421a Expiration Raises Development and Affordable Housing Concerns | Practical Law

421a Expiration Raises Development and Affordable Housing Concerns | Practical Law

Recently, the New York City 421a tax abatement program expired after groups representing developers and construction workers failed to reach a wage deal. The program's expiration is raising concerns over future development in the city and the implementation of the mayor's affordable housing program.

421a Expiration Raises Development and Affordable Housing Concerns

Practical Law Legal Update w-001-3984 (Approx. 4 pages)

421a Expiration Raises Development and Affordable Housing Concerns

by Practical Law Real Estate
Published on 04 Feb 2016 • USA (National/Federal)
Recently, the New York City 421a tax abatement program expired after groups representing developers and construction workers failed to reach a wage deal. The program's expiration is raising concerns over future development in the city and the implementation of the mayor's affordable housing program.
On January 16, 2016, the New York City 421a tax abatement program expired after the Real Estate Board of New York (REBNY) and the Building and Construction Trades Council of Greater New York (BCTCGNY) failed to reach an agreement on wages for workers employed at sites benefitting from the 421a program. The wage agreement between the two groups was the last step to implement a four year extension of the program approved by state legislators on June 15, 2015.

Background

New York City's 421a tax program was enacted on July 1, 1971 to provide a tax exemption for any new construction on under-utilized or vacant land. The program was renewed in 1977 because it fostered residential construction, which provided a significant source of employment. In 1984, the city created Geographic Exclusion Areas (GEA) and required that to receive 421a benefits, any new residential construction in a GEA must include a certain percentage of affordable housing units. The GEAs have since expanded to encompass all of Manhattan and many parts of the outer boroughs.
For more background information on 421a, see Legal Update, New York City 421a Property Tax Program Hinges on Private Sector Agreement.

The June 2015 421a Agreement

After its expiration in June 2015, legislators approved a bill that extended the 421a program for four years and:
  • Extended the maximum length of exemptions to 35 years.
  • Required that all rental projects include affordable housing.
  • Provided developers with three options to comply with affordability requirements.
  • Prevented the use of "poor door" entrances or segregation of affordable housing tenants from the other tenants.
However, the June 2015 421a agreement was contingent on REBNY and the BCTCGNY reaching a wage agreement for workers employed at sites benefitting from the 421a program. Labor organizations advocated that projects receiving 421a benefits should pay workers a prevailing wage, while developers countered that increased labor costs would make development projects economically unviable.

January 2016 Expiration

After failing to reach a deal on wages, the 421a program expired on January 15, 2016, although it is possible that the program will be revived after further negotiations. Many developers rushed to begin construction before the program's expiration to ensure their projects would receive 421a benefits.

Developer Concerns

Developers are hesitant to begin new multifamily residential rental projects until they are assured that the 421a program will continue. Some developers have complained that lower yields from rental developments are making it harder to attract equity investors, which is forcing developers to consider new strategies to find less expensive land.
Until a deal is reached, developers may focus their efforts on condominium and cooperative projects, which are taxed at a lower rate than residential rental developments.

Affordable Housing in Jeopardy

421a was an integral part of Mayor Bill de Blasio's initiative to increase the city's stock of affordable housing under the Mandatory Inclusionary Housing (MIH) program and the city's Zoning for Quality and Affordability (ZQA) program. Without 421a, these programs may prove to be financially infeasible.
Despite 421a's expiration, both the MIH and ZQA program were approved by the New York City Planning Commission on February 4, 2016, and are up for a vote by the City Council. The city has also requested that developers submit their development applications under MIH guidelines.
The expiration of 421a prompted the New York City Bar Association to draft a letter recommending that the city postpone implementation of the MIH program until a deal on 421a is reached to allow additional time to address potential consequences.

Practical Implications

Due to the uncertainty of the continuation of the 421a program, many developers may shift away from projects that are taxed at higher rates, most notably multifamily residential rental projects within GEAs. Counsel should anticipate the need for alternative plans for projects that did not begin construction in time to receive 421a benefits and investigate the tax implications of beginning construction without the program's tax exemptions.
Without 421a tax benefits, many construction projects may not be financially viable, particularly rental properties that face higher tax rates within GEAs. In response, some believe developers may begin to look outside the GEA for new development opportunities, where tax rates are lower. Developers may also be inclined to construct condominiums and cooperative units rather than rentals because of the tax implications.
Concerned parties should continue to monitor future negotiations closely as the program's expiration may provide a greater incentive to reach a deal.