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NYC Land Use Bulletin- 421-a Tax Incentive Lapses

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By Richard Barth, Senior Advisor for Land Use and Housing Strategies, and Claire Altman, Director of Affordable & Supportive Housing Development Services

On Friday, January 15, the 421-a tax incentive program lapsed when the Building and Construction Trades Council and the Real Estate Board of New York were unable to reach an agreement on construction wages.  Projects which had commenced construction by December 31, 2015 will continue to receive the full 421-tax exemptions.  Any project initiated after this date will not qualify for the benefits.

Background

The 421-a program was substantially modified on June 25, 2015 by the New York State Legislature, which extended the existing program until December 31, 2015.  This program had required that within the “General Exclusion Area”, 20 percent of the units obtaining the benefits must be affordable. There was no affordable housing mandate outside this area. The  projects that were able to begin construction by this date can continue with no loss of benefits.

Under the June legislation, all rental buildings commencing construction after December 31, 2015, would have been subject to new requirements that 25 or 30 percent of the units must be affordable, following one of three “tiered affordability options”.   The benefits were eliminated for condominiums and co-ops in Manhattan and for these buildings with over 35 units outside Manhattan.

Key Provision on Building and Construction Wages

During the negotiations on the June legislation, there was considerable debate over the applicability of prevailing construction wages to developments receiving the 421-a tax exemptions.  Under the legislation, new construction aspects of the legislation would be “suspended” unless the real estate industry and building and construction trades agreed, by January 15, 2016, to a memorandum of understanding on wages and benefits for construction workers on buildings over 15 units that receive 421-a benefits.  Because an agreement was not reached, the 421-a program for new developments has now lapsed.

Implications

The Governor and the Mayor have expressed concern over the lapse of the 421-a program.  Experts have noted that it could have significant implications for the Mayor’s Affordable Housing Program, as well as rental housing generally in the City. In addition, the proposed Mandatory Inclusionary Housing Program was designed to work in concert with the new 421-a regulations, and some have noted that deeper city subsidies would be required in its absence.

According to a recent report from the NYU Furman Center for Real Estate and Urban Policy, limited construction could conceivably occur in certain neighborhoods with falling land prices, and condo development could take over in others. It notes that in many neighborhoods such as Bushwick or Bedford-Stuyvesant, rental development could not happen without 421-a.

Jerilyn Perine, Executive Director of the Citizen Housing and Planning Council has noted that 421-a is an important tool for affordable housing, and in order to maintain the level of production that is planned, the gap created by the lapse of 421-a has to be filled somehow.

At Capalino, we work with market rate and affordable housing developers and not-for-profits in creatively packaging housing programs and revenue sources to shape financing and development plans for sites.  The 421-a program is often a key ingredient in these plans, and we will be assessing implications and strategies to help ensure viable projects going forward.

Many have called on the Legislature to take action to ensure this vital program continues. We will monitor events closely in the weeks ahead.  Because of uncertainties going forward, rental projects that were to have relied on 421-a should closely examine their plans and contingencies.

Where Can I Get More Information?

For further information, please contact Richard Barth, Senior Advisor for Housing + Real Estate Strategies, at richard@capalino.com or 212-616-5845 and Claire Altman, Director of Affordable + Supportive Housing at Development Services, claire@capalino.com or 212-616-5839, who can assist in the review of your projects.


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