Hochul pitches conversion tax break. Will developers bite?
Insiders say affordability requirement, tax savings just might work
Last week, Mayor Eric Adams floated a way forward for office-to-residential conversions, saying the city could rezone Midtown so developers could convert underused office buildings into much-needed homes.
The catch: Rezoning triggers an affordable housing requirement, adding costs to projects that already would require a property tax break to pencil out.
Wednesday, Gov. Kathy Hochul proposed a solution: a tax exemption for office conversions that set aside a certain percentage of rental units as affordable.
The proposal, dubbed Affordable Housing from Commercial Conversions, or AHCC, would require 20 percent of converted units to be rent-stabilized and affordable to households earning 70 percent of the area median income, on average. In exchange, developers could nab a 19-year tax break.
Industry experts say the incentive, which requires the legislature’s approval, looks juicy enough to get developers to bite.
“I think this will work for developers, knowing the current market for distressed office properties,” said Max Herzog, a commercial broker with JLL who handles financing on conversions.
It would take “a deal or two to fully understand how well this affordability and tax abatement proposal will really work,” he noted, but said the language looks like a “strong step in the right direction.”
Herzog said it would make sense to compare any proposal to 421a, an abatement that allowed ground-up multifamily projects to succeed.
That program, which expired in June, froze property taxes for 25 years and trimmed them for 10 more if developers made 25 percent to 30 percent of units affordable for households making up to 130 percent of the area median income.
On first blush, Hochul’s conversions benefit is much less generous.
Her tax break would last just over half as long as 421a. Developers would still pay half of their property taxes for the first 15 years, then 10 percent more during each of the final four years.
Only 20 percent of units would need to be affordable but at much deeper levels than 421a required. Affordable units could not rent to anyone making more than 100 percent of the area median income and must average 70 percent of the AMI. Moreover, 5 percent of all units would need to rent to tenants at 40 percent of the AMI.
Affordable rent is generally defined as not exceeding 30 percent of household income.
The tax break for conversions need not match 421a because construction would still be cheaper than doing ground-up development. Conversion costs can be $50 to $150 per foot cheaper, Herzog estimated.
But the wild card is the price of the building. Most offices are still trading for a bit more than the value of the land they’re sitting on, Herzog said.
If more distress hits the sector, owners could be forced to cut prices for their properties or lose them to lenders, who would do the same.
The building at 25 Water Street offers an example. Taken back by its lenders, it traded for about $250 per square foot last year, Herzog said. By comparison, Manhattan development sites went for an average of $532 per square foot in the third quarter of 2022.
Another X factor is whether the state legislature will go for Hochul’s proposal. Lawmakers already let 421a die, deeming it too generous for the affordability it yielded, and rejected her less-generous replacement, 485w, last year.
Assembly Housing Committee Chair Linda Rosenthal said she would need to take a closer look at Hochul’s bill before weighing in on its viability.
“The devil’s in the details and I need to have a better understanding of what the details are,” the Manhattan Democrat said, adding that a proposal similar to 421a would not fly.
“The one thing we don’t need is to have another 421a-like boondoggle where we’re shoveling close to $1 billion every year in exchange for not very much affordable housing,” Rosenthal said.
“It’s just the beginning,” she said of the budget process.“There are plenty of conversations that need to be had.”