The governor and real estate industry are gearing up to revive 421a, but developers should not count on success next year. Or the year after that.
In fact, Douglaston Development CEO Jed Resnick said, it will probably be 2026 before politicians realize that construction of mixed-income apartment buildings in New York City is grinding to a halt without the tax break, which expired in June.
“They’re not going to notice for three years,” said Resnick in a panel discussion at Fordham University on the affordable housing crisis.
“When nothing is happening,” and fewer affordable units are being built, “they’ll realize that they goofed,” he said, calling the expiration of the abatement “bad progressive policy.”
Progressives let 421a lapse because they believed it was forgiving too much property tax — $1.8 billion a year — in exchange for too little affordability. But Resnick chafed at the idea of making developers provide twice as much affordability in projects to get a tax break.
“It’s hard to imagine that at 50 percent affordability, holding everything else constant, the numbers will work,” he said. “Of course, not everything else is constant.”
The cost of capital, land and materials could all change, he noted. Some opponents of 421a believe developers will find a way to build without it, perhaps because sellers of land will have to drop their prices, although few industry people are forecasting that. A more common prediction is that developers will instead build condos, which still get a property tax discount.
A slew of rental projects got footings in the ground in time to qualify for 421a and most figure to be built in the next few years. But fundraising for new such projects has slowed or stopped.
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Katherine McAdams, Director at Wells Fargo (LinkedIn/Katherine McAdams)
Another panelist, Katherine McAdams, a director of multifamily lending at Wells Fargo, took aim at the City Council’s tradition of member deference, in which rezonings that decide a project’s fate are typically negotiated or killed by the local member.
“My personal view is that that’s probably not the right way to look at things,” she said. “We have a whole council of 51 people, and we should have more people weighing in, so I would like to see more collaboration from the Council, from the government, and an end to that practice.”
In June, local City Council member Kristin Richardson Jordan stopped a 51 percent-affordable project in Harlem. That helped inspire City Council Speaker Adrianne Adams and Mayor Eric Adams to get more involved in two other project rezonings, which passed. (It might have also prompted challenges to Richardson Jordan’s re-election next year.)
Other panelists at the Fordham forum — moderated by Lou Mirando, CEO of Streamline CRE Funding Group — were Chris Dunn of Mission Peak Capital and Michael LaCour-Little, finance professor at California State University, Fullerton.
LaCour-Little offered an especially gloomy outlook.
Michael LaCour-Little, finance professor at California State University, Fullerton (Source: PennIUR)
A decade of too little building, combined with a demand boom caused by declining household size and cheap borrowing rates, created a scenario where “without subsidies the bottom fifth of the income distribution cannot afford rentals in any market anywhere,” LaCour-Little said.
If some version of 421a returns, its terms are certain to change. The duration of the tax break, Resnick said, is unlikely to remain 35 years, and the affordability mandates figure to change. Income levels at which units are considered affordable, which had extended up to 130 percent of area median income, could be reduced, and the percentage of below-market-rate units could increase.
The last time 421a expired, in 2016, lawmakers approved a replacement after about 15 months.
Resnick demurred about the role developers play in finding political solutions, alluding to the fact that if projects cannot hope to generate the returns demanded by investors, they don’t get financed.
“It’s not like we set what the return on equity is,” he said. “There are capital markets. Or at least there were capital markets until six months ago.”