The clock is ticking on the final days of a likely-to-expire tax break that real estate developers rely on to build new apartments.
Developers are rushing to get started on projects eligible for the 421-a tax incentive — but what will happen to the New York apartment housing construction market after the June 15 deadline passes and Albany fails to pass an extension?
The CITY published an extensive feature about this issue on May 19, suggesting that there could be serious problems in the marketplace after the housing construction boom turns to bust.
As an example, The Durst Organization expects it will have laid all its foundations for the massive Halletts Point development in Astoria, Queens by the deadline — but the developer says the third phase, with 800 more apartments, will be shelved if 421-a expires.
“The only place we could build a market rate apartment building without 421-a is near Union Square or maybe in a few other slices of Manhattan,” said Jordan Barowitz, a Durst vice-president, told The CITY.
Building permit data indicates new units issued permits rose to 4,091 in March compared to 2,678 in January and February. The CITY says sources who have seen preliminary data for April and early May say the surge has continued.
“Developers say that much needed housing construction — especially of income-restricted affordable apartments now required in return for the incentive — will come to a screeching halt after 421-a expires for any sites that haven’t started by June 15,” the published report says.
To qualify for the 421-a tax break, builders must set aside 25% to 30% of their units for affordable housing at specified family income levels. NYU Furman Center calculates that almost all (about 90%) of New York City’s residential construction received either 421-a or other tax breaks.
The 421-a break costs the city an estimated $1.8 billion a year by eliminating or reducing property taxes for up to 35 years. However, ending the break won’t provide much immediate relief to taxation, since buildings covered by the program will continue to benefit from it for decades to come.
The CITY reports that mayor Eric Adams made one more push to renew the tax break on his trip to Albany earlier this week and said he hoped there could be an agreement on some replacement for 421-a. “But insiders say the odds are against anything but a short term extension,” the published report says.
“The permit scramble happening now is a repeat of 2015, in the months leading up to a lapse of the tax break in a fight over whether buildings would be required to pay higher construction wages. The number of new units issued permits that year soared to more than 55,000 from 20,000 the year before. Permits then plunged to 15,000 in 2016 before the program was reinstated at the end of the year, then slowly increased.”
Durst stopped work on Halletts Point then after completing one 400-unit building, and only resumed work when the tax break returned.
“Without 421-a or a comparable tax incentive, the economics of the third phase of Halletts are not viable,” Barowitz said.
Other developers are switching their plans from rental to condos, says Patrick Sullivan, a partner at the law firm Kramer Levin, who adds that not one of his clients plan to proceed with a rental building after 421-a expires, says the report.
“The only exception will be projects where zoning approval was tied to a percentage of affordable units under the city’s Mandatory Inclusionary Housing program. In that case, his clients will attempt to build two buildings, one with condos and the other with affordable apartments that can qualify for other tax breaks.”
The situation won’t change immediately because projects under construction will continue to be built — but the impact will be felt as new work dries up and the currently-being-built projects are completed. As well, the surge in activity to beat the deadline may cause some overloading and add to pressure on the construction market and supply chains.
Opponents of 421-a, including the city’s chief financial officer, dismiss the developers’ claims, says The CITY.
“The Department of Buildings permitted more units so far in 2022 than they had by this time last year, and we expect permits will continue to climb as we near the 421-a expiration date. Housing development will not come to a crashing halt in a month,” said Comptroller Brad Lander.”
Lander has been campaigning for property tax reform to equalize the burden for rental units, while eliminating 421-a. He says the lower tax burden would be sufficient to spur housing construction at a lower cost to the city.
“Insiders say there is a slim chance the legislature will agree to a short-term extension — but add that a long-term renewal is off the table, as primaries for their seats loom over the summer,” the published repot says. “Both the Adams administration and real estate interests are expected to lobby to reinstate the tax break after the elections are over”.
“Albany’s inaction will only worsen the city’s housing crisis,” said James Whelan, president of the Real Estate Board of New York (REBNY). “The question moving forward is how bad does that crisis need to get for New Yorkers before elected officials address the issue through sound, fact-based policies rather than fringe, Twitter-friendly rhetoric.”