Time is running out on the final days of a potentially expiring tax break that property developers are counting on to build new apartments – and the rush is on to get foundations in the ground before June 15, when 421-a ends unless the state legislature passes an extension.
In Astoria, Queens, the second phase of the Durst Organization’s massive Hallett’s Point development will have laid all of its foundations by the middle of next month, allowing those buildings to qualify for the lucrative tax incentive. But Phase 3 and its additional 800 apartments will be shelved if 421-a expires, the developer says.
“The only place we could build a market-priced apartment building without 421-a is near Union Square or maybe a few other slices of Manhattan,” said Jordan Barowitz, vice president of the company. .
In Williamsburg, Brooklyn, Two Trees Management Co. has begun building 350 Kents as part of its equally massive Domino development, which will add 400 units – 30% of them designated as affordable or rented to specific income-earning households. , as part of the inclusion of the city. housing program. But a developer representative said the future was “cloudy” for another building planned at Domino and the first two structures planned at its newly approved River Ring site, as they may not be able to pour their foundations before the deadline.
New units issued soared to 4,091 in March, according to the Census Bureau building permits survey Data analyzed by THE CITY, compared to 2,678 in January and February combined. Sources who have seen preliminary data for April and early May say the surge has continued.
Developers say construction of much-needed housing — particularly the limited-income affordable apartments now required in exchange for the incentive — will come to a screeching halt after 421-a expires for any sites that haven’t started before June 15.
Buildings eligible for 421-a tax relief must set aside 25% to 30% of their units for affordable housing at specified family income levels. According to the NYU Furman Center, approximately 90% of all residential construction in the city over the past decade received 421-a or other tax breaks. Half of all affordable apartments since 2014 were built under 421-a, according to city data.
Even as developers race to meet the deadline and claim the credit, critics say good riddance to the tax break, which is costing the city $1.8 billion a year by eliminating or reducing property taxes until at 35 years old.
Those seeking to end the program argue that a hiatus will not have an immediate effect and that there are other ways to make building rental housing economically attractive.
Yet even when the 421-a program expires, there will be no windfall for the city, since buildings that qualify before the cut will continue to receive the benefit for three decades. The Non-Profit Citizens Budget Commission estimates the end of the 421-a will bring in less than $100 million a year for the next seven years.
Shortage of affordable housing
Mayor Eric Adams went the extra mile to renew the tax relief during his trip to Albany earlier this week and said he hoped there could be agreement on a replacement for 421-a. But insiders say the odds are against anything but a short-term extension.
The 421-a controversy comes amid an ever-worsening housing crisis. Earlier this week, the city’s latest official housing and vacancy survey showed an all-time low vacancy rate of 1% for affordable apartments.
New York needs 560,000 new homes by 2030 to make up for the shortfall in new construction over the past decade and meet expected population and job growth in the post-pandemic city, according to a study published earlier this year by the consulting firm AKRF commissioned by the Real Estate Board of New York.
The permit rush happening now is a repeat of 2015, in the months leading up to a lapse tax relief in a fight over whether buildings would be required to pay higher construction wages. The number of new homes delivered that year soared to over 55,000 from 20,000 the previous year. Permits then dipped to 15,000 in 2016 before the program was reinstated at the end of the year and then slowly increased.
When the tax relief at the time expired, Durst immediately halted work on Hallett’s Point after completing a 400-unit building – leaving the rest of the project’s planned 2,000 apartments, nearly 500 of which would be affordable, in the limbo. When the tax relief was reinstated the following year, work resumed.
With Phase 2 in the ground, Durst will be able to complete 1,600 units. But the other 800 will not be built without the tax relief.
“Without 421-a or a comparable tax incentive, Hallett’s third-stage economy is unsustainable,” Barowitz said.
Rentals in New York pay much higher property taxes than other types of housing, consuming up to 30% of all rental income. Condos, co-ops and single-family homes pay significantly less.
Other developers are turning their rental projects into condos, says Patrick Sullivan, a partner at law firm Kramer Levin, who adds that none of his clients plan to proceed with a rental property after 421-a expires.
The only exception will be projects where zoning approval was tied to a percentage of affordable units under the city’s mandatory inclusive housing program. In this case, his clients will try to build two buildings, one with condos and the other with affordable apartments that can benefit from other tax breaks.
Since the developers will miss the June 15 deadline, the impact won’t be felt immediately.
“There will be a lag of four or five years until the lack of construction shows up,” said David Lombino, managing director of Two Trees.
Inaction to stimulate action
Opponents of 421-a, including the city’s chief financial officer, reject the developers’ claims.
“The Buildings Department has authorized more units so far in 2022 than they did at this time last year, and we expect permits to continue to increase as the 421-a expiration date nears. Housing development will not come to a screeching halt in a month,” Comptroller Brad Lander said.
Lander campaigned for property tax reform that equalizes the burden on rental housing and eliminates 421-a. Reducing the tax burden would be enough to stimulate the construction of lower-cost housing for the city, he says.
The Community Service Society, another opponent of 421-a, supports the Lander approach. But the 179-year-old nonprofit also says the end of 421-a will lead to lower land costs, which will translate into cheaper homes.
“It is possible that the expiry of 421-a will cause some adjustments in the immediate future, but we strongly believe that the end of 421-a would ultimately encourage the construction of more housing in the long term by stopping the inflationary cycle around the land value and rents,” said senior economist Debipriya Chatterjee.
Property tax relief is governed by state law. Governor Kathy Hochul proposed revised tax relief as part of her budget, with tougher requirements for affordable housing, but did not ask a reluctant legislature to approve it in final budget negotiations. Mayor Eric Adams sought to convince lawmakers to renew the tax relief during his lobbying trip to Albany this week.
Insiders say the legislature is unlikely to agree to a short-term extension – but add that a long-term renewal is not on the cards as primaries for their seats loom over the summer . The Adams administration and real estate interests are expected to push to restore the tax break after the election is over.
“Albany’s inaction will only worsen the housing crisis in the city,” said James Whelan, chairman of the Real Estate Board of New York. “The question moving forward is how bad this crisis must be for New Yorkers before elected officials address the issue through strong, evidence-based policies rather than fringe and fringe rhetoric. friendly to Twitter.”