A revived affordable housing tax incentive has helped boost construction but effectively limited how many units developers could build. Two years in, developers are on the hunt for new ways to change that.

Under 485-x, developers have been incentivized to build — but only up to 99 units, as prevailing labor wage requirements kick in for larger projects. Developers have focused largely on building larger apartments or multiple smaller buildings on the same lot.

But developers and real estate advisers said at Bisnow’s New York Multifamily Operations and Development conference that they are exploring another solution: breaking a single building into multiple condo units under New York tax code.

“You pay full taxes on the units that are not within that condo, and you get an exemption from the rest,” Belkin Burden Goldman partner David Shamshovich said. “I don't think it's a loophole.”

485-x is largely unpopular among developers, especially compared to its predecessor, 421-a. The new incentive, which provides real property tax exemptions up to 40 years, comes with stricter requirements. Once a development plans at least 100 apartments, construction workers must be paid at least $40 an hour, more than double the standard minimum wage, and the proportion of affordable units goes from 20% to 25%.

The adopted rules state that affordable and market-rate units can’t be segregated through the condo structure and that a building with multiple condo units counts as one multiple dwelling. 

But some stakeholders argue those provisions are aimed at ensuring that affordable and market-rate tenants are integrated within a building, not necessarily at preventing a developer from carving out a portion of the building that doesn’t participate in the tax program at all.

“We're getting significant pushback from [the Department of Housing Preservation and Development], and it's an issue,” Shamshovich said. “Having separate tax lots with 199 units is perfectly within the statute as it is today.”

Multiple condo unit structures are more commonly used in mixed-use developments, where the retail or office portion of the building is separated from the residential despite existing within the same building. 

“I joke around about how we're going to have prewar, postwar, and then we're going to have this 99-unit era,” brokerage firm MNS Real Estate CEO Andrew Barrocas said. “Now you're seeing a shift where you have multiple 99-unit buildings sitting on some sort of podium.”

But the theory hasn’t yet been tested with a groundbreaking, and many lenders are hesitant to do so, given that HPD has the potential to shut it down. Shamshovich attributed the issue to “fearmongering.”

“Our banks are like, ‘You need to personally guarantee that you're going to get that tax abatement,’” Fetner Properties President and CEO Hal Fetner said. “We're not going to do that because we're a little nervous about where the 99-unit buildings go.”

Developers across the board said they would like more clarity from the government around the tax incentive, especially since the industry has already been widely toeing the line. Of the 172 buildings proposed in the second quarter, 52 were between 50 and 99 units, 208% above the historical quarterly average since 2008, according to a report by the Real Estate Board of New York.

“The 99-unit question is the question that always has the bull’s-eye on its back,” MAG Partners co-Head of Development Andrew Staniforth said. “Is this allowed? Is it not allowed? Is it a loophole?”

The easier way to build bigger is for costs to come down, panelists said at the Times Square Marriott Marquis. As inflation has pushed construction costs up and investors look to other parts of the economy, the most reasonable place for prices to drop is land.

Sellers are valuing their properties at the maximum zoning floor area, instead of what is realistic under 485-x.

“They have not come to the realization that the people that are buying those properties, developers, are not going to build that way,” Shamshovich said. “Somehow those two have to converge.”

That means that larger lots may lose value. Paradoxically, savings on land costs may increase project size. 

“Land basis is a key component, and if you keep that down, obviously you have more room for construction wages, for greater margins, things like that,” Shamshovich said.

In the first six months of the year, 485-x deals drove the market, making up 70% of development site sales, according to Ariel Property Advisors. Citywide, 106 trades occurred at $211 per buildable square foot. 

For comparison, Rockefeller Group's purchase of 200-204 W. 97th St., planned as a single 340-unit rental, pencils out to $239 per buildable square foot, according to the report.

Still, developers are hopeful that buildings will get bigger, whether that is due to costs, workarounds or larger amendments to the program. 

“You're going to start to see some more 100-plus-unit buildings coming out of the ground,” Fetner said.