How NYC's New Development Tax Credits Are Changing What Gets Built And Where

Developers have had almost a year to try and figure out how to use the newest development tax breaks from New York's blockbuster housing policy makeover.

Now that they've crunched the numbers on the 485-x mixed-income development abatement and the 467-m office-to-residential tax break, they are changing their plans for what kinds of housing to build and where.

“In order to see a true creation of housing with the 485-x — because, my personal opinion, it's not going anywhere — we have to change the way we do business,” Sergey Rybak, founder and principal of Rybak Development, said last week at Bisnow’s New York Multifamily Development and Investment Conference.

Manhattan developers have seized on 467-m, even those that started their projects before the new abatement was on the books. Developers are less enthused by 485-x, which offers less generous tax incentives and calls for prevailing wages that builders say make large projects unfeasible.

Some will still build under whatever circumstances, Rockrose President Justin Elghanayan said onstage at the Marriott Marquis Times Square — but the rising cost of construction combined with stubbornly high interest rates present an unavoidable math problem. 

“I feel like if you don't look at a deal emotionally, you can't do a deal in New York,” he said. “To continue to invest in New York, you actually have to emotionally really believe in New York. You have to be able to blind yourself, to an extent, to the numbers and take this leap of faith.”

New York City had a banner year for housing production in 2024, with 33,974 new units completed during the year, according to the Department of City Planning. That is the most new homes delivered in a single year since 1965, a result of developers rushing to build projects as the 421-a tax break expired in 2022.

That has done little to blunt the city's housing crisis. Rents are up in all boroughs and hit new records last month in Manhattan, and they are expected to keep rising.

Without a tax break, development slowed. Just 15,626 units were permitted to begin construction in 2024, the fewest in the five boroughs since 2016. 

To reinvigorate housing production, state legislators last year passed 467-m and 485-x, intended to replace 421-a.

The 485-x tax break has three variations that developers can choose. Last fall, developers predicted that the option that yields the fewest housing units — between six and 99 apartments per project — would be the most popular because of the prevailing wage requirements in place for larger proposed housing developments.

Opting in to that version of 485-x requires developers to set aside 20% of their units as affordable housing at 80% of the area median income. But developers feel that even that version won't work on many of the sites on the market today.

Ariel Property Advisors partner Sean Kelly was recently trying to sell a Downtown Brooklyn development site that could have accommodated a 100K SF residential building. But using the entire square footage while building only 99 units to avoid the prevailing wage requirements under 485-x would mean larger units.

There isn't yet enough data for developers to feel certain that pushing ahead with larger units will yield higher rents, he said. Studios and one-bedrooms remain the rental units in highest demand.

“We ultimately wound up signing a contract with somebody who's going to build condominiums,” he said. “We can't find enough 10K SF land sites where you can build 50K SF to 75K SF right now.”

With the exception of the Brooklyn and Queens waterfront areas singled out by 485-x as also requiring prevailing wages, developers and brokerages think lower land costs could make 485-x viable in the boroughs. Ariel is “going further out into the boroughs,” Kelly said, while Rybak described the pockets of the city farthest from Manhattan as “phenomenal.”

Rybak Development, which recently delivered 200 housing units in Coney Island and has other residential projects underway, believes there is a case to be made for larger units.

“We're going against the tide,” he said. “We're building larger units. We're not building minimum-size units.”

Rybak is on the cusp of delivering another 500 units in September, one of five multifamily projects underway, according to the developer's website, bringing a total of more than 900 units to neighborhoods on the South Brooklyn waterfront. The developer also plans to vie for the city’s recent request for proposals for more developments in the area, Rybak said.

A part of his calculation is that by avoiding building the smallest unit sizes allowed by the Department of Housing Preservation and Development — possible in areas of the city where land is cheaper — they can therefore also avoid the higher turnover that comes with them, he said. 

“Apartments that are built to livable standards, where there are no 8-foot bedrooms, actually do much better in the outer boroughs and have a lot less turnover, a lot easier to manage,” he said. 

But the biggest change to what gets built under 485-x may not be limited to the number of units that get built, or even where in the city they end up. The new abatements incentivize affordable units at 60% to 80% of AMI, as opposed to the dealer’s choice mix of 30% to 130% AMI allowed under 421-a. Consequently, affordable units built under 485-x will likely be occupied by a different type of renter, developers said.

“With the purely 130% AMI projects, we're seeing a huge, huge increase of subsidy applicants, folks that have different housing vouchers,” MGNY Consulting CEO Yuri Geylik said. 

Roughly 60% of MGNY’s affordable units are occupied by renters who can qualify for 130% AMI units because they have vouchers like City Fighting Homelessness and Eviction Prevention Supplement and Section 8, he said. 

“We believe that when the environment changes and it's mostly 80% AMI blended, we'll have probably a lot more, proportionally speaking, income-eligible applicants,” he said. “We believe that there will be a lot more absorption from the income-eligible applicants versus subsidy applicants as we move forward into the 80% AMI market.” 

That shift could be beneficial for developers, Rybak said: 130% AMI equates to roughly market-rate price, which often means a formal marketing process to persuade tenants to move in, followed by a two-to-four-month vacancy to fill the unit through a mini-lottery after tenants leave. 

“I think 80% AMI is going to be much better in terms of stability of the actual asset,” he said. “Those rents are far below market rate, and I think those units will be lifelong residences. They will vacate much less, and there'll be less turnover.”