421a – The Never-ending Wait & a Discussion with David Schwartz

Interview with David Schwartz of Slate Property Group about the state of new development and affordable housing opportunities in Brooklyn neighborhoods since the 421-a tax abatement program expired, given the program’s uncertain future.

Despite talk of poor doors and impossible-to-win lotteries for too few spots, from a few lucky renters’ perspective, the availability of affordable apartments under the city’s 421-a tax exemption program makes living in New York City–in a great neighborhood, without a half-dozen roommates–possible. For many more, the “80/20” units seem rare and exotic, possibly mythical.

But for developers of multifamily rental buildings, the tax abatement program created in 1972–when anyone building in NYC needed all the incentive they could get–was a sure thing. Just include 20 percent low- or middle-income units (based on neighborhood medians) and you could receive generous tax abatements for up to 25 years. Though the original 421-a program was simply a development incentive without an affordable housing component, that changed when neighborhoods began to change and invite pockets of rampant speculation.

Part of the reason rental development is so closely tied to the program is that the city’s property tax system places a very steep tax burden on newly-developed rental property in multifamily buildings: Homes with three or fewer units are assessed at 6 percent of their value, while multifamily rental housing is assessed at 45 percent, which some say is almost an incentive not to build rentals–even though the majority of New Yorkers live in rental housing. Taxes can be such a high percentage of development costs that it becomes bad business to build in neighborhoods whose rents will be lower, like Mott Haven in the Bronx and East New York in Brooklyn.

Some critics feel the program causes the city to lose out on a huge amount of tax revenue, which some estimate at $1.1 billion last year alone. Opponents feel it should be scrapped altogether for a better affordable housing program. But as of yet no one has come forward with a more viable alternative, and after its expiration last January, the program has been mired in a deadlock between the Real Estate Board of New York (REBNY) and builders’ unions over wages paid to construction workers.

With the fate of 421-a up in the air, many claim the city’s development environment has already been affected by its absence. In the year leading up to the expiration date, there was a frenzy of activity on the development front, which may have been due to the desire on the part of developers to nail down the tax abatement before the clock ran out. An analysis by The Real Deal showed that only 2,700 new apartments in projects with 10 or more units were approved for construction through May of 2016, compared to the 20,700 greenlit during the same period in 2015. There is concern that not only is development of much-needed housing in places like Brooklyn where supply doesn’t meet demand, but that developers have stopped buying land due to the financial uncertainty that exists while Albany debates the program.

Mayor de Blasio has proposed a revised version, which focuses on rental buildings only, that calls for the creation of more below-market units; the proposal allows developments in less affluent neighborhoods to charge 130 percent of the average median income in exchange for longer abatements. The mayor’s plan would also remove geographic restrictions.

There is another facet to the void left by the stalled program. One of the mayor’s high-profile affordable housing victories has been a recent zoning change that affects lower-income neighborhoods like East New York. Known as Mandatory Inclusionary Housing, it requires that the developers of rental apartment buildings in some parts of the city set aside a portion of units to be offered to tenants at below-market rates. Created when the 421-a exemption still existed, the change was meant to ease the path for the creation of about 12,000 affordable apartments through 2024, a sizable step toward the mayor’s goal of building or preserving 200,000 affordable units.

The New York Times quotes REBNY president John Banks as saying it was “not feasible to build rental housing in New York City without the 421-a subsidies. The combination of high construction and land costs and high taxes on rentals made such construction unprofitable, he said, and the passage of mandatory inclusionary housing would not change that.” According to a REBNY report, 42 percent of all the affordable housing built in 2014 and 2015 was aided by the 421-a program. Projects like the second phase of Hallets Point, a 2,400-unit rental complex being built in Astoria, Queens, may be in jeopardy if the 421-a program is not revived.

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schwartzI spoke to David Schwartz, a principal of Slate Property Group who has a long history leading the development and construction of various projects in Brooklyn.

Slate is an owner, developer and manager focused on multi-family in NYC. We have a current development pipeline of over 2,000 units, including 1 Flatbush Avenue, Bedford Armory and Rivertower.

Overall, do you think the program was effective in creating affordable housing?

421a was started as an economic development program, not an affordable housing program. In the 1970s it was important to get investment into NYC, and I think we can see that there were certainly a lot of benefits that came from real estate. Through the years the program was modified to also make it an affordable housing program. I think the latest proposal from the city that unfortunately didn’t pass would be a great affordable housing program.

I find that most of the reasons people don’t like 421a are due to items that were in the old program and have been changed. For instance, the GEA and certificate program.

From a developer’s perspective, do you think the vacuum left by the demise of the 421-a program will have a significant effect on development in Brooklyn. Has it already been seen? What kind of effect?

It definitely will. Developers will only be able to develop really high end condos or low income housing. And there will be nothing in between. Unfortunately the middle class would be hurt most by this, and there would be a lot more pressure put on existing rentals causing them to become even more expensive than they are. It’s really just supply and demand. If we want to bring rents down then we need to create a lot more housing.

Why was the program such a big incentive for developers of rental buildings?

Because it helped keep the taxes affordable for a long term. It’s hard for rental developers to compete with condo developers since rental returns are significantly lower. 421a was big in helping make the numbers work and more importantly in getting banks to finance projects.

Taxes on multi-family buildings really don’t take into account how much it costs to build.  So with record land prices and construction costs, it’s virtually impossible to recoup your investment without a tax abatement.

It has been speculated that at least some form of the tax abatement program will be resurrected; the mayor’s proposed program favors only rental buildings, for example. What do you think is the likely outcome?

I think there will be a program.  Certainly for rentals.  Condos are a little more sensitive.  I think everyone agrees that we don’t need tax abatements for $10 million condos on Central Park or in the West Village. The question is whether there should be a program for work force housing condos in places like Bensonhurst, Jackson Heights or Riverdale.

Regarding recent zoning changes known as Mandatory Inclusionary Housing (MIH); though the zoning changes were done to stimulate building of affordable housing, now that the tax breaks are gone, do you think that will affect the impact of the zoning changes?

I think virtually nothing will get built until we have a program. But this is a good topic. I think we need a lot of tools to create affordable housing as well as market rate housing. 421a is one tool.  And MIH Is another. But we really need to use them together to be most effective. There will be some projects that go ahead without 421a but far fewer than we need in a city with such a housing shortage.

Regarding the idea of incentives for developers tied to inclusionary housing or rental housing in general, do you have any visions for a winning solution?

I think that we do have winning solutions now.  MIH is the most aggressive affordable housing program in the country. And if we couple that with government incentives (tax credits, 421a, subsidies, etc.) we can really start to create the types of housing we desperately need. We don’t need for $10 million plus apartments but we need everything else.

The key thing to remember is that none of these programs are perfect and they don’t address all of the housing issues. But it’s really the best anywhere in the country and the positives far outweigh the negatives.