Carpe Momentum: The Demise of 421-a and the Need for Uniform Tax Abatements

June 15.

The day the Magna Carta was sealed by King John in 1215; the day Bob Barker stepped down as the host of The Price is Right in 2007 and, in the words of Don Mclean, the day the music of 421-a died in 2022.

421-a was a critical development tool. As originally enacted and rebranded as “Affordable NY” in 2017, 421-a subsidized the construction of hundreds of thousands of market-rate apartments and often required developers to build some below-market rentals.[i]

At the risk of being disrespectful to the recently deceased, I will not dive into the weeds of the mechanics of 421-a. Suffice it to say that a developer in New York City could receive a tax exemption/abatement for up to 38 years. It was responsible for the development of the majority of New York City’s new residential development since 2013.[ii] In addition, 28% of affordable units made use of it.[iii]

The perfect storm of the spike in interest rates, inflation pressure, ?the continued supply chain debacle and the end of 421-a, portends significant trouble for the real estate development community. Even though demand for rental housing is high, ?tax abatements are critical because the pipeline of cash that developers need to build is already frozen. [iv] ?

At a recent forum, the city’s biggest multifamily investors were asked how much they will invest in ground-up rental projects without some kind of 421a-style tax abatement. Drew Fletcher, president of Greystone Capital Advisors, gave a clear, direct and unambiguous answer: “Zero”[v] .

I yield to the legislative chambers of Albany on how best to fill the black hole left by the implosion of 421-a. My optimism for a quick solution is not great.?If you know anything about quantum physics, nothing- no light, no particles and surely no legislation - escapes a black hole.

So what can we do now?

We can use the 421-a model for jurisdictions outside of New York City.[vi] Every Industrial Development Agency (“IDA”) outside of NYC can provide for standardized, long-term Uniform Tax Abatements. ?

Every IDA is currently required to adopt a Uniform Tax Exemption Policy.[vii] ?We could compel each IDA to identify areas under their jurisdiction that need qualified residential rental development. In these identified areas, a developer will receive a straight line 33-year tax abatement similar to the parameters of 421-a:

Years 1 -3: property tax equal to vacant land taxes.

Years 4-30: Every 2 years, the tax break on the improvement would be decreased by 6.25% so that the tax break is fully extinguished by year 34.

This program will provide needed certainty to developers and their underwriters. The ratios embedded in economic models will no longer be predicated on the large question marks of a quirky and ever changing assessment system.

Under current tax abatement programs, developers face an exponential increase to property taxes when their abatement expires. Because most PILOT programs do not allow a developer to challenge assessments during the PILOT term, a developer is left with a Morton’s fork. A developer must exit the property prematurely or risk unmarketable projects because at the end of the tax abatement, the isolated project must charge rents that are no longer competitive with neighboring developments because of unchallenged high property taxes.

Our proposal helps fix that problem. Because the abatement will be available to identified communities, we can develop neighborhoods and not isolated projects. Because the abatement is available to identified areas, numerous projects can go forward simultaneously. As the aggregate tax abatements of the developed community burn off, each project within the neighborhood will be competitive with each other. Thus, when the abatement expires, the full tax assessment will correlate to the real market value of the community and will remain competitive in newly developed and thriving neighborhoods.

It's worth a try. We have nothing to lose but our future.?

[i] ?Matthew Haag, ?“Why A Lucrative Tax Break For Developers Is Likely To Die In Albany”, New York Times, May 26, 2022, ?https://www.nytimes.com/2022/05/26/nyregion/tax-exemption-housing-development.html.

[ii] Howard Husock, “421a’s End Means It’s Time For Real Property-Tax Reform In NYC”, New York Post, ?May 30,2022, https://nypost.com/2022/05/30/421as-end-means-its-time-for-real-property-tax-reform-in-nyc/.

[iii] Husock, “421a’s End Means It’s Time For Real Property-Tax Reform In NYC”, https://nypost.com/2022/05/30/421as-end-means-its-time-for-real-property-tax-reform-in-nyc/.

[iv] Joe Lovinger, “With 421a Dying, Apartment Project Financing Has Come To A Stop”, The Real Deal, May 13, 2022, https://therealdeal.com/2022/05/13/with-421a-dying-apartment-project-financing-has-come-to-a-stop/.

[v] Lovinger, “With 421a Dying, Apartment Project Financing Has Come To A Stop”, https://therealdeal.com/2022/05/13/with-421a-dying-apartment-project-financing-has-come-to-a-stop/.

[vi] 421-a applied to cities with a population of 1,000,000 or more. NY Real Prop. Tax Law § 421-1(2)(a)(i).?The New York City IDA dies not have the power to offer financial assistance for residential projects. NY Gen. Municipal Law § 917(c).

[vii] NY Gen. Municipal Law § 874(4)(a).?