New 421-a rule could save stalled projects

A policy change last week affecting applications for 421-a tax exemption could help save the tax rebates for a lot of projects that got into the ground last year. The Department of Housing Preservation and Development has revised the rules such that developers can maintain their eligibility for 421-a benefits even if work stops at a project, or if it takes longer than three years to complete, as long as the developer can prove that the delay was caused by an inability to obtain financing.

The rules for obtaining the tax abatement have always required that a project be completed within 36 months from when the developer broke ground, and that throughout construction, there was continuously work performed at the site. In the past, developers have been able to get around these restrictions — and still receive the abatements — if delays had been caused by a fire at the site, a stop-work order placed on it, or some other cause for delay that was obviously beyond the developer’s control.

This new exemption from HPD’s time requirement could prove very helpful at construction sites around the city, where projects’ loans have fallen through over the past year or two.  

Last year, many developers rushed to break ground on projects by June 30, 2008, to beat a deadline before eligibility for 421-a became much stricter, based on new standards of geographic location and on-site affordable housing requirements. However, this rush occurred just as sources of credit were drying up, and many builders who began construction last spring found themselves unable to obtain the loans needed to continue work on the projects.

AJ Sabo, director of tax incentive programs for real estate consulting firm Jack Jaffa & Associates, said that the change is good news for most of his clients, many of whom were among the developers who rushed to break ground before the implementation of the 421-a changes last year, only to see their projects grind to a halt due to the credit crisis.

Sabo said he’s not surprised with HPD’s course of action.  

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“[HPD] is doing its best to promote revitalization of this tax incentive, and to achieve the swift resolution of cases that have recently congested the 421-a bureau.”

Paul Korngold, a partner at the law firm Tuchman Korngold Weiss Lippman & Gelles and an expert in 421-a policy, has two clients applying for exemptions based on the new policy change.

Unfortunately, some ambiguity in the wording of the new rules leaves some room for subjective determination by HPD on whether or not projects are eligible for the delay exemption. And developers won’t be sure how strictly the department will rule on these cases until at least a few have been filed.

The new rules allow a project to maintain 421-a eligibility if it suffered from delays due to an inability to receive financing, “despite diligent and continuous effort” to find it, Korngold points out.

“It would be easy to prove [diligent and continuous effort] if a developer went to the bank every month for a loan, and every month the bank wrote back, telling them to go jump in a lake,” Korngold said. “But what if the bank pulled the plug on [the developer] in July 2008, and [their consultants] told them not to bother looking for financing for another six months? Would that still constitute ‘diligent and continuous effort?'”

In his specific cases, Korngold plans to present applications for financing and correspondence with financial institutions among other forms of evidence, in order to receive a declarative ruling from HPD on the projects’ eligibility for 421-a.  

With regards to how HPD plans to make their determinations, Seth Donlin, the spokesperson for HPD, said: “We would make an in-depth assessment for each case, and probably go to the banks [that a developer tried to borrow from], and make the determination of whether or not they weren’t lending at the time.”