Deep Dive: Commercial to Residential Conversions (proposed RPTL 467-m)

by | Feb 21, 2023 | Industry Updates

As part of her 2024 budget proposal, Governor Hochul has proposed the addition of §467-m to the Real Property Tax Law. Dubbed “Affordable Housing from Commercial Conversions” or “AHCC,” the proposal would incentivize the conversion of non-residential buildings in New York City to mixed-income rental apartments. Specifically, as will be detailed below, owners converting their non-residential buildings to residential rental apartments would receive a property tax exemption in exchange for making at least 20% of the new apartments subject to affordability and rent stabilization requirements (“Affordable Units”). Notably, while the Affordable Units would remain affordable in perpetuity, the remaining units (up to 80%) would be free-market from their inception. While certain non-residential buildings will also require changes to zoning regulations and the Multiple Dwelling Law to be converted to residential use, the AHCC proposes a property tax incentive to encourage owners to include Affordable Units (instead of just building condominium units or free market rentals). It remains to be seen whether the proposed property tax benefit would be sufficient to incentivize owners to have their non-residential buildings provide the Affordable Units required by AHCC.

While some of the details may change if and when the proposal advances through the legislative process, below is AHCC’s basic structure as envisioned by the governor:

Tax Incentive Benefits: There is a 100% exemption from real property taxation during the construction period, i.e. the period between the date construction work starts and the day prior to the date the TCO is issued (not to exceed the period that is three years prior to the TCO date).

Thereafter, AHCC tax benefits last for a further 19 years after the TCO is issued. The amount of such benefits depends on whether the building is located in the “Manhattan Prime Development Area,” i.e. south of 96th Street in Manhattan:

  • For buildings in the Manhattan Prime Development Area, there is a 50% tax exemption for the first 15 years of the tax benefit period, which decreases by 10% per year from the 16th through 19th years, and thereafter full real property taxes are due from and after the 20th year after the TCO is issued.
  • For buildings outside the Manhattan Prime Development Area, there is a 35% tax exemption for the first 15 years of the tax benefit period, which decreases by 7% per year from the 16th through 19th years, and thereafter full real property taxes are due from and after the 20th year after the TCO is issued.

The construction commencement date must be on or before December 31, 2032, and the completion date must be on or before December 31, 2038. The building must be operated as rental housing and contain six or more dwelling units.

If the aggregate floor area of commercial, community facility, and accessory use spaces exceed 12% of the building, AHCC benefits will be reduced by a percentage equal to such excess.

Buildings receiving AHCC benefits are ineligible to receive real property tax exemptions under any other law.

Affordability Requirements: At least 20% of the converted apartments must meet the law’s affordability requirement by having an average not to exceed 70% of Area Median Income (“AMI”), with a quarter of those Affordable Units (at least 5% of total units applying for AHCC benefits) required to be rented at or below 40% AMI and with various other percentage/average requirements that must be met. Affordable Units must stay affordable and are subject to rent stabilization in perpetuity; no deregulatory mechanisms in rent stabilization (to the extent any remain) are applicable. Affordable Units cannot be rented out to corporations, partnerships or other entities; cannot be rented on a transient basis; and cannot be converted to coops or condos.

Affordable Unit Mix: One of the following requirements must be met:

  • The affordable housing units must have a unit mix proportional to the free market units; or
  • At least 50% of the affordable units must have two or more bedrooms, and no more than 25% can have less than one bedroom.

“Prompt Offering” of Affordable Units After TCO: Affordable units must be “promptly offered” for rental to qualifying tenants after the TCO is issued. Additionally, an affordable unit cannot be held off-market for a period longer than is reasonably necessary to perform repairs needed to make the unit available for occupancy.

Non-Affordable Apartments May Be Market Rate: The other 80% will be permanently market rate unless, for some reason, they would otherwise be subject to stabilization. This is in contrast to expired programs such as older versions of 421-a and the 421-g incentive for lower Manhattan conversions, where all units were required to be rent-stabilized during the tax benefit period.

No “Poor Doors”: All units, whether affordable or market rate, must share common entrances and exits so that the affordable units are not isolated to a specific area of the building.

Wage Requirements: All building service employees employed by the applicant at the building shall receive the applicable prevailing wage for the duration of the 19-year benefit period, with some exceptions for small or subsidized projects. AHCC does not contain any construction wage requirement.

R&E will be following the progress of AHCC and other real estate proposals in the Governor’s budget Bill and will provide further updates when available.

If you have any questions, please feel free to contact your trusted Rosenberg & Estis, P.C. attorney or Daniel M. Bernstein, Member and Head of the firm’s Tax Incentives & Affordable Housing Department.