How LIC's Residential Market is Dealing With A Brave New 421A-less World
Popular tax break’s expiry in January has slowed new rental development
by Rey Mashayekhi
It’s the albatross that has hung over the New York City real estate market for more than a year: 421a, the now-expired state tax abatement that had become a critical component of developing affordable rental housing in the city. After much wrangling in Albany over the tax break’s future, 421a finally expired in January – a consequence of Gov. Andrew Cuomo’s mandate that the real estate industry and construction trade unions reach a compromise on workers’ wages at projects benefiting from the abatement (the two sides were unable to strike a deal).
Now, with no one sure whether 421a – or potentially a similar, replacement program – will ever be back, real estate market participants and observers are left to consider a new landscape when it comes to residential development in the five boroughs. The fear is that without 421a, developers won’t have incentive to build affordable housing in New York; furthermore, builders claim that sans the tax abatement, it simply doesn’t make financial sense to build rental projects, which bring less immediate returns than for-sale condos.
For Long Island City, however, there is good news: there are more than 22,000 new units (the vast majority of them rentals) already in the pipeline in the neighborhood and promised for delivery in coming years. Most of that housing stock was planned prior to 421a’s expiry, and many projects got into the ground and started foundation work prior to January – enabling developers to take advantage of the abatement before it was gone.
“I don’t think it’s affected anything yet [in Long Island City],” real estate attorney Paul Korngold, who represents a number of developers active in the neighborhood, told Living LIC. “Anybody who’s going to do a [rental] project raced like a lunatic to get in the ground by December 31,” which was the deadline to take advantage of the abatement before its expiry.
Korngold acknowledged that the tax break’s absence could eventually have a “serious effect” in Long Island City, as far as building rental housing needed further out into the future. “I think down the road, it’s going to make a big difference,” he said. But he noted that LIC saw a “huge increase in housing [development]” planned between 2013 to 2015 – projects that will more than satisfy demand in the near-to-mid-term.
In fact, developers “know the market is saturated” in Long Island City at the moment, Korngold said. That means many who got their projects into the ground before the end of last year, in order to qualify for 421a, are now moving slowly as far as building those developments. While such projects have already started foundation work, in many cases developers have yet to secure construction financing and push on with their plans – instead opting to hold off and resume work when the apartment market in Long Island City shows signs of tightening.
“You walk around Long Island City and you see a lot of empty lots with foundation work done,” Korngold noted, with those properties having done “just enough to reach the statutory definition” in qualifying for 421a. By law, developers have until the end of 2019 to finish these projects or risk losing the abatement – and Korngold predicted a “major push at the end of 2017” so far as resuming construction on such developments.
In the meantime, the city’s residential real estate market is already seeing the effects of the tax break’s absence, as far as new rental projects commenced since the start of this year. Real estate attorney Alvin Schein told Living LIC that overall, “new [rental] starts are down by 90 to 95 percent" so far in 2016, and that he’s seen “very little new activity” among developers compared to previous years.
“It’s a complete hold as far as rental housing,” Schein said. “It doesn’t work economically. Jobs that are starting up, or have started recently, got in the ground in 2015 and qualify [for 421a]. A number of sites are in a frozen state because the numbers don’t work.” It’s a state of affairs that shows no signs of changing for the time being, despite ongoing negotiations between lawmakers, developers and the unions. “I don’t hear of any deal – there is a standstill,” Schein noted. “We’ll find out in the next couple months whether or not something happens in legislation.”
While the current environment has yet to hinder new condo development, according to Schein, “no one I know is starting a rental project now.” Instead, developers and landlords are looking to get creative when it comes to their exposure in the city’s rental housing market -- eschewing ground-up development and in some cases looking for acquisitions of properties that still receive a 421a tax break.
“I think if a building has maybe a few years left on their 421a, it makes their resale a lot more appealing to the buyer,” Eric Benaim, the founder, president and CEO of Long Island City-based residential brokerage Modern Spaces, told Living LIC.
Benaim said Modern Spaces has seen firsthand the effect that 421a, and its absence, has had on the consumer side of the residential market in LIC – particularly as far as sales of condo units that also benefit from the abatement. The brokerage is currently marketing several condo properties in Long Island City – like the Harrison, at 27-21 44th Drive; the Monarch, at 47-05 5th Street; and the Jackson, at 1333 Jackson Avenue – that received 421a, and in the process hand down their property tax breaks to condo owners.
But the firm also markets condo buildings in the neighborhood that don’t receive the abatement, and Benaim said he’s seen the consequences as far as sales are concerned – estimating that 421a-less properties that took “about a year” to sell out would have “probably taken six months” to sell out if they had the tax break.
“On the condo side, it’s about educating the buyers,” Benaim said. “Sales [of units without the tax break] don’t go as quickly as you think they would with 421a.”
Whether the abatement, or a replacement program, is ever instituted, the developers who have already committed to building new apartments in LIC have provided the neighborhood with a platform from which to grow. "I think the impact, because of the units that got into the ground before [421 expired], is you'll have more people coming here."
While rental prices “are down a little bit,” Benaim noted that LIC’s condo market continues to “slowly go up,” even in the face of the neighborhood’s steadily growing inventory. “The prices are creeping up – not as fast as they used to, but they are.” And 421a or no 421a, that is good news for the neighborhood’s prospects.