Changes to a law that provides a significant tax break to real estate developers have New York builders wondering about the soundness of their financial foundations.
An amendment to the city’s 421-a tax break program signed into law by the mayor last December may cut into the pace of market-rate housing construction, and it could force a rise in housing prices at buildings that opt not to participate in the program, further squeezing the city’s middle class.
But the battle over the tax break continues. The law faces statewide tests, even as its impact is debated as a subsidy for luxury housing development in the city.
The 421-a program, named for part of a section in the state’s Real Property Tax Law, is a tax exemption based on the difference between the taxable value of a particular lot before development and any value added by the completion of a qualifying project. The law, set up in 1971, offers tax abatements lasting from 10 to 25 years, including phase-out periods.
In 1985 a so-called geographic exclusion zone was designated; it covered Manhattan from 14th Street to 96th Street, along with a small slice of the Brooklyn waterfront. Developments inside the zone were only be eligible for the tax break if they met the so-called 80-20 provision, where 80 percent of the units go for market rate and the rest are designated as affordable housing.
The new law, as passed by the City Council and signed by Bloomberg, doesn’t abolish the program; it just makes it more stringent. It expands the scope of the original zone in Manhattan to everything south of 138th Street in western Harlem and 117th Street in eastern Harlem.
It also covers the Queens and Brooklyn waterfront from Astoria to Red Hook, with limited exceptions. It includes significant portions of brownstone Brooklyn, including Park Slope, parts of Fort Greene, most of Williamsburg and a sliver of Bushwick. The city plans to reconsider the exclusion zone’s boundaries every two years.
Though the city law is slated to go into effect on December 28, 2007, the New York State Legislature still must approve it and may make modifications.
Closing a loophole
The revised bill has passed because the incentives weren’t doing much to help with the development of affordable housing, critics said.
A report by the Pratt Center for Community Development found that while the 421-a program did subsidize the building of more than 100,000 units since it was started more than three and a half decades ago, only 8 percent of them were actually affordable for low- and moderate-income residents.
Under the old law, developers could build within the exclusion zone and offload the affordable units onto the outer boroughs under the negotiable certificate system.
The new law abolishes the system of negotiable certificates, which transferred funds from developments within the exclusion zone to affordable housing developers in the outer boroughs.
Developments within the exclusion zone would be required to keep all affordable housing on-site to receive benefits. The new bill also lowers the income level that qualifies for affordable housing, meaning that developers would make less on the affordable units than in years past.
Developer Daren Hornig said that the plan will spur no new 80-20 housing, particularly in the exclusion zone, primarily because those who can afford the market rate will not want to cohabitate with the other 20 percent.
His condo project, the Prime in the Meatpacking district, took advantage of 421-a tax breaks. He bought $400,000 worth of negotiable certificates earmarked for affordable housing in the Bronx to take advantage of the 421-a tax provisions for his nine-unit condominium in Manhattan.
Hornig predicts he won’t be alone in taking advantage of the current tax breaks before the law changes.
“There is certainly going to be a rush to get projects into the ground, mostly of a condominium nature,” he said. “There’s an oversupply of condominiums right now and this will glut the market.
“It may have implications for ’08 or ’09, but whichever way you go, you’re damned if you do build to take advantage of 421-a — and you’re damned if you don’t.”
Savvy brokers have begun to catch on. “Up to a month ago, no one was focusing on the potential that this subsidy would go away,” said Wayne Heicklen, a lawyer at Pryor Cashman in Manhattan. “Now, there’s a groundswell that’s begun where if you’re marketing a project and you’re ready to go in the ground, the sales spiel now is going to be, ‘take advantage of 421-a before it goes away.'”
Hornig said the new rules would hurt buyers when all is said and done.
“Having the 20 percent on-site diminishes value for the market buyer, so it’s all going to be market rate,” he said. “There’s no benefit to doing affordable housing; why would anyone go through the hassle?”
To make up for the loss of revenue for affordable housing provided by negotiable certificates, the city plans to institute a $400 million Affordable Housing Trust Fund, to be administered by the Housing Development Corporation, said Neill Coleman, spokesman for the city’s Department of Housing Preservation and Development.
Developers will be able to apply for the money from the agency; details will be worked out by the end of December 2007, he said. Funds will be limited to projects in the city’s 15 poorest neighborhoods.
The proposed changes to the 421-a program would also diminish value for developers because they limit the amount of 421-a benefits for market-rate units by capping the rate of assessed value subject to tax benefits to approximately $650,000 of a unit’s selling price.
Under the old formula, an apartment assessed at $850,000 would pay $1,911 in the first year of tax liability at a rate of 12.74 percent. With the proposed assessed value cap, the annual tax would be $4,458.
The tax abatements represent a fraction of the city’s real estate tax revenue, said Francis Greenburger, CEO of Time Equities. Most 421-a breaks last 10 years and the longest term, 25 years, is a small fraction of the building’s overall contribution over time. Under the new rules, only those projects providing affordable housing would receive the quarter-century abatement.
This is a bad time to tinker with success, Greenburger said, especially since city coffers are flush with real estate tax money.
“The city has had the biggest building boom in its history, so why kill the goose that laid the golden egg?” he said. “This is a rush by the City Council to address affordable housing, but they’re ignoring the impact this is going to have on the middle class. They’re trying to solve one problem but they’re aggravating another.”
In the state battle over the proposed expansion of the law’s reach, Assemblyman Vito Lopez, who represents Williamsburg and Bushwick, has vowed to widen 421-a provisions.
His plan is based on a proposal promoted by a group of dissident City Council members during the earlier debate over the program’s future. Heavy hitters in the city’s real estate community have begun to marshal considerable lobbying muscle in the State Senate to bring the measure more in line with their interests.