What's the Future of 421-a?

NEW YORK CITY—New York City's 421-a Property Tax Exemption Program, a measure meant to incentivize residential housing development, recently expired, only to be renewed with modifications for four years. While the overhaul of the program has elements that developers should like, Governor Andrew Cuomo has made continuation of the law contingent on a prevailing wage negotiation that has the potential to make new rental projects risky.

Created in the 1970's in an effort to spur New York City housing development and keep city residents from fleeing to the suburbs, the 421-a Property Tax Exemption Program was available for multi-family developments on sites that were either vacant or underutilized. Under its provisions, landlords were exempt from paying the increase in property taxes that resulted from their new developments.

Normally, New York City's real estate taxes are calculated based on an assessed value of the property multiplied by a tax rate. Under the program, if a developer had an empty lot that was used as a parking lot, its assessed value would be calculated on the value of the land alone. A developer could then build a new residential building on the site, and be taxed only on the assessed value of the original vacant lot. Depending on the lot's location in the city, these exemptions run from 10 to 25 years (25 years in the outer boroughs or above 110^th street in Manhattan).

The new and improved 421-a law that Governor Cuomo recently enacted gives both developers and tenants something to smile about. For developers, the length of the abatement was extended to 35 years. For tenants, all rental projects receiving the subsidy must include affordable units, setting aside 25%-35% of total units for that purpose. Other changes include a slight increase in the threshold at which affordable units can be deregulated and the banning of the abatement for condo and coop projects (with certain exceptions in the outer boroughs).

However, the new 421-a could be shut down  by January 15, 2016, due to the law being contingent on instituting prevailing wages for construction workers on projects that would receive the abatement.

The Real Estate Board of New York, which represents developers, and the Building and Construction Trades Council of Greater New York have been tasked to iron out the details in the next six months. Should they fail to come to an agreement, and the 421-a program comes to an end, it is likely that it will have a significant negative effect on the Mayor's housing plan, including possibly reducing the number of affordable housing units in the city.

While it is clearly in everyone's best interest to get the deal done, prevailing wages have historically been viewed by developers as counterproductive to getting a deal done. Some sort of give and take will be necessary in order for both groups to sign off because, at the end of the day, the economics of a deal have to make sense.

For developers, 421-a is a necessity when developing multifamily buildings in New York City. Until the prevailing wage issue is settled, developers will be naturally wary of starting any new multi-family rental projects without knowing that they can rely on a 421-a abatement. When you consider that unabated real estate tax bills eat as much as 30% of top line revenues generated from a property (a problem the Mayor also needs to focus on), 421-a is a good way to incentivize developers to start projects.

Ron Lagnado, CPA, is a partner in the real estate services group at WeiserMazars. He may be contacted at ron.lagnado@weisermazars.com. The views expressed here are the author's own.