Expiration of NYC's 421 Tax Break Hinders Multifamily Projects

Multifamily developers with projects in New York City facing construction delays—projects that were eligible for 421 property tax exemptions—say they’ve been left holding the bag by the NY State Legislature, which let the tax credit known as Affordable New York expire last month.

The 421 tax provision, first enacted 51 years ago, offered a property tax exemption for housing projects in NYC that include a percentage of units designated for lower-income residents. According to a study by NYU’s Furman Center, nearly 70% of rental housing built in the past decade in NYC used the tax abatement.

According to a report in the Wall Street Journal, the expiration of 421 forced multifamily developers in the city to scramble to install a project’s foundation before June 15 in order to be eligible for the property tax exemption, which also required that the project complete construction before June 15, 2026. 

For the developers, the sudden cutoff of the tax credit couldn’t come at a worse time: construction of new multifamily units has been surging in NYC, with 38% more permits issued during Q1 2022 than in Q1 of last year, according to NYC’s rent guidelines board.

The end of 421 also comes as state and city leaders are initiating programs to increase the number of affordable housing units in NYC through new construction and adaptive re-use projects converting aging office buildings and empty hotels into affordable housing.

When 421 expired, the Durst Organization was in the midst of a project to build seven mixed-income and fully affordable buildings in Astoria, Queens. Four of the buildings had broken ground in time to qualify for the tax credit (one building has been completed).

The company has decided to put the last three buildings in the project, each slated to have 700 multifamily units, on hold. Jordan Barowitz, Durst’s VP of public affairs, told WSJ that the balance of the project “won’t move forward until there’s a comparable tax tool to 421.”

Durst may not have to wait too long for a replacement: NY let the tax exemption lapse in January 2016, only to bring it back in November of that year, with a renewed emphasis on affordable housing.

Several CRE analysts have expressed concern that the expiration of 421 could crimp adaptive re-use projects to convert aging office buildings into affordable housing. The 421 abatement was widely credited with spurring a wave of office-to-residential conversions in Lower Manhattan in the wake of 9/11.

Alex Staikos, a director in the New York office of JLL Capital Markets, told GlobeSt.com that the post-9/11 market dynamic in Lower Manhattan was very different from today’s and it is hard to draw comparisons.

“The 421a program made early conversions in the wake of 9/11 more financially feasible, but apartment demand in Lower Manhattan was at a record low following the terrorist attacks. The achievable residential rents were depressed, and the abatement was necessary to make the investment make sense,” Staikos said.

“Today, demand for apartments has never been greater, so we don’t see this same sort of dynamic,” he said.

JLL will arrange financing for what will be the year’s largest office-to-apartment conversion project in NYC. A joint venture of Silverstein Properties and Metro Loft is acquiring 55 Broad Street, a 30-story office tower that opened in 1967 in New York’s Financial District, for conversion into a residential building with 571 multifamily units.

Staikos told GlobeSt.com that the combination of tight housing supply and weak office occupancy has created a “perfect storm” of conditions for adaptive re-use office-to-apartment conversions in NYC.

“Converting underperforming office buildings into multifamily can reinvigorate downtowns,” Staikos said. “When thousands of new residents move into a particular area, you see new restaurants, shops, and entertainment venues pop up. Suddenly an underutilized pocket of the city becomes a vibrant mixed-use live/work/play community.”

“NYC went through a building boom in the late 60s and 70s and those buildings are now at the end of their lives. The pandemic has accelerated a flight to quality in the office sector and demand is towards newer Class A product,” he said.

Developers acquiring office properties for multifamily conversions have some competitive advantages over those who plan to build new residential buildings as well as investors who are buying office buildings and plan to continue office use, Staikos told us.

“A conversion is generally cheaper than building ground-up and quicker, since it’s retrofitting an existing structure,” he said. “While a new building may take 3-4 years to build, a conversion can be completed and ready to be leased sometimes in under one year.”

Staikos said a developer with a viable multifamily conversion plan can generally pay more for an obsolete office building than an investor that will keep it as office because of the capital intensity of improving and leasing that office space, including renovations, tenant fit-outs and leasing commissions, relative to rents.