Developers are fine with Gov. Kathy Hochul's proposed replacement for the expiring 421-a tax break, dubbed Affordable Neighborhoods for New Yorkers (ANNY), or 485-w.
Can NYC Live Without Its $1.7-Billion-a-Year Developer Tax Break? Dueling Claims Define Budget Talks, wrote Greg David 3/16/22 for The City, citing the Citizens Budget Commission, which said the program is crucial to contruction, and City Comptroller Brad Lander, who called it "expensive and inefficient,” not worth replacing.
Until State lawmakers pass a broad reform package that successfully reforms the property tax system to reduce the tax burden on multifamily rentals, reduces construction costs, and modernizes other laws and regulations that now increase operating costs, the need for an incentive will remain.
...For rental buildings in New York City, a 100 percent property tax exemption conservatively reduces operating expenses, excluding debt service, from about 60 to 65 percent of gross rental income to 30 percent of income, depending on a building’s size; this brings expenses as a percentage of income roughly in line with national averages.
Because the proposed ANNY’s incentives would be less generous than 421-a, they would still incentivize "small rental buildings of 29 or fewer units; and large rental buildings in neighborhoods that command the highest rents," while larger buildings in moderate- and middle-income neighborhoods would not be viable.
Brooklyn Crossing rentals, according to StreetEasy, currently average $4,356, while 25 previous rentals averaged $3,987, with no square footage provided. That said, it's not unlikely that rent per 1,000 square feet exceeds $5,000.
Are such projects profitable?
The CBC's study measures financial feasibility via Yield-on-Cost (YOC) , which measures annual return on investment by dividing the project’s net operating income by the total cost to develop the project, including land. A five percent YOC is considered the minimum necessary
Greenland USA's deal with TF Cornerstone to lease the sites for B12/B13 worked out to $222 per buildable square foot--but Greenland soon helped get its partner an enormous bonus: 96,000 additional square feet underground for a Chelsea Piers fitness center and fieldhouse, which previously would've been used for (non-remunerative) parking.
Allowing 421-a to lapse, says the CBC, would virtually kill rental housing, requiring both free land and an additional upfront subsidy--and instead leave sites unbuilt or turned into condos or other commercial projects.
Alternatively: "without the exemption, rents would have to increase by 75 percent to generate a reasonable rate of return, holding other costs constant."
What next with a replacement?
The CBC says the proposed Option A—a weighted average of 25 percent of units at 56 percent of AMI—is viable only in neighborhoods with "very high market-rate rents," averaging $5,000 or more per month.
Projects inside the PDA would be viable at land prices of $130 to $200 per buildable square foot, depending on a developer’s return expectations and development assumptions. This is less than what some developers would pay under the current program, but still potentially feasible. This suggests that projects that work under the current 421-a program likely would work under the new program, potentially with changes to reduce costs or generate additional income, such as building smaller units that generate higher rents per square foot.
But building smaller units means smaller affordable units, as well.
Under Option B, which requires developers to set aside 20 percent of units at 90% of AMI, development is more feasible, but that is proposed only for projects between 6 and 29 units. So the CBC suggests that it would incentivize larger buildings.
(That also implies that setting aside 30% of units at 130% of AMI, as with the current program, is just fine.)
The report also suggests that ANNY, as proposed, "would make it harder for the City to increase development capacity through upzonings, particularly outside the Manhattan core," because they wouldn't be financially feasible, given the affordability requirements.
The CBC's 421-a recommendations
The CBC report makes three recommendations.
One is to "Better tailor affordability options to reflect different market conditions," such as allowing Option B to larger projects outside the PDA, which would mean buildings with more expensive affordable units.
Another is better track and evaluate program usage, which would help tailor successor programs. (Sure--I'd note that I could not get from New York City officials data on the current iteration of 421-a, perhaps because they were embarrassed by the number of buildings with "affordable" untis at 130% of AMI.)
And the third is to work with New York City to better harmonize with current city programs like Mandatory Inclusionary Housing and Voluntary Inclusionary Housing, and to clarify rules for projects receiving bond financing and/or other subsidies.
The CBC's housing recommendations
The CBC in August 2020 issued Strategies to Boost Housing Production in the New York City Metropolitan Area, blaming "policy choices made by City and State officials– some deliberate, others unintended– that have slowed the pace of new construction in many neighborhoods," leaving demand exceeding supply.
So the CBC cited:- The prevalence of low-density zoning districts throughout the city
- A shortage of as-of-right development sites
- Uneven distribution of already-limited zoning capacity
- Leftover lots, too small or oddly shaped
And it blamed "other policies and laws unique to New York City and State":
- High land and construction costs
- Outdated construction and building codes
- The state's cap on floor area ratio (FAR)
- Expensive laws about construction liability unique to New York
- A lack of State policies to promote housing production in suburban communities
- "A distortionary, opaque, and inequitable property tax system that taxes multifamily buildings at a higher rate than comparable owner-occupied housing and relies on a costly and inefficient property tax incentives to stimulate new development."
The latter, of course, is 421-a
So the CBC's recommendations:
- a comprehensive, citywide housing strategy, aiming to quantify the city’s current and future housing needs at all market segments, and setting goals
- zone for growth with a citywide approach, to avoid "the contentious, expensive, and time-consuming neighborhood-by-neighborhood rezoning strategy"
- that could include increasing density near transit and along commercial corridors; modifying contextual zoning districts for growth; limiting historic district designations; and regulatory changes to ease creation of three (or more) unit buildings otherwise limited to single-family houses
- modernize the building code and reduce parking requirements near mass transit
- the state could, following other states, require local governments allow more housing and more variety of housing, particularly near commuter rail stations
- the state could reform laws that increase costs, including the cap on bulk and the rent stabilization laws, "which apply to many market-rate units built in middle-income neighborhoods" under 421-a
- and the state could reform the City’s property tax system, including "provisions to reduce the high tax rate on multifamily rental buildings relative to single family homes and other owner-occupied units," this leading to reform of programs like 421-a
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