With the 421-a extender set to expire by the end of the year, there are signs that developers are hanging back to see how the negotiations for the tax break plays out.
The tax abatement program, which was extended for six months last June, is now teetering on extinction as construction unions and the Real Estate Board of New York attempt to forge a deal over prevailing wages.
If an agreement is reached before the deadline, an amended version of the program (which includes a provision requiring developments to include 25 to 30 percent affordable housing units as opposed to the previous 80-20 split) would be extended for four years.
However, if both sides fail to forge an agreement, the tax abatement may be discontinued entirely.
“The developers who are sweating are those who build midsize rental buildings in the boroughs and upper Manhattan, where several hundred extra dollars a month in property taxes can make all the difference in your ability to fill the units, but having to include 25 percent affordable and then pay higher labor costs kills your pro forma,” said Ken Fisher, a partner in the real estate and government and regulatory practices at law firm Cozen O’ Connor.
The uncertainty produced by the negotiations is said to be weakening the appeal of the city in spite of the massive deals that adorn local real estate publications.
According to John Catsimatidis, the CEO and chairman of supermarket operator and real estate development firm Red Apple Group, the fate of the tax break will determine where his company invests next.
“Because they’re playing around with that 421-a system, we may not build. If the city creates obstacles, the next $100 million we spend might be in Florida instead of New York,” Catsimatidis said during a keynote presentation at the EisnerAmper Real Estate Private Equity Summit last week.
If Catsimatidis’ firm reduces its footprint in the New York City, it would be one of the many firms to do so in spite of a profitable second quarter for the real estate industry.
According to data from Douglas Elliman, the average sale price for a Manhattan apartment reached a record $1.872 million during the second quarter of this year, buoyed by transactions such as Raymond Svider’s $32 million purchase of a penthouse unit at 737 Park Avenue.
However, this was followed by a sharp drop in the number of building permits issued last July. According to data from the US Census Bureau, the number of permits that the city issued in July dropped by 90 percent compared to the previous month, with the total number of permits shrinking from 17,786 to 1,786.
This has been attributed to a last-minute rush for approvals under the previous version of 421-a, indicating weak enthusiasm from developers for the new version of the program. However, while Catsimatidis’s comments show dissatisfaction with the negotiations, Fisher said it is unlikely that investors will flee from New York City.
“There’s a lot more money chasing deals today than deals chasing money. That isn’t going to change just because of a bad 421-a outcome, because New York’s fundamentals are sound: rising population, crime still low and a safe haven for foreign flight capital,ˮ Fisher said.
“But that’s not the same as saying that they are all going to fall into line and build rental buildings where they have to give away 25 percent for affordable housing, and pay higher wages, to get 421-a benefits.
“Some will take a shot at condos without 421-a and others are suddenly discovering the office market.”
Aside from inspiring indifference from developers, the new version of the tax break may also be up for a legal challenge.
According to an earlier report from Crain’s, real estate figures may sue to nullify the government’s move to delegate the decision on the prevailing wage to the private sector.
The tax break has been a point of contention among city and state officials.
Shortly, after the extension was adopted, New York City Mayor Bill De Blasio criticized Governor Andrew Cuomo, saying: “On 421-a, he did not act in the interest of people who need affordable housing in this city, which is a huge percentage of the people in this city.” Cuomo, on the other hand, has mostly stayed silent on the subject since the extender passed, in spite of playing a role during earlier negotiations.