NYC's Apartment Developers Look To Other Uses, Other Places, Without 421-a
With the treasured 421-a tax break for developers now dead until further notice, the thousands of people in the New York City development community are looking at the best ways to pivot their businesses — if at all.
“This is probably my fourth 421-a expiration … [but] there felt there was a little more support last time,” Slate Property Group principal David Schwartz said. “I think at some point, it comes back. It's just I don't know when, and that's the challenge.”
The Affordable New York tax provision, previously known as 421a, lapsed earlier this month after the legislative session in Albany wrapped up with no new arrangement or extension in place. The real estate community had been urging lawmakers for years to find a solution before the program expired, arguing that without it, all rental development in the city would grind to a halt.
With community opposition to the program fiercer than ever, and several lawmakers railing against the program, New York developers have arrived at their long-dreaded future with the program unavailable for a while, if not forever. Now, many are looking at building nonresidential properties, putting development plans on ice or investing out-of-state, brokers and developers told Bisnow in interviews since the incentive officially expired.
“We've been preparing for the eventual expiration for years,” The Durst Organization’s Jordan Barowitz said. “Developers will do condominiums, we don't. We've been looking to see if there's potential for commercial development. We're also looking in other cities like Philadelphia; we have a project that we're just breaking ground on.”
He added that some developers may be looking at the competitive field of last-mile industrial development with greater interest, but at the moment, with very few exceptions, rental housing is seen as “off the table.” At the firm’s Halletts Point megaproject, some 800 apartments that were planned will not be built until a new tax break is agreed upon.
“Some suggest developers are bluffing when they say they won’t build rental housing in New York City without a program. Honestly, I wish they were right, but they’re just not,” Brookfield Senior Vice President and head of communications Andrew Brent said in an email.
“And obviously the city desperately needs more housing,” Brent said.
At last week’s REBNY gala, Gov. Kathy Hochul attempted to placate the industry, promising changes, though she never mentioned the program by name. Her proposal for a replacement, which she released in January, was criticized by housing advocates and failed to get any traction in Albany. Still, she painted an upbeat picture of what may be ahead.
“We're coming back next session, we're going to make sure that we get the changes we need to support this industry, because you create thousands of jobs, you give people their homes,” she said at the ceremony. “You are going to watch an extraordinary comeback for this state and this city."
On Tuesday, Hochul, who replaced the scandal-plagued former Gov. Andrew Cuomo last year, easily secured the Democratic nomination for governor with 67% of the vote, making her an overwhelming favorite to become New York's first woman elected to the state's top office.
With the race in the rearview mirror, some CRE players, after the industry directed its financial support her way in the primary, expect next year will bring a more favorable political environment for a new program.
“Elected officials [will be able to] play less politics as far as their electability goes and focus on the true politics of finding a way for much-needed housing projects to flourish in New York City,” said YuhTyng Patka, the chair of the New York City Real Estate Tax and Incentives Practice Group at law firm Duval & Stachenfeld.
Patka said some of her clients are looking at more “developer-friendly jurisdictions” in other states or considering building condos. Others, she said, are opting to simply focus on their current project and taking a “wait-and-see” approach.
But not everyone feels so sure about a more amicable political environment in Albany, even after the election.
“Last time when it expired, the governor was really committed to it … I think the political world is a little bit different than it was back then,” Schwartz said. “I felt more confident in previous years … I know that something will come at some point in time, but I think the opposition to it this time is stronger than it was last time.”
The 421-a program lapsed back in 2016, and it wasn’t renewed until 2017 after Cuomo reached a deal with REBNY and the construction unions and rebranded it as Affordable New York. But even though he is less confident about the future of the program, Schwartz said there are more alternatives available in the market this time around.
“There's a lot of that stuff that could be industrial … there's a lot of need for medical space and other uses,” he said. “A lot of people are going to be doing other things and in the very high-end areas look at condos. Then people will still build low-income housing, which has a different tax abatement.”
That’s what Joy Construction principal Eli Weiss is considering, nothing that there are certain tax programs, like the Low Income Housing Tax Credit, available for that kind of work. The problem, he said, is that there is little land available at a price that would make sense.
“If you're a landowner in a prime neighborhood, you're not going to sell land for $75 a foot … it's going to be very difficult. We're going to have to look in areas like the Bronx and far out in Brooklyn and certain neighborhoods in Queens,” he said.
“The other problem is it also screws up mandatory inclusionary housing, because if you have a project that was in a rezoning, you're required to do 25% or 30% affordable," he added. "But you don't get the tax abatement for it, so it makes the math even worse.”
Weiss, like many others, rushed to get two projects in the ground before the program expired — buildings with foundations poured were grandfathered in. One of them, which the company is building with Maddd Equities, will feature two towers of commercial space and 611 housing units in recently rezoned Inwood The other, on Tillary Street in Brooklyn, will have 465 apartments and span 436K SF.
Joy certainly wasn’t the only one in a rush to meet the deadline. Some 80 applications were filed in Brooklyn in the past 12 months, per TerraCRG. But Patka, of Duval & Stachenfeld, said that doesn’t mean that developers will hold onto the projects if costs become too high.
“It's scary because I've seen reports say how the filings and this past spring are sky-high,'' she said. “And so it looks good for the pipeline, but I don't think it's self-reported or taking into account that just because a permit filing occurred it doesn't mean that project is going to become completed.”
The Affordable New York program, however, requires construction to be completed by 2026 for taxes to be abated, The Real Deal reported. But even as people look for alternatives, rising costs are another complexity to consider, said DJ Johnson, a partner and senior managing director in the capital markets group at B6 Real Estate Advisors.
“I've heard people say, 'Listen, we used to be able to build for $275 a foot, now we're building for $350 a foot,'” he said. “I wouldn't advise any landowner to transact unless they're in a condo market, because the price adjustments are going to be too much. So my advice would be to hold.”
But for many, there’s a looming sense of the inevitable.
“We have a few nice projects in the pipeline that vested the 421-a program, but I guess that's going to end also at some point," said Isaac Hirsch, the CEO of Brooklyn-based JIH Builders Group. “If it drags for too long, then people will start looking for alternative investments.”