Permits surged before 421-a tax break expired, developers warn it’s not enough to stave off a housing construction lull

Before the widely used construction incentive expired this spring, one-third as many building permits were issued than when the last expiration loomed.

August 17, 2022 Greg David and Suhail Bhat, THE CITY

Tenants in a West End Avenue building look over a West 96th Street construction site, May 27, 2022. Photo: Ben Fractenberg/THE CITY

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This article was originally published on Aug 16 7:25pm EDT by THE CITY

In 2015, the year Albany lawmakers last allowed a lucrative real estate property tax break to expire, developers filed building permits for 55,000 residential units — three times more than the previous year.

By getting their projects started, they could still qualify for the tax abatement, known as 421-a, even if it took as many as three years to actually construct and finish.

The surge meant the city had development pending that would keep expanding the housing supply even as Albany struggled to come up with a replacement, which did not arrive until 2017.

In spring 2022, 421-a expired again, despite pleas from Mayor Eric Adams and the real estate industry to extend it. But this time around, far fewer permits are in motion, according to preliminary building data.

But if opponents of the tax break are right, the number of permits will begin to increase later this year even without the 421-a abatement as an incentive.

And there is one new complication: rising costs and interest rates might also curb development, regardless of what happens with taxes.

Asked about the building permit numbers, the Adams administration reiterated its support for the tax break, hoping it can pressure Albany to reconsider the issue when lawmakers reconvene early next year.

“New York City’s decades-old housing affordability crisis has grown even worse over the past several years,” said Chief Housing Officer Jessica Katz. “It is increasingly apparent that we urgently need to create a new tax incentive program that supports the building of rental housing — one that makes real affordable housing available to New Yorkers.”

The latest chapter in the decades-long controversy over 421-a comes amid an ever-worsening housing crisis. Earlier this year, the city’s latest official Housing and Vacancy Survey showed a historically low vacancy rate of 1 percent for affordable apartments.

New York needs 560,000 new units of housing by 2030 to make up the deficit in new construction over the past decade and accommodate expected population and job growth in the post-pandemic city, according to a study released early this year by the consulting firm AKRF commissioned by the Real Estate Board of New York. In the last two years, permits for new residential units averaged just over 20,000 annually.

Chief Housing Officer Jessica Katz joined Mayor Eric Adams’ housing plan announcement in Brooklyn. June 14, 2022.
Photo: Ben Fractenberg/THE CITY

Cost of the tax break

The 421-a tax break is designed to offset the high cost of building in New York and high property taxes on rental properties that developers say eat up 30 percent of their operating income compared with a national average of 10 percent.

Buildings participating in the 421-a program must set aside 25 percent to 30 percent of their units for affordable housing at specified household income levels. About 90 percent of all residential construction in the city in the last decade received either 421-a or other tax breaks, according to the NYU Furman Center. Half of all affordable apartments since 2014 were built under 421-a, according to city data.

The tax break costs the city $1.1 billion a year in forgiven property taxes, according to the city’s financial documents. Gov. Kathy Hochul proposed to extend the tax break with modest changes in her executive budget, but the legislature let 421-a expire in June.

Building permit data released by the Census Bureau shows developers filed for 3,300 permits in June, bringing the total for the first six months of the year to 13,464, about a 40 percent increase over the average of the last two years. By contrast in 2015, more than 42,000 permits were taken out by June when 421-a previously expired. After the law lapsed over that summer, a temporary extension to the end of 2015 then led to another 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 the residential building permits, some units may not be in the Census Bureau’s count yet 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, which was rezoned by the city last year with the aim of spurring new housing construction.

Attorney Brett Gottlieb, a partner at the law firm Herrick, Feinstein, says he is working with a number of developers on making sure their projects in Gowanus qualify for 421-a.

Experts who are analyzing the data – but asked not to be identified until their work is complete – say that the final number of building permits for the first half of 2022 will be higher than 14,000, but that the total will be far lower than the 2015 peak. They also expect very few builders to move ahead with projects while the tax break is in limbo, meaning the revised number for the first six months will be most of the total for the year.

Others said it is too early to draw conclusions. They include Brad Lander, the city comptroller, who is a critic of 421-a and wants property tax reform to eliminate the need for the break.

“The available data shows a small spike in the number of permitted units filed before this 421-a expiration, but this data is too preliminary and incomplete to draw firm conclusions,” Lander told THE CITY. “There’s no question, however, that we have a housing affordability crisis and need more supply at all income levels. Rather than continue a program that failed to provide housing affordability to the vast majority of New Yorkers, we need all our partners in government to work together on fixing our property tax system and establishing programs that will target tax relief for genuinely affordable housing.”

Construction challenges

While developers wanted to qualify for the tax break before its expiration both in 2015 and this year, two fundamental factors drove the surge in 2015. The economy had finally begun to gain momentum following 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 at the Citizens Budget Commission.

This year, only the rezonings of Gowanus and SoHo provided development opportunities, and those did not pass until late 2021, allowing little time for development planning before the tax break ended. Doubts about the impact of COVID on the future of the city’s population growth and economic recovery also dampened real estate interest in future construction.

Two new problems have emerged this year, as well.

Construction costs have increased by as much as 20 percent because of the surge in inflation, notes Marc Erlich, chief investment officer of Rose Associates, which manages 21,000 multi-family units and has $1 billion in projects in development.

In addition, higher interest rates are making loans that cover construction much more expensive, with rates averaging about 5.5 percent compared with a little over 3 percent last year.

“Construction lenders are taking a much more conservative view of the market,” said Erlich. “I am skeptical that all of those projects that filed will be able to be built because of rising costs and interest rates.”

Real estate interests argue that a tax break like 421-a is necessary because property taxes on city rental units come to about 30 percent of their income, substantially higher than apartments elsewhere in the country, or on co-ops or condos in the city. In addition, any building using 421-a must set aside a portion of their units for rental at well below market rate.

“421-a has never been an ideal solution, but it is the only tool that makes new construction financially feasible,” said Gottlieb. “I have yet to hear of a single person looking to develop a multi-family property without 421-a.”

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