As NYC residential developers evaluate the new 485-x tax incentive program (replacement for the expired 421-a tax incentive program) they have raised concerns that the burdensome construction wage requirements may deter the development of “very large rental projects” (150 or more units) in key areas like Manhattan south of 96th St., and parts of Brooklyn and Queens.
Since the 485-x program was signed into law in April 2024, I’ve engaged in discussions with various developers and the NYC Comptroller’s office. We are eagerly awaiting their draft rules and FAQ guidance, which should clarify details of how these new construction wage requirements will be implemented.
The Financial Landscape
One of the most pressing issues developers face is the substantial property tax burden that can consume around 30% of rental income. Without some form of economically viable property tax incentive, many new multifamily developments are unprofitable and cannot be financed. Tax incentives are not just beneficial; they are essential for fostering residential rental development in New York City.
Potential Development Paths
Based on my discussions with industry stakeholders, as of the Fall of 2024 NYC developers are likely to explore the following pathways:
- Office to Residential Conversions (467-m Program): Projects with a Commencement Date (applicable DOB permit) on or before June 30, 2026 will receive the longest benefits. Notably, HPD and the Comptroller have confirmed that no construction wage requirements apply to these conversions, making them an attractive option.
- Completing Vested 421-a Projects: Developers can also focus on projects that are already vested under the 421-a program and are eligible for completion by June 15, 2031. It’s important to note that only specific projects with 300 or more units face construction wage requirements, providing some flexibility for developers.
- Pursuing “Large Rental” or Smaller 485-x Projects: While larger 485-x projects may face formidable construction wage challenges, smaller projects are subject to lower construction wage requirements (and no construction wage requirements for projects of 99 or fewer units), allowing for potential opportunities in this space.
Looking Ahead
For those interested in understanding these complex programs better, I invite you to join my upcoming in-person CLE program on residential tax incentives, scheduled for November 20, 2024, at the New York City Bar Association. This session will cover the latest developments regarding 485-x, 467-m, 421-a, and other crucial tax incentives vital to underwriting residential rental development in NYC.
Whether you are an attorney or a professional in the real estate industry, this program will be essential for anyone looking to navigate the evolving landscape of NYC residential development.
Conclusion
As we await further guidance on the 485-x program and its implications, it’s clear that developers will need to be strategic in their approach. By exploring the available pathways and taking advantage of as-of-right property tax incentives, there remains potential for successful residential rental development in New York City.
If you need assistance with any of these programs, feel free to reach out!