Looming end of tax break triggers real estate “hunger games”
Developers bracing for expiration of 421a race to get projects filed and foundations laid
Developers made a gamble in Gowanus in November, likely to avoid an even bigger risk: paying real estate taxes for the next 25 years.
More than three weeks before the city approved a contentious rezoning in the Brooklyn neighborhood, Domain Companies and the Vorea Group filed plans for two projects totaling 628 apartments. Both sites were, at the time, limited to manufacturing use.
A few days later, Property Markets Group filed plans for a 344-unit, mixed-use building at 267 Bond Street.
By that point, the rezoning’s approval was a near certainty, but a major financial component of these and other multifamily projects was not. Affordable New York, the property tax exemption better known as 421a, is scheduled to expire on June 15. Some state lawmakers have already made clear that they will fight to stop its renewal.
It is this uncertainty that is expected to lead to a rush of project filings in the coming months, just as it did the last time the tax break expired, in Jan. 2016. Developers must have foundations completed by June 15 to qualify for the current program, and if their projects require zoning changes or other approvals, they will need to vie for the attention of a new mayor, borough presidents and City Council.
“As we’ve seen before, it will turn into the ‘Hunger Games’ in terms of who can pull their permits and get their footings into the ground,” said Ken Fisher, a real estate attorney with Cozen O’Connor and a former City Council member. “There’s a bulge in applications, just as there was [when] there was a renewal last time.”
Preparing for the worst
The threat of losing 421a has been a long time coming. Fisher said some of his clients started planning for the tax break’s elimination in 2018, when Democrats took control of the state Senate for the first time in half a century, paving the way for extensive revisions to the state’s rent stabilization law a year later. Many of the same advocates and lawmakers at the center of that transformation are now pushing for 421a to be left to expire.
Not everyone has planned ahead.
“Others woke up more recently, so that anybody who can is trying to get their foundations started in time to be grandfathered,” Fisher said.
Under the program, multifamily developments are fully exempt from taxes for 25 years after construction, then receive a partial break for another 10 years. The incentive costs the city $1.7 billion in annual revenue, but developers who benefit must set aside 25 to 35 percent of units as affordable for the duration of the tax break.
It is not clear how many new building applications have been filed with the aim of vesting under the existing 421a. Developers argue that the high cost of land and the structure of New York City’s property tax system mean the exemption is necessary to make multifamily construction financially feasible.
The flow of applications for new multifamily buildings has, thus far, not been too dramatic. According to the Department of Buildings, 852 applications for new multifamily projects or major renovations on such buildings were filed last year, as of Dec. 16. That’s fewer than the 1,067 filings in 2020 and the 1,243 in 2019. On average, it takes the agency 37.3 days after receiving a new building application to approve it and issue permits.
“The Department of Buildings regularly sees influxes of new applications from developers who are looking to meet deadlines related to changes in regulations,” a spokesperson for the agency said in a statement. “We continue to have sufficient staff to review these applications in a timely manner.”
Ofer Cohen said his firm, TerraCRG, began marketing two large development sites in Gowanus during the first half of last year, and had to navigate uncertainty surrounding both the rezoning’s approval and the future of 421a.
“Developers really needed to get into the pre-development process last summer,” he said.
Because approvals for the 421a exemption can take several months, the outlook is not great for developers who have not yet submitted inclusionary housing plans to the Department of Housing Preservation and Development, said Jay Seiden, a partner at the law firm Seiden & Schein who has been working with the program since its inception in 1971.
“You’re dead,” he said.
As the June deadline approaches — absent any action by the state legislature — some developers will likely take a wait-and-see approach. Others may opt to build condominiums, if their site allows it.
“Uncertainty is the real problem here,” said Ross Moskowitz, a partner at Stroock & Stroock & Lavan, who focuses on real estate tax and abatement issues. “Projects that are on the fence will probably not come to fruition.”
Cohen expects sites with pre-approved plans to come to market in the first half of 2022. After that, the city may see a slump in development-site sales, as both buyers and lenders will be unsure about how future projects will pencil out.
“It is clear that people are not going to buy anything new now,” Seiden said. “They don’t know if there is going to be a program.”
Seiden hopes that Eric Adams’ mayoral administration will allow partial permits for initial building footings as a vesting option for developers.
“The mayor’s office has to say, we want this housing,” he said.
If 421a is ultimately renewed, the industry largely expects that it will look different. The last time the program expired, a key part of the debate revolved around whether construction workers should be paid prevailing wages for work on projects benefiting from the exemption.
This time, the industry will likely come to the table alongside organized labor with a different framing, one that focuses on contracting with minority- and women-owned businesses, new types of wage agreements, deeper levels of affordability, sustainable construction and hiring locally, according to two real estate sources.
Negotiations could be further complicated by efforts to pass good cause eviction this legislative session, a policy that would effectively cap annual rent increases at 3 percent or 150 percent of the Consumer Price Index, whichever is higher.
In the meantime, the market will have to brace for heightened activity followed by several months of uncertainty.
“The market is overwhelmingly understanding that this program is going to expire. There is probably going to be a gap,” Cohen said. “The inability to price what the program is going to look like is paralyzing.”