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Deals & Dealmakers

City cracking down on 421a abuses as new program kicks in

Two weeks after the 421a tax program was resuscitated when the Real Estate Board of New York (REBNY) and the Building & Construction Trades Council reached a deal on wages, officials are now cracking down on those who are already receiving benefits from the program.

Photo by Stephen Rush/ Flickr
Photo by Stephen Rush/ Flickr

Yesterday (Tuesday) Mayor Bill de Blasio, Attorney General Eric Schneiderman and Governor Andrew Cuomo announced in a press release that the Department of Housing Preservation and Development (HPD) would be issuing letters to building owners of 178 residential buildings in New York City that their 421a tax benefits would be revoked unless they complied with the requirements of the program, including registering their apartments as rent-regulated.

“Owners wrongfully receiving 421a are on notice — comply with the law or your tax benefits will be revoked. Since day one, my Administration has made enforcement of rent regulation laws and protecting tenants a priority. With our state and law enforcement partners, we will continue to fight for a reformed 421-a program that better serves New Yorkers,” said de Blasio in the release.

The action is part of the Real Estate Tax Compliance Program, launched last year by Schneiderman, HPD and the Governor’s Tenant Protection Unit to make sure building owners receiving benefits from the 421a program are in compliance with the law.

The program was established to address ongoing violations of rent stabilization requirements of the 421a law.

The AG’s office began investigating owners of multifamily rental buildings that claimed to be operating as co-ops or condos in 2014. The next year, compliance letters were sent to landlords of 285 buildings targeted by the investigation.

Of the 285 buildings, 35 had their 421a benefits revoked this past September, and an additional 178 were sent revocation notices on Nov. 21. The rest of the building owners investigated proved they are in compliance with the law, or are addressing the violations that were uncovered in the investigation.

“The 421-a tax program is a two-way street: landlords who receive these lucrative tax benefits must afford their tenants rent-stabilized leases and protections. But investigations conducted by my office have found that some landlords are flouting these requirements and instead, using the tax break to simply increase their profits,” said Schneiderman in the release.

“We will never hesitate to protect tenants or New York City’s affordable housing stock, which is critical to the economic stability of many families.”

The 421a agreement regarded specific construction wages for buildings with 300 or more rental units in Manhattan south of 96th Street and in Brooklyn and Queens Community Districts One and Two, within one mile of the nearest waterfront bulkhead.

Manhattan buildings subject to the construction wage requirement would have to pay an average hourly wage of $60, while Brooklyn and Queens buildings would have to pay an average hourly wage of $45. (Wages listed include salary and benefits).

In another move to ensure building owners are in compliance with the law, City Council members Jumaane Williams and Stephen Levin introduced two bills at a Council meeting on Nov. 17 that would provide more oversight of building receiving the 421a abatement.

The two bills would require an annual audit by HPD of a certain number of buildings with the tax abatement to ensure that the buildings are complying with rent registration requirements and affordability requirements.

Other changes to the new 421a agreement include affordable rental units remaining affordable longer (40 years), 421-a exemption benefits increasing to 100 percent exemption for 35 years, (only for buildings paying the specified construction wages), and developers subject to the 421a wage requirement will be required to hire independent monitors to audit certified payrolls.

Daniel Bernstein is an attorney at Venable LLP, where he concentrates on affordable housing and urban development issues in New York, said it’s possible that the new 421a deal could affect projects already under construction.

“Projects which commenced construction in 2015 to vest under the old 421-a program (i.e. by making 20 percent of units affordable) may be able to elect to participate in the new 421-a program,” he said.

“This could involve making a higher percentage of units affordable, at different affordability levels, and for a longer period in exchange for receiving an increased property tax exemption.”

The 421a tax abatement program, which had expired in January, allows building developers to receive a tax exemption for a determined amount of years in exchange for builders setting aside a certain percentage of their units for affordable housing.

The program will not be formally extended until the new agreement is passed by the New York State legislature and signed into law by Gov. Cuomo, who has requested a special legislative session to address the extension of the 421a program.

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