REFM Breakfast Briefing: Lack of clarity over 421a guidelines stalls NYC affordable housing market

New York’s affordable housing market has hit a speedbump as developers wait for clarity on proposed changes to the city’s 421a tax incentives, which provide a major part of for affordable housing development, according to panelists at a recent Real Estate Fund Manager briefing. The October 6 event, held at the Lamb’s Club in New York, featured Alvin Schein, partner atSeiden & Schein, Karim Hutson, founder of Genesis Companies and Chris Balestra, senior v.p. at Taconic Investment Partners. Marion Jones, senior director atAckman Ziff, moderated the panel.

In June, Mayor Bill de Blasio’s proposed changes to the 421a guidelines were largely adopted by the New York State Legislature. The changes included extending the program by four years, increasing the length of tax abatements offered from 25 to 35 years and mandating that all rental projects that receive a real estate tax exemption under the program include an affordable housing component. Additionally, most condominium developments would no longer be eligible for 421a benefits under the‎ new law. The catch, however, is that implementation is contingent on the ability of union workers and developers to agree on prevailing wages by January 15, 2016. At the same time, the New York’s Rent Guidelines Board voted that there will be no increase in rents for one year for leases starting on or after October 1.

“Overall, my clients are not perturbed by the changes brought about by 421a. But they are upset about the zero percent [rent] increase because operating costs do go up every year,” Schein said. “I also feel that the new inclusionary program is overreaching. Mayor Bill de Blasio has said it’s the toughest inclusionary program in the country, but it’s so tough it might be unconstitutional.” A larger issue for the 421a abatements in the potential for an agreement between the developers and the unions, he added noting that if there is no consensus by the deadline, the plan will be torpedoed.

Still, there are other ways to preserve affordable housing, including acquiring units that are coming to the end of their 15-year tax credit compliance period, Hutson said. “Folks are trying to figure out ways to keep those units affordable at a time when market rate players are coming in and aggressively buying properties with the aim of converting them to market-rate units,” he said. “The only way to do it is to use leverage lower-cost financing to acquire them and maintain the affordability through moderate rehabilitation projects. Going forward, we’re going to see more of that and less new construction.”

At the end of the day, new regulations may end up hurting the tenants they are meant to help, panelists said. Developers are turning away from potential deals because they are not approved for tax benefits or enough subsidies from the city. Meanwhile, if rents are frozen, then property owners do not have the capital they need to keep up with maintenance, which affects the quality of existing units.

There are projects, however, that are under construction. One example is Taconic’s Essex Crossing, a nine-site development in the Lower East Side. About 50% of the two million-square-foot project is earmarked for affordable housing. “The interesting thing is that we have a high-level of affordable housing, but zero subsidy from the city. The city already owned the land, so it could sell the land to us for a value that reflected its goal of no subsidy and 50% affordable,” Balestra said. The mixed-use and mixed-income development will also consist of moderate-income housing, senior housing and 150 condo units, as well as retail and commercial availability.

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