Permits rose before 421 expires – a tax break – but not enough to stave off a housing slump, Deve – THE CITY | Vette Leader

In 2015, the year Albany lawmakers last phased out a lucrative property tax break, developers filed building permits for 55,000 housing units — three times more than the year before.

By getting their projects off the ground, they could still qualify for the tax credit known as 421-a even if actual construction and completion took up to three years.

The surge meant the city was facing development that would continue to expand the housing supply, although Albany struggled to find a replacement, which only arrived in 2017.

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

If real estate prospects are correct in claiming that rental housing won’t be built without a 421-a-like tax break, that means the pipeline of new housing could be exhausted within two years, worsening the city’s housing crisis.

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

And there’s a new complication: Rising costs and interest rates could also slow development, regardless of what happens to taxes.

When asked about the building permit numbers, the Adams administration reiterated its support for the tax break and hoped it could pressure Albany to reconsider the matter when lawmakers meet again early next year.

“The decades-long housing affordability crisis in New York City has only gotten worse in recent years,” said Chief Housing Officer Jessica Katz. “It is becoming increasingly clear that we urgently need to create a new tax incentive program that supports the construction of rental housing – one that will provide New Yorkers with truly affordable housing.”

Jessica Katz, chief housing officer, joined the announcement of Mayor Eric Adams’ Brooklyn housing plan. June 14, 2022.

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 a historically low vacancy rate of 1% for affordable housing.

New York will need 560,000 new housing units by 2030 to make up the housing deficit of the past decade and to cope with expected post-pandemic population and job growth in the city, according to a study commissioned earlier this year by consultancy AKRF of Real Estate Board of New York. Over the past two years, an average of just over 20,000 permits for new residential units have been issued each year.

tax relief costs

The 421-a tax break is designed to offset New York’s high construction costs and high property taxes on rental properties, which developers say eat up 30% of their operating income, compared to a national average of 10%.

Buildings participating in the 421-a program must reserve 25% to 30% of their units for affordable housing with a given household income. About 90% of all housing construction in the city over the past decade received either a 421-a or other tax break, according to the NYU Furman Center. According to city data, half of all affordable housing since 2014 has been built under 421-a.

The tax break costs the city $1.1 billion a year in waived property taxes, according to the city’s financial records. Gov. Kathy Hochul proposed extending the tax break through minor changes in her executive budget, but lawmakers let 421-a expire in June.

Building permit data released by the Census Bureau shows developers applied for 3,300 permits in June, bringing the total for the first six months of the year to 13,464, up about 40% from the average for the past two years. In contrast, more than 42,000 permits were issued through June 2015, when 421-a had previously expired. After the law expired in the summer of this year, a temporary extension until the end of 2015 led to a renewed increase at the end of the year.

Because the city’s building department rolled out a new information system last year that has slowed accurate reporting of residential building permits, some units may not yet be included in the Census Bureau’s census, and the final number for the first half of the year is likely to be greater. The surge is expected to be fueled by activity in Brooklyn’s Gowanus, which was rededicated by the city last year to boost housing construction.

Attorney Brett Gottlieb, a partner at Herrick law firm, Feinstein, says he is working with a number of developers to ensure their projects in Gowanus are 421-a qualified.

Experts, analyzing the data but asking not to be identified until their work is complete, say the final number of building permits for the first half of 2022 will top 14,000, but the total will be well below 2015 Summit. They also expect very few builders to press ahead with projects while the tax break is in limbo, meaning the revised figure for the first six months will make up the bulk of the total for the year.

Others said it’s too early to draw any conclusions. That includes Brad Lander, the city’s financial controller, who is a critic of 421-a and wants property tax reform to eliminate the need for the pause.

“The available data shows a small increase in the number of registered units submitted prior to this 421-a expiration, but this data is too preliminary and incomplete to draw firm conclusions,” Lander told THE CITY. “But there is no question that we have a housing crisis and need more supply at all income levels. Instead of continuing a program that has left the vast majority of New Yorkers without affordable housing, all of our government partners must work together to improve our property tax system and put programs in place that target tax breaks for truly affordable housing.”

Structural challenges

While developers wanted to qualify for the tax break before it expired in both 2015 and this year, two fundamental factors drove the 2015 surge. The economy had finally started to gain momentum after the Great Recession, and the Bloomberg administration had pushed through a significant boost A series of major rezonings that offer a plethora of new sites for development, noted Sean Campion, housing expert at the Citizens Budget Commission .

This year, only the Gowanus and SoHo rezonings offered development opportunities, and these didn’t pass until late 2021, leaving little time for development planning before the end of the tax break. 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.

Building costs have risen by as much as 20% as a result of the inflationary spike, notes Marc Erlich, chief investment officer at Rose Associates, which manages 21,000 multi-family homes and has $1 billion worth of projects under development.

In addition, higher interest rates make home loans significantly more expensive, with interest rates averaging around 5.5% compared to just over 3% last year.

“The mortgage lenders see the market much more conservatively,” said Erlich. “I am skeptical that all submitted projects can be built due to rising costs and interest rates.”

Real estate prospects argue that a tax break like 421-a is necessary because property taxes on city rental units account for about 30% of their income, significantly higher than housing elsewhere in the country or on co-ops or city condominiums. Additionally, any building using 421-a must set aside a portion of its units for rental at well below market rates.

“421-a has never been an ideal solution, but it’s the only tool that makes new builds financially viable,” Gottlieb said. “I haven’t heard of a single person wanting to develop an apartment building without a 421-a.”

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