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Fringe area fallout from 421-a changes?

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East New York. The West Farms section of the Bronx. The North Shore of Staten Island. Parts of Red Hook.

What do all these areas have in common?

They are all neighborhoods piled into the New York State Legislature’s new version of the 421-a bill, sponsored by Assemblyman Vito Lopez. The bill has received a lot of ink for being drastically different from the Mayor Michael Bloomberg-sponsored version that was signed into law in December 2006, notably including a $300 million tax break for Atlantic Yards developer Forest City Ratner.

But pork comes in both big and little servings. As the Assembly was changing the bill, state Assembly members and senators added their neighborhoods to the “exclusion zones” — areas where developers are required to provide subsidized housing in return for their tax breaks.

In addition, developers were given six additional months to get their cement poured in the ground. The deadline extension from Dec. 31, 2007, to July 1, 2008, was clearly negotiated with the Real Estate Board of New York, sources said.

While the extended deadline will please developers, the stricter affordable housing requirements for fringe neighborhoods have some concerned about the future of market-rate construction in those areas.

The bill was sitting on the desk of Governor Eliot Spitzer as of late last month, awaiting his signature.

For many years, the exclusion zone for the 35-year-old program that has helped spur residential development in the city stretched only from 14th Street to 96th Street in Manhattan. Under the city-approved bill, the exclusion zones were expanded to cover all of Manhattan except a part of the northern part of the borough; large parts of Brooklyn including Brooklyn Heights, Park Slope and Williamsburg; and along parts of the East River waterfront in Queens.

Lopez’s bill took that a step further.

Added to the list of areas where developers must offer more affordable housing to get tax breaks were a number of Brooklyn neighborhoods, such as parts of Red Hook, Sunset Park, Crown Heights, Bushwick and East New York. Other exclusion zones annexed to the central 421-a bill include parts of Astoria, Corona, Long Island City and the Flushing River waterfront of Queens; the West Farms section of the Bronx; the north shore of Staten Island; and all of Upper Manhattan.

There is concern from the city about adding the new neighborhoods in the state’s version of the bill. Neill Coleman, a spokesman for the New York City Department of Housing Preservation and Development, said many of the neighborhoods that have been added to the exclusion zone simply were not economically viable enough to attract developers without the added incentive of a tax break.

“The expansion of the geographic exclusion areas is in neighborhoods where we think the market and the sales prices are too low to make the exclusion zone requirements economical,” said Coleman, who indicated that the city is talking with state legislators to take back these changes.

Coleman said that the city had established a task force that examined the economics of all the neighborhoods in depth over a six-month period, and that the city’s exclusion zones were determined after careful analysis.

“It will be too costly for developers to build with the requirements and without the 421-a benefit, and they may not build at all,” he added. He also said that some neighborhoods, like Bushwick in Brooklyn, which were determined by the city’s task force to be among the 15 poorest neighborhoods in the city, will also now be ineligible for the city’s $400 million affordable housing trust fund — which was created with the city’s 421-a bill.

In addition to the neighborhood changes, income requirements for the subsidized housing were tightened, so that the ancillary units will be low-income, as opposed to moderate-income, housing. The bill also forces the city to renege on its 421-a abatement commitment to the Queens West development in Long Island City because it includes the area in a new exclusionary zone.

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Will apartments for janitors crowd out apartments for cops? According to Coleman, the newest state bill could threaten tens of thousands of potential new moderate-income housing units.

Coleman also said the bill could disqualify a large number of affordable housing units from receiving monies from the city’s $400 million trust fund. He estimated that the city needs 22,000 additional moderate-income housing units, and that some 10,000 or so would be negatively affected by the state’s bill.

“Manipulative BS,” was the response from Brad Lander, director of the Pratt Center for Community Development, who supports portions of the latest version of the bill. He commented on the city’s assessment that affordable housing projects would lose out on the city’s $400 million trust fund. “That $400 million [dollars] is about five percent of the new housing marketplace plan of $8 billion dollars,” he noted. “There are no projects that would go wanting.”

Lander predicts that Governor Spitzer will sign the bill “as is.”

Others agree that the 421-a changes won’t actually affect the construction of affordable housing. The president of a large affordable housing investment company who did not want to be identified for this article said that only one of the company’s clients had used 421-a to develop affordable housing in the past year. “There are still substantial subsidies from the city and the state that will allow for the continued rehabilitation and new construction for affordable housing,” she said.

Meanwhile, another change in 421-a — which would put the subsidized-housing component of these developments in the buildings themselves, as opposed to giving the developers some discretion over placement — has brokers shaking their heads. Many have told The Real Deal that it is just not possible to have two different types of occupants in the same building, a view echoed by REBNY president Steven Spinola.

Lander disagrees with that assessment too. “There are lots of [80/20 developments], and people pay top dollar to live in the 80 percent,” said Lander. “The facts show that in Manhattan, rich people are willing to live in buildings that are 20 percent affordable.”

The impact on condo prices is also being debated. Elan Padeh, president of the Developers Group, said that the old tax abatement saved the typical buyer about $600 a month for an average-size two-bedroom apartment. That would equal about $100,000 in the mortgage, he noted.

In other words, for buyers to maintain their purchasing power, developers will have to sell the same apartments for $100,000 less. “That now has to come out of the sales price,” Padeh noted.

Louise Phillips Forbes, executive vice president of Halstead Property, said that the previous effect of 421-a on developments was to improve land around the city, especially in the Village and Tribeca.

She noted that with the changes coming in either the city’s or state’s version, it would be much harder for developers to save up certificates to use to build a massive project in one place. She predicted that the worst-hit developments will be boutique-size condo buildings.

Daren Hornig, managing partner of Saxa Inc., a developer with projects in New York, Las Vegas and other cities around the country, said that for now, “they made it more expensive for developers to develop.”

Saxa is currently developing the Prime, a nine-unit luxury condominium at 333 West 14th Street that was partially financed with $365,000 worth of 421-a certificates. The units should be completed in October 2007 and are priced at $3 to $9.5 million.

Hornig said that going forward the law will not have the desired effect of increasing affordable housing development. He noted that among other things, it does not address the current situation of high land and construction costs.

“I am going to lose money,” he said, “on 20 to 30 percent of my buildings.”

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