With 421a expired, all eyes in the NYC real estate industry turn to Albany

In the months leading up to a state-imposed negotiations deadline in January, the Real Estate Board of New York and union leaders came tantalizingly close to coming up with a deal to renew 421a, the controversial tax abatement program for new developments.

The compromise, according to sources familiar with the talks, would have extended 421a to condominiums, which had been cut out of the most recent proposal. It would have also assured that workers were paid prevailing wages on such projects. But it was no secret that Gov. Andrew Cuomo had been strongly against a deal including condos in the program following public outrage over the 421a inclusion of luxury condos like One57.

Ultimately, the talks broke down.

“The affordable housing program that we hoped would pass did not pass. Right now, we have no affordable housing program operating in the City of New York,” said Cuomo in the days following the expiration of the program.

Now, 421a — or whatever may replace it — is back in Albany and the governor’s hand. But depending on who you ask, it’s been there the whole time. The ultimatum handed down by Cuomo and the legislature on the prevailing wage issue in June 2015 — which put developers and construction unions in the position of having to agree on an extremely contentious issue — has been painted by some observers as doomed from the start.

“You just have to wonder what exactly was on the governor’s mind when insisting on union wages. It’s very difficult to build affordable housing and also use union workers,” said Howard Husock, a senior fellow at the Manhattan Institute. “If the governor continues to insist on it, I think the program will continue to lapse.”

Though all eyes seem to be on Albany, according to Cuomo’s office, no moves are yet being made to replace 421a.

“There has been no discussion regarding the design of a housing program that would replace 421a or [regarding] the design of a state housing program,” Dani Lever, a spokesperson for Cuomo, told The Real Deal last month.

Hank Sheinkopf, a political consultant who worked on the campaigns of Bill Clinton and Michael Bloomberg, said that it’s unclear where this will go, but if a program will take its place, it would require Cuomo, Assembly Speaker Carl Heastie and Sen. Majority leader John Flanagan to get it done. But as it stands now, the desires of developers and unions are in direct conflict with each other, and no one appears — at least publicly — to be jumping at the chance to tackle the prevailing wage issue.

“That’s a battle that no politician will want to get in the middle of,” Sheinkopf said. “It can happen if the three most important people in government want it to happen. The question is: What’s the incentive for them now?”

It’s a somewhat bizarre, although politically familiar, situation: People on both sides of the table agree that something must be done to replace 421a to curb property taxes and drive the creation of affordable housing. But no one, at the moment, seems to have the appetite for finding a compromise.

“It’s hard to make a case that right now developers need a tax incentive because New York City is in the process of a building boom,” Sheinkopf said. “In legislative politics, more often than not, you need a win-win. All the participants in the conflict need to come out with something.”

Representatives for the Cuomo administration have stressed that it wasn’t the governor alone calling for the prevailing wage provision. However, Heastie declined to comment for this story, and Flanagan did not return requests for more information.

At a press conference in New York City in January, Cuomo himself suggested that an overhaul of 421a was necessary.

“Where do we go from here? We would need at this point a new piece of legislation,” he said. “It might be a totally different approach and a totally different program because you have to start with a blank piece of paper.”

The parties involved in the discussions leading up to the program’s expiration seem to be taking a wait-and-see approach.

In February, Gary LaBarbera, president of the Building and Construction Trades Council, declared the program “dead” in a press release sent out to state political reporters. He said the city needs “a new, comprehensive approach that builds needed affordable housing citywide, while also offering construction workers good middle-class wages and benefits.”

On the developer side, REBNY president John Banks III said in a statement that the group “remain[s] committed to working with stakeholders” to establish an affordable housing program but that a prevailing wage requirement was untenable.

Lawrence Levy, a political analyst and executive dean at the National Center for Suburban Studies at Hofstra University, said that the program will likely be addressed as part of budget talks in Albany.

“It is very important to the real estate industry so it is likely to be considered on the Senate Republican ‘list’ in negotiations, along with eliminating prior school aid cuts and various tax cuts,” he said.

“And like just about everything in Albany, how this and other major issues play out will be complicated by the relationship between the governor and mayor,” he added.

A spokesperson for Mayor de Blasio, Norvell Wiley, declined to comment on how the relationship between the mayor and the governor may complicate future talks on a replacement tax exemption. He said the mayor is prepared at any time to sit down and hash out plans, but for now, the current pipeline of affordable housing projects grandfathered into 421a should leave the city in good shape.

Back in Albany, Lever said the uncertainty of the tax program has “nothing to do with anyone’s relationships” but was caused by the collapse of 421a negotiations.

From the beginning, de Blasio and Cuomo have engaged in a tug of war over 412a. The mayor had suggested reforms to the abatement that would require developers benefiting from the program to include a certain percentage of affordable housing. Cuomo publicly denounced the mayor’s proposal, saying that it favored developers and only certain labor groups and didn’t have a chance to pass. However, the next month Cuomo, Heastie and Flanagan announced a new deal that closely mirrored the mayor’s revisions but with the added contingency of union representatives and developers reaching an accord over the prevailing wage. The mayor’s proposal included prevailing wages for some service workers but not construction workers.

More recently, in January, the governor delivered yet another blow to de Blasio’s housing goals by requiring state oversight of federal tax exempt bonds used to fund affordable housing projects. During a budget hearing afterwards, the mayor testified that the added “two layers of bureaucracy” to the bond process would be costly and slow down affordable housing efforts. Cuomo has said the program will bring much-needed transparency and accountability to the process.

Meanwhile, urgency is clearly building for some program that incentivizes the development of housing, especially affordable units.

In New York City, the fate of de Blasio’s rezoning plan, which includes an affordable housing mandate, is set to be decided this month by the City Council. Many have said that 421a is critical to the mayor reaching his goals of creating 80,000 affordable units over the next decade. In Albany, Cuomo touted his own affordable housing plan, which will dedicate $10 billion to the creation of 100,000 new affordable housing units statewide over the next five years.

Meanwhile, New York City developers seem confident that 421a will be resurrected in some capacity.

“It has to be revived in one form or another,” said Jordan Barowitz, vice president and director of external affairs for the Durst Organization. “Without it, you can’t build market rate rentals. I can’t imagine that they are going to feel comfortable causing this much disruption in the housing market.”

In January, Durst held a groundbreaking ceremony for Hallets Point, a 2.5-million-square-foot mixed-use development that would add seven new residential buildings to Astoria’s waterfront. Two of the seven buildings — and a total of 480 units — are slated to be affordable.

But the company has since halted work on Hallets Point beyond the first building, citing the loss of 421a. When asked about the timing of the groundbreaking — the day before the tax break was set to expire — Barowitz said the company didn’t expect the subsidy to die.

“We’re developers. We’re optimists,” he said. “We had to believe that saner heads will prevail.”

Bob Shapiro, president of City Center Real Estate, said 421a or something like it will eventually reemerge from the program’s ashes, but that it’s likely to not be so welcoming to developers, by increasing the amount of onsite inclusionary housing required.

“Eventually you’re going to have the 421a certificates given out, but there will be a couple more pounds of flesh taken from the developers,” he said.