Multifamily developers who counted on 421a search for plan B
Spoiler alert: There isn’t one. But some builders are forging ahead
Developers admitted taking a “leap of faith” when they pitched a $2 billion transformation of five blocks of parking lots and industrial buildings in Astoria, Queens.
The most publicized aspect of their risk paid off: The City Council approved the rezoning they needed to build more than 3,000 homes.
But the future of the project is uncertain given the expiration of 421a, which freezes developments’ property taxes at pre-construction levels for 25 years and discounts them for another 10. The tax break has long been considered essential for most rental projects in New York City.
The developers acknowledged they planned the Astoria project with the tax break in mind, telling Bisnow in 2021 they were counting on the state to renew or replace 421a.
Many developers were able to qualify their projects for the break before it lapsed in June but are now scrambling to meet a construction deadline to keep it. Those that have development sites without 421a, meanwhile, are weighing their options: They could pursue nonrental projects, such as condominiums, or wait until the market for ground-up development improves and try to build apartments without the break.
Developers are not the only ones coping with 421a’s demise. City planners were also counting on it.
They designed the city’s Mandatory Inclusionary Housing program to work in tandem with 421a, and made no contingency plan for state lawmakers’ dropping it. The city program set affordability requirements in rezoned areas that would allow projects to pencil out by getting the tax break. The requirements remain, but the break doesn’t.
There does not seem to be a plan B.
At a panel in December, the city’s housing czar, Jessica Katz, lamented the expiration of 421a and another tax break, J-51, calling them affordable housing tools that were relatively simple to administer.
“Losing those two, that was painful,” she said.
The path from regulatory purgatory looks different for each developer. Deep-pocketed, long-term landowners can generally sit on underdeveloped property for an extended period, knowing its value will rise if the property tax break for multifamily development is restored. A firm that borrowed money to buy and develop a site doesn’t have that luxury.
With New York’s high rents and home prices and the state losing congressional seats as population shifts to the South and Southwest, politicians, too, are under pressure to ease the housing crunch. Gov. Kathy Hochul and Mayor Eric Adams have put adding homes at the top of their policy agendas for 2023.
There is room to build: An analysis by Altus Group found 77,000 vacant or underdeveloped sites in New York City that could yield 858 million square feet of residential and office space, the Wall Street Journal reported. That number increases with every upzoning, and the Adams administration plans several in the Bronx and one in Brooklyn. A West Side community board just pitched one to add 23,000 homes.
But it is unclear how projects obligated to include affordable housing can pencil out without 421a.
The developers behind the Astoria project — Silverstein Properties, BedRock Real Estate Partners and Kaufman Astoria Studios — agreed to make 45 percent of the project’s 3,200 units affordable, well beyond the 25 percent required by the inclusionary housing law.
They could build the project, Innovation QNS, in phases, starting with city-subsidized units and commercial components while waiting for a new 421a. But the team has not disclosed how it will approach the project absent the tax break.
“Replacing 421a is critical to meeting Mayor Adams’ goal of creating 500,000 new homes, and we look forward to a productive legislative session that addresses this urgent need,” a spokesperson for the development said in a statement. Albany’s session begins Jan. 5.
Ofer Cohen, CEO of commercial real estate firm TerraCRG, said some developers are mulling whether to hold onto property until rents rise enough to justify building rentals without a tax incentive. He said that in some neighborhoods, that could happen within the next few years.
Median rents in Manhattan reached $4,000 in June for the first time and have since hovered at that level. Median rents in Brooklyn and northern Queens also broke records this summer, but decreased slightly to $3,300 and $3,161, respectively, in November.
“The backup is, rents are going to be so high at some point that it would actually make sense to build without it,” Cohen said. “The demand is not going to slow down just because there is no incentive.”
“A futile exercise”
December was a month of housing announcements. Mayor Eric Adams unveiled a plan to reduce development timelines and set his first numerical housing goal, although he admitted adding 500,000 homes in a decade was a “moonshot.” It would require doubling the pace of the past decade.
Hochul set her own 10-year goal of 800,000 new homes across the state. This month she will unveil her strategies to reach it; they are expected to include a replacement for 421a similar to the one she tried to pass last spring.
The mayor and governor have said a 421a-like incentive is important to building affordable housing, but crafting one that developers consider workable and progressive legislators find acceptable will be difficult. “It is somewhat of a futile exercise,” one industry source said.
Another option is a property tax overhaul that eases the burden on rentals. However, that involves raising taxes on some properties, which involves both city and state lawmakers and is even more politically fraught than subsidizing development. A lawsuit seeking to force the issue is now before the state’s highest court.
Progressives saw Hochul’s proposed replacement for 421a, dubbed 485w, as too similar to the old program, which they said cost the city $1.8 billion last year yet failed to create enough deeply affordable housing. Many believe developers will build without a tax break, because building is what developers do, but that scenario figures to depress production and concentrate it on luxury units, which have higher profit margins.
Alvin Schein, a partner at Seiden & Schein who focuses on affordable housing, expressed doubt that a replacement program could achieve more affordability than Hochul’s 485w. Nearly three-quarters of the apartments in affordable housing lotteries between 2019 and 2021 targeted households earning 130 percent of the area median income, according to the Association for Neighborhood & Housing Development, a group that opposed 421a.
The governor’s rejected proposal capped thresholds at 80 percent of AMI for projects with more than 30 units, and at 90 percent for smaller projects.
The anti-poverty group Community Service Society has pitched replacing 421a with an incentive that only provides developers with “benefits in direct proportion to social benefits they provide the city.” It has also pushed for audits to see if previous recipients of the tax break kept apartments affordable.
Housing Justice for All and progressive lawmakers are proposing the state create a Social Housing Development Authority to oversee publicly financed affordable housing. They also plan to make another run at good cause eviction and would likely demand its inclusion in any legislative package that included a tax break for developers.
City Council Speaker Adrienne Adams has pointed to Innovation QNS as a model for affordable housing projects, as it uses city subsidies to more evenly balance market-rate and affordable units. (Other tax abatement programs, such as Article XI and 420c, are limited by various factors, such as the availability of federal money and the state’s volume cap on private activity bonds.)
But using subsidies in neighborhoods where developments can achieve 30 percent or more affordability without them would take subsidies away from neighborhoods where they can’t.
“Using city subsidy to increase affordability will only cannibalize existing resources without adding additional supply,” said Basha Gerhards, chief planner at the Real Estate Board of New York, in a statement. “We hope the legislature will now take a different approach by focusing on common-sense policies that produce more of the rental housing New Yorkers desperately need.”
Looking at available development sites today, even those that qualify for the old 421a, reminds developer Eli Weiss of his mother’s instructions to his young self at high-end toy store FAO Schwarz: He could look, but not buy.
Sites that just qualified for 421a by getting footings in the ground may be tempting, but to secure the tax break, a project must be completed by a June 2026 deadline. “The risk of missing that is huge,” said Weiss.
Before the pandemic, a typical building took 2.2 years to complete, a Furman Center report found. But now developers face higher interest rates and inflation, supply chain disruptions and lenders not keen on financing ground-up development.
Weiss’ Joy Construction is working on two 421a projects. “If I had to start today, I don’t know that I would,” he said. Some in the industry say the city should extend the deadline if it wants all vested 421a projects built, but that seems unlikely given the program’s lack of political support.
Jim Hedden, a representative for the developers of a planned 1,440-unit project in Queens called Halletts North, said banks are asking projects to wrap up a year before the 2026 deadline, knowing that missing it would wreck a project’s finances.
It is not likely that Halletts North’s three planned towers will be completed in that timeframe, jeopardizing the 350 deeply affordable housing units that Tiffany Cabán, one of the most progressive members of the City Council, required in the project’s September rezoning deal.
“Given that the project was approved by the city and the community, we would hope that the state legislature understands that the time allotted to complete [it] is unrealistic,” Hedden said by email. “We believe that they should extend that time frame beyond June 15, 2026, to reflect this obvious challenge of building large projects.”
Innovation QNS is more than twice as large, and many lawmakers cheered its deal to make 45 percent of units affordable. If its developers only needed more time, as Halletts North is seeking, they would likely get it. But a multiple-decade property tax break is a much heavier political lift.
If multifamily development does indeed stop, it likely will not happen for a few years. Cohen said developers anticipated 421a’s end and hustled to create a project pipeline of two or three years. Some think it will take that long for legislators to replace it.
“They’ll realize that they goofed,” predicted Douglaston Development CEO Jed Resnick at a Fordham University panel discussion. But he said their epiphany would not come until multifamily development actually dries up.
There has already been a drop in activity. In the third quarter of 2022, permit applications were filed for 3,346 apartments across 78 multifamily buildings, according to REBNY. That was down 68 percent from the previous quarter and 46 percent year-over-year. The numbers are inflated in part because applications surged before 421a’s expiration.
Still, some developers are pursuing rezonings and new projects.
“They are essentially rolling the dice,” Schein said. “The developers are optimistic. They feel something will happen.”