Murky future for 421a tax incentives worries developers, marketers

Nov.November 09, 2007 02:07 PM

The 421a tax abatement has become a valuable marketing tool for new condo projects — and saves thousands of dollars in monthly taxes for buyers — so possible changes to the incentive by the city have real estate developers and marketers worried.

The city started the 421a program to spur new housing construction in New York. In the midst of a residential building boom, the city may significantly alter the incentive, possibly ending what’s not only become a welcome incentive for new construction but also a means to lure buyers to new luxury projects.

Since its creation in 1971, the 421a has provided the financial impetus through tax breaks for construction of more than 110,000 apartments, according to the city. Most of that construction has been of rental apartments, but about a third of it from mid-2002 through mid-2005 was of co-ops and condos, the city Department of Housing Preservation and Development reported.

Real estate professionals say there is still a shortage of housing, so the incentives should be kept in place.

“In the long run, there’s a big, big housing shortage,” Andrew Heiberger, CEO of developer Buttonwood Real Estate, said. “And with the costs of land and the costs of construction, to eliminate incentives to build is going to further exacerbate an already severe crisis.”

The incentives are also a significant tool for marketers of new projects, because buyers of 421a-funded housing save thousands in monthly taxes. Depending on the location and size of a project, among other factors, tax exemptions can last up to 25 years.

“We recommend to our clients [developers] that they apply for the 421a abatement any time they can,” said Tricia Cole, senior executive vice president at Corcoran Group Marketing. “Because they understand the economics of our ability to then market the housing product as something that gives people this purchasing power.”

While the savings for buyers can be significant, so can the loss to the city: In its first 16 years, the 421a cost the city $551.1 million in tax revenues that it agreed to forgo, according to the New York Times.

The Bloomberg administration announced in late February the creation of a task force to evaluate the current 421a and make recommendations about possibly changing it.

Only new construction of multiple-unit developments on lots which are at least mostly vacant qualifies for the 421a. Also, construction in so-called Manhattan exclusion zones, between 96th and 14th streets on the East Side and 96th to Houston streets on the West Side does not qualify for 421a unless a developer has some sort of affordable component or concession, or government assistance.

The task force may end or alter the 421a’s exemptions by increasing the sizes or the numbers of the exclusion zones, or by changing the time lengths of the exemptions.

Details on what the task force might ultimately do weren’t available, and members of the task force didn’t return calls for comment, but its recommendations are expected this fall. The task force includes representatives from for-profit and nonprofit real estate organizations, including the Related Companies, the Gotham Organization, and the Real Estate Board of New York.


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