421a Fallout: Project Sales, Lawsuits and Wasted Rezonings

The seers of New York City real estate predict it will take a few years of stalled housing production for lawmakers to revive a key property tax break.

But Nostradamus is not needed to forecast the immediate effects of 421a’s demise. They are already upon us.

Since state legislators let the property tax break expire last June, filings for multifamily construction have plunged. Some developers, fearing they will miss a critical construction deadline to receive the tax break, have offloaded projects. Others have struggled to make a sale.

And in at least one instance, investors are suing developers for allegedly overstating their ability to qualify a Brooklyn project for the program before it slipped away.

The state Senate and Assembly are not eager to extend the construction deadline for 421a, let alone replace the program, before they adjourn for the year on June 8. Critics have called the 35-year exemption — which requires developers to rent out 25 to 30 percent of a project’s units at below market rates — a giveaway that does not require enough affordable housing.

To qualify for the incentive, developers needed to have foundation footings in the ground by June 15, 2022, and be completed by June 15, 2026. Gov. Kathy Hochul proposed adding four years to that second deadline, but key lawmakers would only support an extension for certain projects. Even that hasn’t happened yet.

The fate of the issue may be tied to several other housing policies. Senate Majority Leader Andrea Stewart-Cousins reportedly indicated this week that any housing legislation should be passed as part of a package that includes tenant protections, presumably a reference to some version of good cause eviction.

Rachel Fee, executive director of the New York Housing Conference, said it would be a “huge blow” to affordable housing if lawmakers do not extend the construction deadline for 421a.

She said there is a lot of attention around the 2021 Gowanus rezoning and that housing projects in the neighborhood will likely not move forward without a tax break in place. The rezoning was supposed to generate 8,000 housing units, 3,000 of which would be affordable.

The housing goals of the 2021 Soho rezoning may also be toast without 421a, as would three major projects in Astoria and one in Throggs Neck. The city’s Mandatory Inclusionary Housing law still requires affordable units in projects that benefit from rezoning, but the state tax break it was paired with is gone.

“I think these discussions are happening right now, and it is not really clear if Albany is willing to advance anything on housing,” Fee said. “I feel like, especially for the [Mandatory Inclusionary Housing] projects, the legislators understand that they are blocking housing from being built.”

“It is about to come to a head, real fast. We barely made it.”
Tucker Reed, Totem

Ahead of the Gowanus rezoning, developers rushed to file plans for apartment projects, knowing they needed to meet those two 421a deadlines. Some have since sold their sites, using the exemption as a selling point, or taken on partners — with the completion deadline a likely motivator.

Property Markets Group just sold development sites at 267 Bond Street and 498 Sackett Street to Carlyle for $100 million. The Brodsky Organization recently bought a majority stake in a 350-unit project at 499 President Street from Avery Hall Investments, which retained a piece.

Elsewhere in Brooklyn, Douglaston Development paid Totem $66 million for a site at 1057 Atlantic Avenue in Bedford-Stuyvesant, where the firm plans a 456-unit rental building. The developer secured a $185 million loan from Wells Fargo and M&T Bank for the project.

Douglaston’s Jeff Levine told The Real Deal that it is likely one of the final sites to qualify for 421a. Lenders have been requiring developers to guarantee that they will finish their projects well ahead of the 2026 deadline, in some cases mandating a one-year buffer. Starting a project today gives developers a little more than two years.

Tucker Reed, co-founder and principal of Totem Group, said projects without financing in place and shovels in the ground in the next 30 to 60 days will likely not move forward.

“It is about to come to a head, real fast,” Reed said. “We barely made it. I’m sure there are a bunch of other owners out there who are not able to thread that needle.”

One that did not, according to a lawsuit filed by its own investors, was for a 64-unit rental project in Crown Heights.

Ahron Gluck filed plans for the project in March 2022, and developers Joseph Rubin and Samuel Haikins bought the site in May, helped by an $8 million investment from three Ohioans. A Google photo shows demolition in progress the same month that 421a lapsed.

The Midwesterners’ suit claims that footings were not put in place before the deadline, and nothing has happened at the site since. Missing the 35-year property tax break drastically alters the finances of a project, which can make it impossible to get a construction loan.

The Real Estate Board of New York projected that some 32,000 planned apartments would not be built without an extension to the construction deadline. The trade group has also been tracking the decline in multifamily building filings.

According to its latest report, developers only requested permits to lay foundations for 22 multifamily buildings — the fifth straight month of fewer than 30. In the six months leading up to 421a’s expiration, an average of 77 foundation applications were filed.

“New York City’s rental production numbers are anemic and getting worse,” said the Real Estate Board of New York’s Basha Gerhards.

On Thursday, Mayor Eric Adams, members of his administration and housing and labor groups held a press conference at Monadnock Development’s 300-unit housing project at 155 Third Street in Gowanus, which is in jeopardy if the 421a construction deadline is not extended. Adams lamented rising rents, shrinking inventory and “the total slowdown in construction.”

“We need lawmakers to respond now. We need to pass the housing package,” he said. The city has been pushing for that extension, as well as changes to enable more office-to-residential conversions, a proposal to lift the city’s residential floor-area-ratio cap and a new J-51 tax break.

Reed said his company is exploring its options for its other 421a sites. He is hopeful, given that lawmakers have not proposed property tax reform in 421a’s absence, that Albany will replace it.

“We’re optimistic that policy makers will wake up and do the right thing,” he said.

Asked if the timeframe for that was within the next week, he said, “I have a very high risk tolerance, but I would not take that bet.”