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Study puts builders’ tax under the spotlight

A new study on the 421a tax program suggests that affordable housing could suffer a substantial blow in at least certain sections of the city, should developers not be enticed to invest and build there.

“Our financial modeling finds that, without a tax exemption or some other form of public subsidy, there are neighborhoods in the city that may be no longer economically attractive for developers to construct new mid- or high-rise housing even if the land were free,” said Mark Willis, executive director of the NYU Furman Center and co-author of the report.

The study, entitled The Latest Legislative Reform of the 421-a Tax Exemption: A Look at Possible Outcomes, considers the possibilities that the program will expire or continue based on an agreement between the real estate industry and construction trades.

Using financial analysis, the report examines the program’s future across different market types, including neighborhoods where rents and sale prices are far lower than in the Manhattan Core. If the new 421-a program is not approved after the six-month stay it was granted this summer, the fallout could lead to a disruption in the supply of housing by market-rate builders.

However, should it pass as it currently stands, there are neighborhoods in New York which may still not benefit from Mayor de Blasio’s much publicized push for increased affordable housing in the city.

“We hope that this study sheds light on how the 421-a legislation will impact construction across New York City’s neighborhoods,” said Willis. “The outcomes regarding 421-a may be determined by the negotiations between residential real estate developers and construction labor unions. In doing this study, our goal is to detail the effect each of the possible outcomes would have on the production of housing in different parts of the city.”

Willis told Real Estate Weekly that the study did not examine the impact of a possible general increase in construction costs, but it does explore what might happen if the newly revised 421-a program goes into effect in 2016 without any increase in construction expenses.

This analysis shows that, compared to what the existing 421-a program might have created, there are likely to be more affordable rental housing units, but some of these units could be serving higher-income households.

While there would likely be no change in construction in areas currently dominated by condominium development not using 421-a, like portions of Manhattan, there are parts of the city where the production of mid- and high-rise buildings might be disrupted while land prices adjust. In these neighborhoods, once development resumes, new development may tend toward condominiums rather than rentals.

Even in those portions of the city where condominium development would thrive without 421-a, The program appears to make rentals more attractive for developers who focus on the longer tax exemption period and less on near-term net operating income. Elsewhere, due to the lengthened property tax exemption, rental development with the 421-a program would be more attractive than it is now by some measures, even in parts of the city where no affordable set-aside is currently required.

Finally, if construction costs increase, the report notes that the development of rental housing could become more expensive. If this were to happen, the government would have to increase the level of other subsidies to cover the increased costs, thus restraining the type and amount of affordable housing that can be produced with a given amount of government resources.

“While it’s impossible to predict the future with any certainty, our financial modeling helps provide an informed assessment of how changes to the 421-a program may affect housing development in different parts of New York City,” said Willis.

The City Council must move on the 421a issue next month, either continuing to extend the program in its current form or otherwise.

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