Are you a condo developer? Do you want a tax exemption? HPD says you better sell all your units first

Final city rule to Affordable New York includes another barrier for builders

TRD New York /
Dec.December 06, 2017 07:00 AM

Maria Springer-Torres and Paul Korngold

When the state legislature revived the controversial 421a tax abatement in April, it drastically limited the number of exemptions available to condominium developers. And now, a new rule from the city’s Housing Preservation and Development agency will make it even more difficult for condo developers to receive the 421a benefit, The Real Deal has learned.

Deal-makers in Albany did condo developers no favors when they wrote into law a provision that limits the number of qualifying projects to being in the outer boroughs, and checking in at 35 units or fewer. The new 421a law, now called Affordable New York, also requires that condo units have an average tax assessment value of less than $65,000. Real estate legal experts told TRD earlier this year was difficult to plan for before a building is completed, since final assessment amounts vary significantly depending on which method the city uses to make them. Oh, and under the new law, apartment owners also have to agree to use the apartments as their primary residence for at least five years.

But this one might be the kicker: In order to even apply for the tax exemption, developers must have a sales contract on every single unit in the project within a year of the building’s completion, according to an adopted rule making document signed by HPD commissioner Maria Torres-Springer in September.

That could prove a tough feat in the emerging real estate markets where the exemption was most likely to be used in the first place.

“Most sponsors don’t have 100 percent sellout at the time of completion,” said Alvin Schein, a real estate attorney with several developer clients. Making it more difficult to meet that sales benchmark, Shein said, is the inability for developers to market the units based on a tax exemption they may never qualify for in the first place.

Paul Korngold, another real estate attorney, claimed that the rule requiring 100 percent sellout was not included in the request for feedback on new rules HPD issued this spring, and was instead quietly inserted in the final rulemaking document at the end of the process in late September. Korngold said he’s only received “willy-nilly responses” from HPD on the matter and that he wouldn’t be surprised if some developers decided to sue the city over imposing the rule.

“My gut feeling is it’s City Hall,” Korngold said of the new rule. “They didn’t want condos in [Affordable New York] at all.”

However, a spokesperson for HPD said the new 421a statute made the 100 percent sellout requirement self-evident. “The law specifically states that all of the unit owners must have agreed in writing to use the units as their primary residences for five years. Without executed purchase contracts in which all unit owners agree to this requirement, HPD cannot determine that the project meets the statutory eligibility requirements.”

As for complaints the rule was added in at the last minute, the spokesperson said that final rules “may be amended from proposed rules during the [City Administrative Procedure Act] process.”

Korngold said he hasn’t yet had any clients ask him how to qualify. He said that it was too early to know whether the latest rule would further discourage developers from bothering to plan a project with the exemption. Schein said it seemed lawmakers were “intentionally making it as difficult as possible to qualify.” The HPD spokesperson said the agency “expects condo developers will continue to use Affordable New York tax exemptions.”

Derek Bestreich, a development site broker in the outer boroughs who specializes in small- and medium-sized sites, said none of his clients considered developing a condo with the abatement. “Of all the sites we sold this year, no one has brought up the new 421a program for condo development,” he said. “I don’t think they’re doing the 421a program.”

In December, Politico reported that Brooklyn state senators Simcha Felder (D) and Marty Golden (R) were working on a plan to allow the rebooted 421a to include more expensive condo projects, though they ultimately fell short on that effort. In the months before the final vote, Mayor Bill de Blasio expressed concerns that the new bill would end up including major concessions to condo developers.

Though originally enacted in the 1970s to generally spur residential construction, the tax exemption is now viewed by most lawmakers as an affordable housing program, even though the majority of apartments constructed with the benefit are rented at market rates.

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