Uncertainty Over Affordable New York Abatement Reverberating Through Investment Sales Market
There is growing angst over the future of the treasured Affordable New York tax break, formerly known as 421-a, and as the expiration date marches closer, there is a sense of resignation in real estate circles that the program is almost certainly set to undergo some market-altering changes.
Affordable New York is set to expire in June. The program currently allows developers a tax exemption for 35 years if they set aside 25% to 30% of the units for low- and moderate-income tenants when they build a market-rate rental building with more than 300 units. It was last reformed in 2017, when its name changed from 421-a.
“I don't see why they can't vote on something like this ahead of the deadline, so that we kind of know what we're dealing with,” B6 Real Estate Advisors Senior Managing Director D.J. Johnston said. “The assumption of the market is that we probably won't know until June 15 what the new program will look like — or if it will get extended at all.”
Real estate players, who argue it is a make-or-break program for the economics of New York City multifamily development, have been fretting about the looming deadline all year. With lawmakers and advocates continuing to voice criticisms — and the 2022 state legislative session happening under a vastly different political climate than five years ago — the industry is bracing for adaptations to the way the policy works.
The uncertainty is now affecting deal- and decision-making in the city’s investment market, and reigniting the debate about how to best solve the housing crisis that continues to imperil the future of the city.
Johnston said developers and lenders don’t know how to underwrite development projects right now, because no one can predict how the program will look. Some landowners with the cash and resources are working to have their sites approved by the Department of Buildings to make use of Affordable New York in its current form so that they will be worth more on the sales market in the coming months.
But, he said, with the future of the abatement unknown, condominium developers are increasingly eyeing sites that would normally be earmarked for apartments.
“I do think that right now there's an opportunity for condo developers to be really competitive, because they don't feel the effects of the abatement the same way the rentals guys do,” Johnston said. “[It’s] an opportunity for developers, but isn't necessarily good for New York.”
Avison Young Tri-State Head of Investment Sales James Nelson said the vast majority of land that is selling in New York right now is either fully affordable or priced for condos.
“We have seen developers of market-rate housing on hold unless the project is shovel-ready, where they know they can get in the ground by June,” Nelson said. “Without Affordable New York, without knowing the program, developers aren't going to take the risk.”
Some are plowing forth, however, even in the face of uncertainty. Silverstein Director of Development Brian Collins said at Bisnow's Queens and Long Island City event in October the firm’s plan to build some 2,700 units of mixed-income housing at Steinway Street and 35th Avenue with Kaufman Astoria Studios and Bedrock Real Estate Partners is being done as a “leap of faith” regarding the future of the abatement.
“Come Jan. 1, no one's going to take on a new project because they don't know what's going to happen,” he said of Affordable New York.
Several lawmakers have made it clear they do not favor the program at all. New York State Assembly Member Linda Rosenthal has sponsored a bill to repeal the program, and she plans to move it this upcoming session.
“Developers often talk about a reasonable return on their investment; well, the taxpayers of New York have invested heavily in the 421-a program and have not seen enough units of affordable housing constructed as a result,” she said in a statement. “Despite the fact that New York State is facing a growing homelessness crisis and affordable housing has become more scarce, the 421-a program continues to be used as a taxpayer-funded handout to developers to construct super luxury buildings.”
State Sen. Brian Kavanagh, the chairman of the Senate Committee on Housing, Construction and Community Development, told Bisnow in February the program should no longer exist unless it can be overhauled. He believes the program is “far too generous to property owners” and “costly to the city relative to the public benefit it is supposed to create.”
A representative for Kavanagh told Bisnow this week that the senator’s position hasn't changed.
“It's a juicy sound bite for politicians to say, ‘Big bad developers are taking tax dollars away and this is a giveaway, they don't need it.' But really it's just factually inaccurate to say that,” said YuhTyng Patka, the chair of the New York City Real Estate Tax and Incentives Practice Group at Duval & Stachenfeld. “The 421-a exemption doesn't take a single tax dollar away from the city's coffers.”
Patka said there is “cautious optimism” in the development community that the program will continue to exist, albeit with significant changes.
“We all expect the affordability options to change to be different from what they currently are. It's just a question of what the new affordability levels will be,” she said, adding that everyone is expecting more clarity once Mayor-elect Eric Adams is sworn in.
“Under the current program, 130% AMI is the most popular affordability option," Patka said. "So there is a possibility that that amount will be decreased.”
A spokesperson for the Real Estate Board of New York said in a statement the main way to address the housing crisis is to build more units.
“The private sector plays a critical role in producing rental housing, and it’s up to the State to craft a program that incentivizes production and reflects the increasingly urgent need for affordable housing. We look forward to working productively with the State and other stakeholders to identify the best way to accomplish those goals while increasing supply — otherwise, the housing crisis will only get worse.”
REBNY pointed to data from the city's Department of Finance and Housing Preservation and Development that has found that since 2014, 421-a and Affordable New York are estimated to have been used for about 50% of the city multifamily rental housing production and 30% of below-market-rate rental unit production.
But that kind of argument doesn’t sway many of the program's critics. Emily Goldstein, the director of organizing and advocacy at the Association for Neighborhood & Housing Development, said it would be more beneficial to focus on what kinds of housing are generated rather than just incentivizing in an attempt to drive up supply.
"Yes, the numbers might change [if the program is canceled], but from my perspective, it's more important to create the type of housing that's really needed by folks who are homeless, by folks who are rent-burdened, by folks who are being pushed out of the city than to just get the most numbers possible without any regard for who's actually being helped,” she said.
The impact of the pandemic, she added, is that people are accepting of change.
“In general, there's maybe a little bit more space for questioning what we assume has to be done the same,” she said.
CORRECTION, DEC. 20, 1 P.M. ET: New York City’s Department of Finance and Housing Preservation and Development data found Affordable New York/421-a generated around 50% of all multifamily rental building production since 2014. An earlier version of this story misstated the figure.