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Ensure Compliance With New York’s Revitalized 421-a Tax Abatement Program

For developers able to navigate the city’s unfolding new rules, the New York skyline offers an enticing tax break.

New York’s 421-a property tax exemption lapsed in early 2016, amid escalating concerns that developers weren’t providing adequate affordable housing in exchange for tax breaks, but it was officially renewed as “Affordable New York” in April 2017.

The new program, which runs until 2022, offers developers of multi-family residential housing a potential benefit that can offset less favorable market conditions, such as rising interest rates, high costs of construction and land, and decreasing city-wide investment by foreign individuals and entities. The abatement also potentially minimizes some of the new federal tax law’s constraints, like limits on losses and interest deductions.

But as those grandfathered into the old program have seen, new participants face steep penalties for noncompliance. In March 2018, nearly 1,800 property owners, with more than 11,000 apartments across New York, had their tax breaks suspended by city officials after failing to comply with requirements for a mandatory Final Certificate of Eligibility.

These stakes underscore the importance of complying with the program’s key enforcers: The Department of Housing Preservation and Development (“HPD”), which determines eligibility; the Department of Finance, which administers the benefit; and the New York City Comptroller, which determines ongoing compliance. Here’s how to stay compliant on all fronts.

Weigh the Opportunity

The new abatement program—spanning a Geographic Exclusion Area of Manhattan, the Bronx, Brooklyn, Queens, and Staten Island—increases the previous law’s full property tax exemption status from 25 to 35 years. Lenders thus may be more inclined to underwrite larger mortgages and developers will be able to borrow more because of higher net operating income. But eligibility for the new abatement hinges on several factors that developers need to weigh carefully.

Projects that include residential units will only qualify if 25 to 30 percent of the housing is composed of affordable units. The old law specified only 20 percent. Within the previous program, developers built high-end condominiums, particularly as the economy strengthened in the 1980s and ’90s, but the new abatement excludes luxury condominium projects. Condos located outside of Manhattan with 35 or fewer units are exempted from the affordable requirement, but each unit must have a tax-assessed value of $65,000 or less. Even though the tax-assessed value is much lower than the actual fair market value in an open market, the actual fair market value will equal a much lower value than the $1MM+ that condominiums are going for today.

Most critically, developers must provide construction workers with a prevailing minimum wage—That’s $60 an hour in wages, benefits, and payroll taxes if the project is multi-residential with 300 or more rental units and located south of 96th Street in Manhattan; and roughly $45 an hour on the same basis if it’s within one mile of the East River waterfront in Brooklyn or Queens. Developers are only exempt from these wage requirements if at least half of their unit inventory is marked below market.

Developers need to address at the outset whether a 35-year tax exemption offsets a prohibition on building luxury condominiums and consider the potential compliance challenges of certifying projects to meet required wage standards.

Devil in the Details

Developers should also assess whether they have the infrastructure in place to accommodate ongoing filing obligations. As demonstrated by the wide-ranging tax break suspension this past March, failure to timely submit the right documentation can have serious consequences.

HPD is very specific about what needs to be submitted, and these requirements—whether it’s the initial budget or monthly reports on prevailing wages—must be met on a global basis. Despite developers’ best intentions, they may get caught out if one of their vendors—or subcontractors—fails to follow suit.

Practically speaking, if there are 50 different contractors and a general contractor on a project, it will be necessary to combine all their numbers to meet the wage requirement. From an owner’s perspective, a contract should be drafted early on, requiring that each entity meet this stipulation. Owners may also consider whether it’s more efficient to source contractors through a union.

Designate a Quarterback

In all cases, developers should designate a point of contact who can coordinate a three-party dialogue among outside attorneys, the developer, and the HPD on ongoing requirements.

Beforehand, however, developers need to make sure they’re familiar with the details of Affordable New York. A CPA can provide that initial understanding, and help determine accompanying ways to tailor accounting records to comply with monitoring requirements. A competent CPA can also offer appropriate financial modeling and help budget correctly for hard costs—something a typical construction project has a 5-10-percent contingency on.

By consulting with experts to ensure the right infrastructure for compliance, developers and owners can avail themselves of this important tax break, while building more affordable housing into New York’s skyline.

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