New York City May Face New Real Estate Concerns As 421a Tax Credits Expire



James Andrews / Getty Images / iStockphoto

James Andrews / Getty Images / iStockphoto

For the past five years, developers have enjoyed 421a tax exemption, making it easier building in new york during the coronavirus pandemic and as a result, the worst real estate market in recent decades. As the perks expiring in June 2022 draw near, developers are struggling to prepare for an event in which they will have to ditch projects altogether.

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What is 421a?

421a is a New York State tax exemption that is given to developers to build new multi-unit housing in New York City, and was created out of concern that if developers were given tax breaks, they would build large, new multi-unit buildings intended for wealthy people. To insure this, the state government also included a rule that parts of new developments must be “available” in order for units to qualify for tax exemption.

If the building meets the requirements, developers are granted 100% tax exemption for up to three years during construction, plus a 100% exemption for 25 years after construction and reduced tax credits for an additional 10 years after completion of the project. A large part of the deal is the requirements for affordable housing levels, including low and middle income wage levels and labor rates.

How did this happen?

When the initial exemption expired in January 2016, a fight ensued between the state legislature and unionization for the new deal. During the negotiations, Gov. Andrew Cuomo did not give up affordable housing, while unions demanded higher wages for what they saw as a surge in demand for project books.

The Compromise, dubbed Affordable New York, effectively increased the proportion of affordable housing that developers had to build in Manhattan and along the Brooklyn and Queens quays while increasing wages for union workers on projects. Over the past four years, taxpayers have paid for both increases.

How does this affect real estate now

Since the exception expires next June, many developers just throw in the towel instead of trying to get started before the deadline. Real estate attorney Kevin Power told the Commercial Observer that investors who find it impossible to meet deadlines are beginning to change their minds about home deals.

“When you tell them they have to plunge into the ground in less than a year to reap the benefits of 421s, I’ve had clients say, ‘I can’t get this deal – I’m not buying this site because I won’t. “. know if i can meet it [June 2022] the project deadline is not possible without it, ”added Power.

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This has serious potential implications for the real estate market. There were many development projects in New York, and apartments grew throughout the city – then the coronavirus pandemic broke out. As people leave urban areas for the suburbs, prices for existing buildings have fallen, and construction in many areas has been forced to cease altogether. Projects that have been postponed due to the pandemic are expected to miss the 421a deadline next year.

Exactly how this affects prices will likely depend on where residents are supposed to live. If teleworking becomes the new normal and people choose to avoid the city forever, prices could continue to decline. If the return to the office is in cards for New York employees, as many financial firms have already suggested, the resumption of demand with a new drop in supply may work in the opposite direction, actually driving prices up.

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This article first appeared on New York City May Face New Real Estate Concerns As 421a Tax Credits Expire


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