Developers are one step closer to receiving new property tax breaks for multifamily housing and office-to-residential conversions — or at least understanding how to apply for them.
The Department of Housing Preservation and Development released proposed rules for 485x — the tax exemption that replaced 421a — and for 467m, an incentive for converting offices to residential space. The rules must be finalized before HPD can approve applications for either program.
State legislation approved in April created the programs and left little wiggle room for the city to change how developers could use the tax breaks. Still, the city’s guidance is critical for developers whose projects depend on the tax breaks.
“We are working quickly to roll out the new programs created by the state in partnership with HPD and the administration because we don’t have time to waste. People need homes now,” HPD Commissioner Adolfo Carrión said in a statement.
The proposed rules for 485x clarify what qualifies as a “reasonable effort” by developers to spend at least 25 percent of contract costs on minority- and women-owned businesses throughout the design and construction of projects, which is required to get the tax break.
YuhTyng Patka, a partner and real estate tax attorney at Adler & Stachenfeld, said it is still “murky” how projects that began construction after 421a expired but before 485x passed would be able to show a “reasonable effort.” For that 22-month period, no one knew the new program would have MWBE hiring requirements.
Jason Hershkowitz, a partner and real estate attorney at Seiden & Schein, said,
“There doesn’t seem to be a surefire way of complying, and I think that is somewhat problematic.”
But he said the proposed rules provide HPD with a lot of discretion in determining whether developers made a reasonable attempt to meet the 25 percent threshold.
Lack of clarity upfront could spell trouble for projects later. Alvin Schein, co-founder of the firm, noted that if HPD finds that the developer of a finished project did not meet the hiring threshold, it would be too late for the developer to fix it.
Compared with the state law, the city’s proposed rules for 485x and 467m decrease the rents for affordable apartments, which are allocated through a city-run lottery. Apartments will initially be marketed at rates affordable to households earning 3 percentage points less than the area median incomes laid out in the legislation — so, 77 percent AMI, rather than 80 percent.
The 3-point deduction is standard in other HPD programs and is aimed at increasing the number of lower-income families that qualify for the apartments. HPD does not believe the change will be disruptive to financing 485x projects, but it could still affect underwriting.
“I don’t think it will be a deal-breaker, but it does affect the project bottom line depending on how tight the underwriting is,” Patka said.
Developers are still waiting to hear what penalties they will face if they do not abide by 485x’s affordability and wage requirements. Penalties for the latter will be determined by the city comptroller, and HPD’s first set of proposed rules do not lay out fines for the former.
The state legislation indicates that penalties will be calculated as a percentage of the program benefits, but cannot exceed 1,000 percent. HPD is expected to release a penalty schedule separately.
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