New York City’s highly sought-after tax exemption program for new multi-family developments called 421-a has expired as of June 15, 2022. Developers needed to set aside 25-30% of their market rate units as affordable to qualify for the “up to 100% tax exemptions for 25 years”. The programs’ goal was to increase affordable housing across the 5 boroughs. Low-income workers could benefit as a lot of 421-a developments are in more affluent communities. According to city data, 421-a costs the city more than $1billion yearly to maintain the program and about 90% of new residential construction has received 421-a or other tax breaks in the last decade. Developers who completed the project’s foundation before the deadline and finish construction before June 15, 2026, may still qualify for the tax break. Tax breaks like 421-a is important to developers because real estate tax for multi-family buildings can make up to 25 to 30% of gross revenue – much higher than most apartments in the country. As such, this becomes a popular solution which makes new construction and operating it financially feasible.
In June 2022, when the program expired, far fewer permits were filed in comparison to 2015 when it expired. In 2015, the economy was gaining momentum from the crash of 2008, close to 0% federal funds rate for about 6 years couple with the Bloomberg administration’s approvals of several rezonings which provided a lot of opportunities for development. Notable rezonings during Bloomberg’s administration include Hudson Yards, Chelsea, Downtown Brooklyn, Williamsburg/Greenpoint, LIC, Mott Haven and Jamaica. This time, the major rezonings of SoHo and Gowanus did not pass until late 2021 which leaves about approximately 6-8 months of time before the tax break ended. Also, the SoHo area is relatively a fully built environment compared to the other rezonings. Multiple rate hikes since the beginning of 2022, supply constraints and rising costs became problematic for developers. New York saw an 8.17% increase in cost compared to last year according to a study by RLB back in April. From the table, 2014-2015 saw a big increase in NB fillings (other than 1-3 families) because of the expiring 421-a. Compared to 2013, 2014 saw a 43.97% increase in NB fillings while 2015 saw a 4.9% decrease in filings. In 2015, the June deadline was further extended by 6 months to December which provided developers a second round of opportunity to get the tax break.
2021 showed the lowest number of NB fillings in the past decade with only 266. The fact that the city shutdown multiple times in the second half of 2020 due to covid could be the main reason and filings may take up to 6-9 months depending on the project. The first half of 2022 saw a big rebound with the number of NB fillings with a 156% increase as it is the final 6 months of the 421-a deadline. The projected NB fillings for the year 2022 should be around 1,000 fillings on par with the pre-pandemic 2016 to 2019 averages.
Across the 3 different tax breaks, the minimum affordability requirement has increased over time along with an increase in tax abatement period. The old 421-a that expired in 2015 was a tax heaven for condominium owners as there are no specific limitations on condominium projects that could qualify for 421-a. The requirements of “affordable condominium” in the project were often blurred and sometimes could be mixed-up with rental units under the same building. About one third of the total units that received 421-a were condominiums, which was more than rental units according to Department of Finance data. A single-entrance for market and affordable units, on-site affordable housing and limitations of condominium projects have been introduced in the just expired 421-a. Core Manhattan required more affordability whereas other areas require 30% of the units to not exceed 130% AMI. The focus was rental projects as condominium projects were capped at 35 units and no projects in Manhattan. The newly proposed 485-w requires 20-25% of the units at 90% AMI and these numbers are similar to VIH requirement which is 20% of the units at 80% AMI. Rental projects could become less feasible and there might be a possibility for developers to consider condominium development instead. Some solutions: Perhaps tax assessed value on new rental buildings should be reassessed? Reduce the abatement period or exempted amount with an increase in AMI requirement? The city clearly needs affordable housing and future requirements on tax breaks must not jeopardize the financial feasibility of a project.
Gov. Hochul indicated with optimism that a new 485-w program is in the works for 2023. Negotiations continue and uncertainties still loom large for the fate of affordable housing in New York City. In the meantime, the options for multi-family developers are fully subsidized affordable projects or market rate condominium, the loss of tax incentives will lead to fewer moderate-income units.