The end of tax incentives in New York jeopardizes the construction of apartments

New York City's multifamily development faces an uncertain future after the expiration of the main tax incentive for affordable housing, real estate investors and analysts say.

The New York City Affordable Tax Regulation, commonly known as 421a, offered property tax exemptions for housing projects in New York City that include a percentage of units intended for low-income renters. Nearly 70 percent of rental housing built in the past decade has benefited from tax breaks, according to New York University's Furman Center.

But the 51-year program expired in June, when state lawmakers ended their session without extending or replacing it. This has left many New York city developers in the quandary of trying to complete lease projects they started before the deadline, or switching gears and building other types of real estate.

"People are working on their current projects, but later in the summer we'll have this 'holy cow' moment, like, 'What are we doing now?'" said David Dishi, chief executive of LMXD, an affiliate of L+M Development Partners that specializes in affordable housing.

At the end of the first quarter, New York City issued 38.1% more permits than at the same time last year, according to the City Charter Board.

Real estate investors had to install the foundation of the project with a permit by June 15 and will have to complete construction by June 15, 2026 in order to receive tax benefits.

Daniel M. Bernstein, an attorney and property tax specialist at Rosenberg & Estis P.C., had to tell developers who approached him for advice on rental projects, "I'd love to help you, but you missed the deadline." Those projects, he said, can't "make the numbers work" without a tax instrument like 421a.

Many developers are likely to stop pursuing their rental projects, either waiting for 421a to be replaced or instead seeking to move into condominium or non-residential real estate.

Durst's organization, for example, planned to build seven mixed-income buildings and fully accessible buildings in Astoria, Queens. The first building is completed and the next three are laid out on time to qualify for tax breaks.

But the last three buildings, which were supposed to include between 600 and 700 new mixed-income apartments and affordable rents, "won't move forward until there's a comparable tax instrument to the 421a," said Jordan Barovitz, Durst's vice president of public affairs.

His company, like many others, has no plans to turn its rental spaces into condominiums. Condominiums offer a better tax regime and can generate more profits, but the cost of converting medium-sized construction, combined with current fluctuations in market demand, make these conversions high-risk, developers say.

"In this market, with uncertainty surrounding office [demand], a shift to a different use is not really possible" for projects already underway, said David Lombino, managing director of external relations at Two Trees Management. The Brooklyn developer continues the projects approved under 421a, but is waiting for a new tax cut before starting new construction.

The 421a program in New York City expired in the past, but was resumed shortly thereafter. Its last sunset was in January 2016, when lawmakers similarly allowed it to expire without a replacement. It was returned in November of that year with a new focus on stimulating affordable housing.

But 421a is unlikely to return in its current form this time, said New York State Sen. Brian Kavanagh, a Democrat representing lower Manhattan and parts of Brooklyn. Many lawmakers in his party believed the policy did not encourage enough affordable housing, but offered tax breaks for developers who built mostly for above-average renters.

Some lawmakers have proposed overhauling the property tax system after 421a. But since the legislative session ended in June, it will take at least six months before new negotiations can take place.

Meanwhile, the state legislature created a 25-member Affordable Housing Commission to hold public hearings and prepare a report on how best to increase the supply of affordable housing in the city. The commission will take effect once New York Governor Katie Khoohul signs the law.

Not all apartment buildings will stop. Some officials say rising building permits will sustain it long enough to buy time before the lack of a tax program is felt in the housing supply. The spike in permits is likely to be enough to increase rental supply over the next few years, New York Comptroller Brad Lander said.

A similar spike occurred in 2015, when nearly 18,000 units were built with 421a tax exemptions, up 44% from a year earlier, keeping housing construction afloat while lawmakers decided whether to extend it. And then there's the patchwork of tax support that housing projects can count on without 421a.

Over the long term, the city's most economically viable projects are likely to be luxury units and highly subsidized affordable housing for extremely low-income renters, said Peter Fine, chief executive of New York-based real estate firm Bolivar Development.

"They're creating a tale of two cities for the very rich and the very poor," he said. "These are the people who will get housing. Everybody in the middle won't get anything."