With a record number of new residential building permits issued in NYC in 2015, it is likely that many of these sites are now being marketed for sale as having been grandfathered for the 421-a property tax exemption, which can significantly reduce property taxes. But buyer beware! Prospective purchasers looking to buy and build such projects and who are relying on 421-a eligibility in their underwriting should be careful to verify that a project does indeed qualify for 421-a benefits before going hard on a contract. In the absence of 421-a benefits, new multifamily projects in NYC can expect to pay property taxes amounting to 25% to 30% of gross rental income, so 421-a eligibility is a very significant consideration.
Prospective purchasers and property sellers should keep in mind several considerations:
- Grandfathering a project for 421-a benefits may involve more than just installing an initial footing or foundation element.
- 421-a site eligibility must still be verified, even for projects that commenced construction in 2015 or earlier.
- Certain completion of construction deadlines apply to 421-a projects.
- Even if otherwise eligible for 421-a benefits, projects may need to provide affordable housing both to qualify for 421-a benefits and possibly to receive a zoning bonus under the Inclusionary Housing (IH) program. 421-a and the IH program each have their own requirements, and a project must comply with the more restrictive requirements of each program.
- 421-a is subject to certain construction requirements with which developers and project architects must comply.
- A project's commencement of construction date, location, affordable unit mix, and the mixture of residential and other uses will determine how 421-a benefits are to be calculated and the benefit schedule they will be calculated for.
Understanding the possible amount and schedule of 421-a benefits, and the affordability restrictions applicable to a particular project, will help developers to underwrite projects and determine their viability with greater accuracy.