The Daily Dirt: The early bird gets the biggest office-to-resi tax break

The quicker developers decide to convert their office properties into housing, the longer their potential tax break will be. 

Those who begin such conversions after December 31, 2022, and on or before June 30, 2026, can qualify for a 35-year tax exemption, cutting 90 percent off their bill if located below 96th Street in Manhattan. That value lasts for the first 30 years of the break, and then drops down by 10 percent each year for the remaining years. If the project is located elsewhere in the city, that value is 65 percent for the first 25 years of the break. 

Developers who start later are eligible for a 30- or 25-year benefit. Those who start work between July 1, 2026 and June 30, 2028, can receive a 30-year benefit, while those who begin between July 1, 2028 and June 30, 2031, get 25 years. Projects must be completed on or before December 31, 2039.  

The tax break, approved in the state budget, applies to office buildings that are being converted to include at least six housing units. At least 25 percent of the housing units must be affordable, which means that the weighted average of tenants’ income does not exceed 80 percent of the area median income.      

This is all spelled out in newly released guidance on the Department of Housing Preservation and Development’s website. 

Developers cannot yet apply for the tax break because HPD must first adopt rules for the program. Those rules will determine what qualifies as a project “commencing,” and hence, what the length of the tax exemption will be. The agency has, however, issued interim guidance indicating that, for now, a project begins when the Department of Buildings issues one of three types of alteration permits. 

Similar to 421a and its successor program, 485x, developers do not file applications for this exemption until after the work is completed anyway. 

“Thanks to our partners in Albany, New York City has the green light to turn the dual crises of underused office space and critically needed affordable housing into an opportunity,” Mayor Eric Adams said in a statement. “Now, a little more than a month later, the city will begin the work of converting office space into housing throughout the five boroughs and delivering much-needed relief to everyday New Yorkers.” 

In addition to creating the tax incentive, the state budget lifted the city’s residential floor area ratio cap, a key change for office-to-residential conversions because many office buildings have a floor area ratio larger than 12, which was the previous limit for residential space. The mayor’s City of Yes for Housing Opportunity text amendment would pave the way for sites and areas to be rezoned to reflect the state’s FAR change, and also includes provisions to allow office buildings constructed prior to 1990 to be converted into housing.

Still, real estate professionals have raised concerns that the affordability requirements, compounded with the complexity of conversions, would deter developers from embarking on such projects. 

One lingering question I have (among many) is whether folks will regularly refer to the tax break as its code in the tax law, 467m, its program name, Affordable Housing from Commercial Conversions Tax Incentive Benefits, the program’s acronym AHCC, or if we will go on saying: That tax incentive for office-to-residential conversions. Time will tell if 467m can be burned into our brains the way 421a was. 

What we’re thinking about: The City Council on Thursday approved the City of Yes for Economic Opportunity, with a 36-14 vote. Given the changes needed for that proposal to go ahead, what will it take to get the City of Yes for Housing Opportunity passed? Send a note to kathryn@therealdeal.com. 

A thing we’ve learned: Empire State Development says it has yet to receive word of any potential developer candidates for the six development sites at Pacific Park (aka Atlantic Yards) from lender, United States Immigration Fund. An auction scheduled for the site this week was postponed until July.

Elsewhere in New York…

—  ICYMI, the City Council on Thursday approved a measure that will give it more say in the mayor’s appointments to city agencies, Politico New York reports. Under the bill, the Council will host confirmation hearings and hold a vote on 20 positions that did not previously require the body’s approval. The mayor is expected to veto the measure. 

— Rex Heurmann, the expeditor charged in the murder of four women, has been accused of killing two more women, the New York Times reports. After his arrest last summer, investigators dug into the unsolved murders of six other people, similarly found along Ocean Parkway by Gilgo Beach. The latest charges involve one of those victims, and another murder that was previously not linked to the Gilgo Beach serial killings. Heurmann has pleaded not guilty to all charges.  

— A federal judge recently gave the green light to a Long Island woman’s lawsuit against Cold Stone Creamery in Levittown. Thanks to the ruling, Farmingdale resident Jenna Marie Duncan can sue Cold Stone for serving her pistachio ice cream that Duncan says did not contain the nut, Gothamist reports. 

Closing Time

Residential: The priciest residential sale Friday was $15 million for a 4,552-square-foot condominium at 527 West 27th Street in Chelsea. Chase Landow and Ryan Serhant had the listing. 

Commercial: The largest commercial sale of the day was $114.5 million for a 39-unit apartment building at 170 East 83rd on the Upper East Side. 

New to the Market: The highest price for a residential property hitting the market was $25 million for a 6,630-square-foot condominium unit at 78 Irving Place, in Gramercy. Eleonora Srugo, Abigail Godfrey, and Rebecca Mardikes of Douglas Elliman have the listing. Breaking Ground: The largest new building application filed was for a 136,000-square-foot affordable housing apartment building at 725 Van Sinderen Ave in East New York. Michael Gelfand of MHG Architects filed the permit. — Matthew Elo