Funds investing in real estate projects, and their returns on investment, often are affected by legal and regulatory developments, particularly with respect to the tax treatment of such projects. New York City new residential projects that seek to minimize their property taxes face a commencement of construction deadline of December 31, 2015 (among other eligibility requirements) in order to qualify for property tax exemption benefits under the current 421-a statute. Funds investing in NYC new residential projects commencing construction January 1, 2016 or after should be aware of looming changes to the 421-a property tax exemption statute (NYS RPTL Section 421-a(16) aka the "Future 421-a Statute").  

The Future 421-a Statute will take effect only if there is a construction wage agreement between the Real Estate Board of New York and the Construction Trades by January 15, 2016. Under the Future 421-a Statute, projects commencing construction on or after January 1, 2016 are subject to greater affordability requirements for rental projects than ever before (and certain other changed eligibility criteria), in exchange for receiving a longer and more valuable property tax exemption than is available under the current 421-a Statute. Rental projects qualifying under the Future 421-a Statute will receive a partial exemption of property taxes for a total of thirty-five years (ten or fifteen years more than the current 421-a tax exemption program).  

Fund investors will want to understand how the Future 421-a Statute and other relevant requirements impact the rents available for affordable units, how to model the affordability and eligibility requirements (including rent and income requirements), and how to project the impact on net operating income: weighing lower rents from affordable units against property tax savings. Under the Future 421-a Statute, condominium projects would be prohibited from receiving any tax exemption benefits (except for small projects outside of Manhattan).  

Fund investors will need to evaluate the particular requirements of the Future 421-a Statute applicable to residential projects commencing construction in 2016 and after, as well as any other incentives (zoning bonus from the Inclusionary Housing program of the NYC Zoning Resolution), subsidies (New York State or City subsidies, if available), or other requirements (Mandatory Inclusionary Housing) that might apply to future projects.  

A summary of some of the main aspects of the Future 421-a Statute are available on the website of the NYC Department of Housing Preservation and Development.  

A recent study by the NYU Furman Center predicts that, assuming no overly onerous construction wage requirements are applied to the Future 421-a Statute, certain rental projects may achieve better financial returns on investment than under the current 421-a Statute.