Effects of 421-a Expiration And Issues To Consider
It has been a little over a week since the Real Estate Board of New York and the Building and Construction Trades Council failed to reach an agreement on construction wages for 421-a development projects. With the 421-a property tax exemption no longer available for residential projects commencing construction in 2016 or later, there are significant implications for residential development in NYC which will affect a variety of real estate issues for as long as we do not see new legislation and 421-a remains unavailable:
- While development of market-rate condominium projects can be expected to continue in locations where sales prices are robust enough to support development without 421-a, future mixed-income rental projects can be expected to stall as developers will have to revise their underwriting to account for full property taxes. To continue to encourage the production of affordable housing as part of mixed-income projects, subsidies would have to be provided, either through the provision of additional zoning floor area for market rate units, or through financial support, to make up for the increased property tax burden that will be imposed without 421-a benefits.
- The likelihood and implications of the anticipated adoption of the Mandatory Inclusionary Housing zoning amendment (MIH) in re-zoned areas, without 421-a benefits, will have to be considered. MIH adoption by the NYC Council, if it occurs, is expected in March of 2016 (albeit with some amendments). Following MIH's adoption, a series of re-zonings are expected to occur throughout NYC, with newly re-zoned areas subject to MIH's requirements (assuming MIH survives anticipated statutory and constitutional challenges).
- MIH's adoption as presently drafted and without a 421-a exemption being available will lead to a curious situation: 100% affordable projects may be built (and may qualify for other property tax exemption program(s) such as the 420-c exemption under NYS RPTL Section 420-c) while also qualifying separate market-rate projects to be built in an MIH area, albeit without any property tax exemption or abatement.
- MIH zoned areas, however, are unlikely to see construction of mixed-income rental projects for which affordable units would be required under MIH but for which the 421-a exemption is not currently available. Only with significant changes to MIH or the provision of significant subsidies to make up for the absence of 421-a exemption benefits would the economics of mixed-income rental projects in MIH areas be improved. A quick and clear extension of the 421- a exemption without a prevailing construction wage requirement would go a long way in reassuring the developers of mixed-income residential projects. If 421-a is extended with a prevailing construction wage requirement, we can expect to see developers build fewer (more expensive) affordable units and / or to request additional subsidies to make up for the additional construction cost.
- The details of MIH as adopted and of particular re-zonings will be critical to prospective residential developers and to owners of existing properties in re-zoned areas.