In 2015, the year Albany lawmakers last allowed a lucrative real estate tax break to expire, developers filed building permits for 55,000 residential units, three times as many than the previous year.
When starting their projects, they could still qualify for the tax abatement, known as 421-a, even if it took them up to three years to build and complete.
The push meant the city had a pending development that would continue to expand housing supply even as Albany struggled to find a replacement, which didn’t arrive until 2017.
In the spring of 2022, 421-a expired again, despite calls from Mayor Eric Adams and the real estate industry to extend it. But this time around, far fewer permits are in circulation, according to preliminary construction data.
If real estate interests are right when they say rental units won’t be built without a 421-a-like tax break, it means the pipeline of new apartments could run out within two years, worsening the housing crisis. from the city.
But if opponents of the tax relief are right, the number of permits will start to rise later this year, even without the 421-a deduction as an incentive.
And there’s a new complication: Rising costs and interest rates could also hold back development, regardless of what happens with taxes.
Asked about the building permit numbers, the Adams administration reiterated its support for the tax relief, hoping it can pressure Albany to reconsider the issue when lawmakers meet again early in the year. ‘next year.
“New York’s decades-old housing affordability crisis has gotten even worse in recent years,” said Jessica Katz, director of housing. “There is growing evidence that we urgently need to create a new tax incentive program that supports the construction of rental housing – a program that makes real, affordable housing available to New Yorkers.”
The latest chapter in the decades-long 421-a controversy comes amid an ever-worsening housing crisis. Earlier this year, the city’s latest official housing and vacancy survey showed an all-time low vacancy rate of 1% for affordable apartments.
New York needs 560,000 new homes by 2030 to make up for the shortfall in new construction over the past decade and meet expected population and job growth in the post-pandemic city, according to a study published earlier this year by the consulting firm AKRF commissioned by the Real Estate Board of New York. Over the past two years, permits for new residential units have averaged just over 20,000 per year.
Cost of tax relief
The 421-a tax relief is designed to offset New York’s high cost of construction and high property taxes on rental properties that developers say consume 30% of their operating income, compared to a national average of 10%.
Buildings participating in the 421-a program must reserve 25-30% of their units for affordable housing at specified household income levels. According to the NYU Furman Center, approximately 90% of all residential construction in the city over the past decade received 421-a or other tax breaks. Half of all affordable apartments since 2014 were built under 421-a, according to city data.
The tax relief costs the city $1.1 billion a year in waived property taxes, according to city financial documents. Governor Kathy Hochul proposed extending the tax relief with modest changes to her executive budget, but the legislature let 421-a expire in June.
Building permit data released by the Census Bureau shows developers filed 3,300 permits in June, bringing the total for the first six months of the year to 13,464, an increase of about 40% from the average of the last two years. By contrast, in 2015, more than 42,000 permits had been revoked by June, when 421-a expired. After the law expired that summer, a temporary extension until the end of 2015 then led to a further surge at the end of the year.
Because the city’s Department of Buildings instituted a new information system last year that has slowed accurate reporting of residential building permits, some units may not yet appear in the Census Bureau count and the final number for the first half of the year is likely to be larger. The surge is expected to be fueled by activity in Gowanus, Brooklyn, which was rezoned by the city last year in a bid to spur new housing construction.
Attorney Brett Gottlieb, a partner at the Herrick law firm, Feinstein, says he works with a number of developers to ensure their projects in Gowanus are eligible for 421-a.
Experts analyzing the data, but who asked not to be identified until their work is complete, say the final number of building permits for the first half of 2022 will be over 14,000, but the total will be well below 2015. peak. They also expect very few builders to move ahead with their plans while tax relief is in limbo, meaning the revised number for the first six months will make up the bulk of the total for the year.
Others said it was too early to draw conclusions. They include Brad Lander, the city comptroller, who is critical of 421-a and wants property tax reform to eliminate the need for the break.
“Available data shows a small spike in the number of authorized units deposited prior to this 421-a expiration, but this data is too preliminary and incomplete to draw definitive conclusions,” Lander told THE CITY. “There is no doubt, however, that we have a housing affordability crisis and need more supply at all income levels. Rather than pursuing an agenda that has failed to provide affordable housing for the vast majority of New Yorkers, we need all of our partners in government to work together to fix our property tax system and establish programs that will target tax relief for truly affordable housing.
While developers wanted to qualify for the tax break before it expired in both 2015 and this year, two fundamental factors led to the push in 2015. The economy had finally started to pick up steam after the Great Recession, and the Bloomberg administration had pushed through a significant number of major rezonings, providing an abundance of new sites for development, noted Sean Campion, housing expert with the Citizens Budget Commission.
This year, only the Gowanus and SoHo rezonings provided development opportunities, and these did not materialize until late 2021, leaving little time for development planning before the tax relief ended. . Doubts about the impact of COVID on the city’s future population growth and economic recovery have also dampened interest in real estate for future construction.
Two new problems have also appeared this year.
Construction costs have risen by up to 20% due to soaring inflation, notes Marc Erlich, chief investment officer of Rose Associates, which manages 21,000 multi-family units and has $1 billion in projects under development.
In addition, rising interest rates are making loans covering construction much more expensive, with rates averaging around 5.5% compared to just over 3% last year.
“Construction lenders are taking a much more conservative view of the market,” Erlich said. “I’m skeptical that all of these filed projects can be built due to rising costs and interest rates.”
Real estate interests argue that a tax break like 421-a is necessary because property taxes on rental housing in the city are about 30% of their income, significantly more than apartments elsewhere in the country, or on co-ops or the condos in the city. In addition, any building using 421-a must reserve part of its units for rental at a price well below the market price.
“421-a has never been an ideal solution, but it’s the only tool that makes new construction financially feasible,” Gottlieb said. “I have yet to hear of a single person looking to develop a multifamily property without a 421-a.”