New York City Real Estate | Blog

Unless an agreement is reached to extend it, the 421-a tax exemption program will expire today. Curious about what that all means? Read on.

What is 421-a?

Put simply, the program gives developers a 10-year tax exemption for building a multi-unit residential project on vacant land. But its potential expiration won't just hit developers—it could affect residents as well. The exemption can also be applied to developers building affordable housing units, but that's a little more complicated.

When did 421-a start?

The program was established in 1971 when, according to the Pratt Center for Community Development, "New York City officials were concerned that residential construction was dropping as many residents moved to the suburbs."

What are the benefits?

The way it works is that the developer of a project on vacant or mostly vacant land is exempt from paying the taxes it would usually have to pay for a construction period of up to three years. That's followed by a 10-year-long exemption period, during which the exemption becomes more of an abatement. Every two years during that period, the tax break is reduced by 20 percent, until it's all gone. There are other exemption periods, but we'll get to them.

Are there geographic limitations?

In the 1980s, when the housing market in the city improved, it was realized that such a broad program was overly generous to developers and Geographic Exclusion Areas (GEAs) were created. Those are areas where 421-a would not be available, at least not for just new development. Not surprisingly, the first GEA was in Manhattan, from roughly 14th Street to 96th Street. Greenpoint and Williamsburg in Brooklyn came next, though that GEA has some special rules of its own. Over the years, more and more GEAs were created.

Currently, all of Manhattan is a GEA. In the Bronx, portions of Claremont and Crotona Park are GEAs. In Queens, it's portions of Long Island City, Astoria, Woodside, Jackson Heights, and other areas on the East River waterfront. In Brooklyn, the GEA has expanded considerably to include Downtown Brooklyn, plus portions of Red Hook, Sunset Park, East Williamsburg, Bushwick, East New York, Crown Heights, Weeksville, Highland Park, Ocean Hill, Prospect Heights, Carroll Gardens, Cobble Hill, Boerum Hall, and Park Slope. Finally, on Staten Island, portions of St. George, Stapleton, New Brighton, and Port Richmond are in a GEA.

What if you are in a GEA?

Of course, and as mentioned above, there are plenty of projects built within those GEAs that have benefited from the 421-a program. How does a developer do that? Mostly, they do it by building 25 to 30 percent affordable units in their development (initially, it was 20 percent).

How do you get an extended exemption period?

As mentioned above, there are also extended exemption periods, including 15 years (11 years with full exemption followed by a four-year phase out period), 20 years (12 years with full exemption followed by an eight-year phase out period), and even 25 years (21 years with full exemption followed by a four-year phase out period). How do you get those exemptions? There's no blanket answer, but you do it by building in northern Manhattan, building in the outer boroughs, and by including those affordable units.

Do the savings get passed on?

All of that sounds pretty sweet for developers, and it is, but it is supposed to get passed on to the tenants, as units in developments that receive 421-a are to be stabilized during the exemption period.

In 2011, the New York Times wrote about a man who bought a brand-new apartment at the Orion at 350 West 42nd Street in 2007. He was trying to sell it and move to Los Angeles, in part because of work and to be closer to his son, but also because it was going to get a lot more expensive to live at the Orion. When he moved in, his taxes were $35 a month. But when the building's 421-a exemption period ends in 2018, the estimate was $1,629 a month.

So why is it set to expire? What's the fight about?

The program sounds like a good way to bring development to desolate areas and, as more GEAs are established, affordable housing units to those areas. So, why wouldn't it be extended?

The most recent extension of the program required an agreement to guarantee union-level wages for construction workers on those projects, Gothamist reported. The deadline for that agreement: Friday, January 15, 2016.

Guaranteeing that wage could mean a significant increase in construction costs, DNAinfo reported. A report from the city's Independent Budget Office (IBO) said that the cost of Mayor Bill de Blasio's 80,000-unit affordable housing goal could shoot up by $2.8 billion. The IBO analyzed 57 new projects and found costs would go up, on average, by 13 percent.

Building and Construction Trades Council President Gary LaBarbera disputes the IBO report, saying it "does not even factor into consideration the massive tax breaks developers receive under the 421-a program, which would reduce any construction cost differential considerably." Gov. Andrew Cuomo said any extension of the 421-a program must include fair wages, DNAinfo reported. If an agreement on wages is reached, the program would be extended to June 15, 2019.

What if it isn't extended?

A report from New York University's Furman Center for Real Estate and Urban Policy said land prices might fall, DNAinfo said.