Commercial Space Is Developers' Secret Sauce For Making Residential Conversions Work

Developers are realizing they have an extra way to boost their revenues when they tap 467-m, the city’s program to slash property taxes for office buildings being converted into apartments.

The fine print of 467-m, which was signed into law by Gov. Kathy Hochul in 2024, says developers can abate taxes on the commercial space in a conversion project as long as it is no more than 12% of the aggregate floor area.

That rule was enough to convince Issac Hera, CEO of Yellowstone Real Estate Investments, to convert a vacant office building he bought at 220 W. 42nd St. into apartments, abandoning early plans for a hotel, he said at Bisnow’s New York Conversions and Building Upgrades conference last week.

“When the city came with the 467-m, that was the reviving force to turn it into residential for sure, taking into account also the fact that there's very valuable retail for us on 42nd Street,” he said onstage at Convene One Liberty Plaza.

The tax break allows developers to forgo paying the vast majority of property taxes if they execute an office-to-residential conversion and set aside a quarter of apartments as permanently rent-stabilized affordable units. 

The incentive is one of several ways that New York is trying to get developers to build 500,000 homes by 2034 amid a protracted housing shortage and record high rents. It is the most popular multifamily development incentive available today.

By the end of Q3 2025, 467-m projects made up 11% of units in the city’s development pipeline, while just 3% of projects had applied for the 485-x ground-up development abatement, which was enacted simultaneously, according to a Real Estate Board of New York report. Around 60% of projects hadn’t yet filed for an incentive, while the remaining 27% had obtained 421-a before the tax exemption and its extension deadline expired.

The Financial District has become a hotbed of activity since 467-m came into effect. Bushburg is converting a 1.2M SF office at 80 Pine St. into hundreds of apartments, GFP Real Estate is turning 40 Exchange Place into a 382-unit apartment building, and RXR and One Investment Management are converting 61 Broadway into 796 homes.

Developers are also finding opportunities in Midtown. In May, Apollo Global Management, SL Green and RXR received approval to turn the 1.1M SF office at 5 Times Square into 1,250 rental units. TF Cornerstone is planning to turn a 430K SF tower on Billionaires’ Row into housing using 467-m, the developer revealed in August.

Part of the appeal, according to the panelists at the conversion event, is the ability to get a massive tax break on retail space that can be offered at market rents.

Up to 12% of a building using 467-m can be dedicated to commercial space and still receive the tax break, according to state legislation. If the commercial space occupies a larger percentage of the building, the developer’s tax break will still apply but will be reduced.

“That's a very powerful incentive for owners to offer to commercial tenants when they're trying to lease up space,” Adler & Stachenfeld partner YuhTyng Patka said onstage. “I think that's a really powerful strategy that's not often talked about enough.”

Nonprofit developer Breaking Ground, which focuses on permanent supportive affordable housing, has been using commercial space to shore up revenue in its properties for decades as a way to cross-subsidize its developments.

In 1999, it converted the Prince George Hotel between Madison and Fifth avenues into 416 affordable housing units. It kept the neo-Renaissance 5K SF ballroom and renovated it, opening it as an event space in 2005.

“We look for retail spaces, we look for other spaces where we can really take advantage of drawing in revenue so that we can cross-subsidize,” Breaking Ground CEO and President Brenda Rosen said onstage. “So, now we're in the ballroom business.”

The nonprofit has kept looking for opportunities to keep commercial space inside its developments ever since. In 2022, it converted a former Jehovah’s Witnesses hotel at 90 Sands St. in Dumbo into a 491-unit affordable and supportive housing development, keeping a 17K SF commercial kitchen in the basement.

But there is still uncertainty about the value of buildings utilizing 467-m because of the incentive’s permanent affordability requirements, Silverstein Properties Vice President for Development and Acquisitions Jonathan Hong said.

“[Investors] want to know that they'll be able to get out, have an exit,” he said. “You have a plan to get them out.”