly Democrats are behind the change.

“I guess that reflects the strength of Carl Heastie and his people,” he said.

A representative for Heastie didn’t respond to requests seeking comment.

A city spokesperson indicated on Monday that the city likely won’t interpret the exclusion to mean that it can modify the law.

“I don’t think we’re ready to go there,” the spokesperson said.

City Hall and Albany haven’t exactly seen eye-to-eye on how the tax abatement should be changed. Mayor Bill de Blasio proposed his own version of the program in 2015, which didn’t include any condo projects nor a prevailing wage requirement for construction employees. During a press conference on Monday, the mayor said Affordable New York was an improvement on the old 421a, but wasn’t perfect.

“On balance, it’s certainly an outcome we can live with,” de Blasio said. “This is not the plan that we originally proposed, which I still think was superior. But I understand that in Albany a lot of things happen.”

The required wages for certain projects receiving the tax break is also a point of confusion.

The law sets wages for large Manhattan projects (300 rental units or more) south of 96th Street at an average of at least $60 an hour. For projects on the Brooklyn or Queens waterfronts, the average is $45 an hour. Because the requirement is an average, the city’s comptroller or an “analogous officer” won’t enforce the wages until the projects are completed. (Bills for the many different subcontractors can’t be averaged until all the work is done).

It’s not yet clear how this will play out and what exactly will be required of developers to certify that — together — hundreds of workers were paid the required average wages. Typically, property owners aren’t aware of how much their general contractor is paying their many different subcontractors; they simply come to some sort of agreement on what to pay the general contractor. That’s likely going to change and will require developers to more carefully map out who they are hiring and what they plan to pay in order to ensure that they get the 35-year abatement, according to Robert Gilman, accounting and audit partner at Anchin.

“It could be a very complicated calculation and verification process,” Gilman said. “You have to know the entire parameters of what you’re doing.”

Condo projects eligible for the abatement don’t have to pay these higher average wages. This stands out among the three exclusions laid out in the law, which include projects that are 50-percent affordable and those where the owner has signed a project labor agreement (meaning that they’re paying union wages anyway.) Gilman said condo projects aren’t subject to the wage requirement because the units are “relatively inexpensive” and few in number. Weissenberg agreed, saying the exclusion is a compromise that will aid middle-income buyers. He remarked that the tax abatement is needed to counter “astronomical” land prices.

“It’s something that the industry really needs, and something the region really needs to create affordable housing,” he said. “There’s only so many multimillionaires who can buy condos and co-ops. Everybody else needs somewhere to live too.”

(To see a ranking of the top Manhattan condo developers by number of units, click here)