Temporary Tax Incentives & Permanent Restrictions on Property Use: How NYC Developers Finance and Build Multifamily Rental Housing Today

Recently a multifamily developer new to NYC asked us a question: how do NYC developers underwrite a temporary property tax incentive (421-a(16) aka AFNY; 485-x aka ANNY; or for conversions of non-residential buildings 467-m aka AHCC) benfiting newly developed multifamily rental property which will be subject to affordability and rent stabilization (RS) restrictions longer than the tax incentive (and potentially permanent restrictions).

 

For decades NYC developers have been underwriting affordability and RS requirements for mixed-income projects where a restriction (affordability and/or RS) exceeds the length of the property tax incentive benefits. For example under the permanent affordability and RS requirements of the Voluntary Inclusionary Housing (VIH) or Mandatory Inclusionary Housing (MIH) program or under versions of the 421-a tax incentive program in which affordable units remain subject to affordability and RS for 35 or 40 years and thereafter remain subject to RS until a vacancy occurs. Acheivable rents for market units — which are needed to cross-subsidize lower rents for affordable units — will be critical, as will standard developer considerations (acquisition cost, construction wage requirements (if applicable), zoning/land use considerations, etc.).

 

Consider the Underwriting Period / How Long Asset Will Be Owned

 

For developers whose time horizon aligns with the duration of the property tax incentive, permanent affordablility / RS may not be a pressing concern. The economics of the asset post-tax incentive expiration may depend on factors which cannot presently be known (available rents for market units, legal changes, etc.). For example NYS’ recent Affordable Housing Retention Act has enabled owners of certain older mixed-income properties to sell market rate apartments in exchange for preserving existing affordable units and potentially adding affordable units. Who knows what rents will be and what repositioning options may be available 35 years from now? Note: to developers / investors with a multigenerational outlook, permanent affordability / RS may present more of a concern.

 

Developers Look to Optimize Benefits from Applicable Economic Incentive Programs

 

With proper planning, affordable units can satisfy the requirements of two or more programs: property tax incentive (421-a, 485-x, 467-m), zoning affordability requirements (MIH) or bonus programs (the new Universal Affordability Preference program or the prior VIH program, as applicable), as well as below-market financing programs from governmental agencies (if available). The more restrictive requirements of each program must be satisfied which includes affordability, design and many other requirements.

 

Requirements of NYS’s Newest Incentive Programs for Residential Development: 485-x and 467-m

 

Under NY’s most recent property tax incentive programs — 485-x for new construction and 467-m for conversions from non-residential to residential use — the affordability and RS requirements are permanent. For the underwriting period, the net operating income (NOI) of such multifamily / mixed-income projects — market rents for most of the dwelling units and affordability / RS for (typically) 20% – 30% of units plus a substantial property tax incentive (421-a, 485-x, 467-m, etc.) and potentially zoning or other benefits, can make for a positive NOI for at least the tax incentive period and forecasting underwriting beyond such a period is subject to legal and political uncertainties. Even where a development site is ground leased, assuming the fee owner and the ground lessee can come to a business arrangement, NYC mixed-income multifamily developments can occur and benefit from an as-of-right property tax incentive provided that both the fee owner and ground lessee agree to subject the property to the requirements of the property tax incentive program and any other applicable regulatory regimes.

 

For more information about NYC property tax incentives, zoning affordability programs and the development of mixed-income multifamily development, please contact Daniel M. Bernstein and Nicholas DiLorenzo of R&E’S Tax Incentives & Affordable Housing Department. Read Daniel’s Tax Incentives and Affordable Housing blog on the Rosenberg & Estis, P.C. website, and connect with Daniel and Nick on LinkedIn.