The Real Estate Board of New York (REBNY) and the Building & Construction Trades Council of Greater New York (Construction Trades) have reached an agreement which could extend the 421-a property tax exemption program for new residential construction projects commencing construction after 2015 (the New Program). The 421-a program for projects commencing construction in 2016 and after was suspended in January of 2016 because of the lack of an agreement between REBNY and the Construction Trades on construction wages for projects receiving 421-a benefits.
In the absence of 421-a benefits, developers and lenders have been unable to underwrite New York City mixed-income rental projects without knowing whether they will have to pay full (unexempted) property taxes of up to 25-30% of their gross rents, whether 421-a or a replacement program would be available, and what property tax benefits, affordability limits, construction costs and other requirements would come with the replacement program.
What’s in the New 421-a Deal?
The 421-a deal, brokered by Gov. Cuomo, involves REBNY and the Construction Trades agreeing to specific construction wages for buildings with 300 or more rental units in Manhattan south of 96th Street and in Brooklyn and Queens Community Districts 1 and 2 within 1 mile of the nearest waterfront bulkhead. Manhattan buildings subject to the construction wage requirement would have to pay an average hourly wage of $60, while Brooklyn and Queens buildings would have to pay an average hourly wage of $45. (Wages listed include salary and benefits.)
What Other Changes Could the New 421-a Deal Involve?
- Affordable rental units would remain affordable longer (40 years).
- 421-a exemption benefits would increase (to 100% exemption for 35 years).
- Developers subject to the 421-a wage requirement must hire independent monitors to audit certified payrolls.
Could This 421-a Deal Impact Projects Already Under Construction?
It might. Projects which commenced construction in 2015 to vest under the old 421-a program (i.e. by making 20% of units affordable) may be able to elect to participate in the new 421-a program. This could involve making a higher percentage of units affordable, at different affordability levels, and for a longer period in exchange for receiving an increased property tax exemption. Only 300+ unit projects in certain Manhattan, Brooklyn or Queens locations would have to pay specific construction wages. Whether it will make sense for a vested 421-a project to participate in the new 421-a program will require revised project underwriting to compare the costs and benefits of the old 421-a program against those of the new 421-a program.
What Happens Next?
421-a will not be formally extended unless and until new 421-a legislation is passed by the New York State legislature and signed into law by Gov. Cuomo. It is possible that 421-a extension legislation could differ from the deal agreed to by REBNY and the Construction Trades and/or from the existing but suspended 421-a Statute. Until the 421-a statute is officially extended, these details should be considered tentative.
Governor Cuomo has asked for a special legislative session to address the extension of 421-a and Venable will be monitoring the legislative process.