The Evolution of the 421a Tax Exemption ProgramFebruary 19, 2020
By: Vivian Martinez, CPA | Matthew Hausman, CPA
The Section 421a Tax Exemption Program has historically provided extended tax relief for multi-unit residential projects as a way of spurring residential and affordable housing development and has been one of the most utilized tax incentive programs by developers over the last decade in New York. As real estate tax expense is often the largest expense of an operating real estate company, the extension of the 46-year program in 2017 came as a relief to many, though it introduced several changes, including the name. It is now called the Affordable Housing New York Program, and this article summarizes some of the major items in both the former Section 421a Tax Exemption Program (the “Former 421a Program”) and the new Section 421a Tax Exemption Program (the “New 421a Program”) with a focus on what has changed and how clients can utilize and benefit from the new program. The complex nature of the new program, which is compounded by the new rent regulations New York put in place last year, underscores the important role that the right advisor can play should you choose to pursue this real estate tax savings endeavor.
THE FORMER SECTION 421a TAX EXEMPTION PROGRAM
Under the Former 421a Program, all units were subject to the Rent Stabilization Law (RSL). To qualify for the Former 421a Program, the property was required to reserve a minimum of 20% of the total units (the “Old Affordable Units”) for occupancy by low or moderate-income households, or demonstrate that the building was receiving substantial governmental assistance for 35 years post-completion of the construction of the property. Subsequent to the 35-year period, tenants occupying the Old Affordable Units continued under the rent stabilization until they vacated the premises. Upon vacating of the Old Affordable Units, the unit was no longer subject to regulation.
With respect to the market-rate units, the Former 421a Program provided that during the exemption period (10 to 25 years), the market-rate units were governed by the RSL. However, such units were deregulated upon the first lease renewal after the expiration of the benefit period, provided that a required notice was provided in the leases.
THE NEW SECTION 421a TAX EXEMPTION PROGRAM
The New 421a Program will be available to applicable projects that have six or more dwellings, for which construction commenced after January 1, 2016, provided construction is completed on or before June 15, 2026. Under the New 421a Program, benefits will include a 100% real estate tax exemption for up to three years during the construction period and an additional 35 years thereafter. For the first 25 years, projects will receive a 100% tax exemption. During the remaining 10 years, the exemption will be equal to the percentage of affordable units that remain in the project.
Rental projects with fewer than 300 units, or that fall outside of the Enhanced Affordability Area, are required to meet one of the following options in order to receive the 421a tax exemption:
Option A—25% of the units must be affordable, with at least 10% affordable at up to 40% of the area median income (AMI), 10% at up to 60% of the AMI, and 5% at up to 130% of the AMI; this option also precludes the developer from receiving any governmental subsidies other than tax-exempt bond proceeds and 4% tax credits.
Option B—30% of the units must be affordable, with at least 10% affordable at up to 70% of the AMI, and 20% at up to 130% of the AMI.
Option C—At least 30% of the units must be affordable at up to 130% of the AMI; this option also precludes the developer from receiving any government subsidies, and the project cannot be located south of 96th Street in Manhattan or in any other area established by local law.
Rental projects with more than 300 units or that fall outside of the Enhanced Affordability Area are required to meet one of the following options in order to receive the 421a tax exemption:
Option E—At least 25% of the units must be affordable, with at least 10% of those units affordable at up to 40% of the AMI, 10% at up to 60% of the AMI, and 5% at up to 120% of the AMI. This option also precludes the developer from receiving any government subsidies other than tax-exempt bond proceeds and 4% tax credits. This option is available within enhanced areas, including Manhattan below 96th Street, Brooklyn Community Boards 1 & 2 and Queens Community Boards 1 & 2.
Option F—At least 30% of the units must be affordable, with at least 10% of those units affordable at up to 70% of the AMI, and 20% at up to 130% of the AMI. This option is available within enhanced affordability areas, including Manhattan below 96th Street, Brooklyn Community Boards 1 & 2 and Queens Community Boards 1 & 2.
Option G—At least 30% of the units must be affordable at up to 130% of the AMI. This option is available within Brooklyn Community Boards 1 & 2 and Queens Community Boards 1 & 2. This option also precludes the developer from receiving any governmental subsidies.
Additionally, developers of rental projects with 300 or more units in an Enhanced Affordability Area must pay certain wages and set aside a certain number of units as affordable housing in order to be eligible for the 421a tax exemption. To meet the wage requirement, the developer must pay an average hourly wage of $45 for projects in Brooklyn and Queens, and $60 for Manhattan projects. These hourly wages are set to automatically increase every three years at a rate of 3%. The affordability restrictions shall remain in place for 40 years from the date of commencement of benefits, which means that developers will be required to maintain affordability for an additional five years after the exemption expires.
CHANGES UNDER THE NEW SECTION 421a TAX EXEMPTION PROGRAM
Significant changes are summarized as follows:
- Affordability restrictions will be for a period of 35 years in buildings with affordability requirements.
- Previously, any rental unit in a building with the 421a tax exemption was required to register with the New York State Division of Housing and Community Renewal (DHCR). Going forward, only units with rents that are within the RSL will be registered. Units with rents that exceed the maximum permissible rents determined by the Rent Guidelines Board will be free market;
- Benefits are applied for only after completion of construction (i.e., after issuance of either a full temporary certificate of occupancy or permanent certificate of occupancy for the building eligible for benefits), and the benefits will be retroactive as opposed to available during construction as they were in the past. Construction benefits are available for up to three years;
- Wage requirement for projects with greater than 300 units.
NAVIGATING THE NEW PROCESS
Under the Former 421a Program, in order to receive the 421a benefits, a schedule of construction costs was to be certified by an independent certified public accountant and submitted no more than 90 days prior to the filing of an application for certification of eligibility. However, under the New 421a Program, this requirement was eliminated. In lieu of the construction cost certification, an independent certified public accountant is to act as an independent monitor of the project. The role of the independent monitor is as follows:
- Prior to the date for which the department of buildings issues the first temporary or permanent certificate of occupancy covering all residential areas of a building for the project (the “Completion Date”), obtain, within 90 days of the completion of construction work of the contractor or subcontractor, the Contractor Certified Payroll Reports, as defined in the Real Property Tax Law §421a (RPTL). If a contractor or subcontractor failed or refused to submit the Contractor Certified Payroll Report within the time required by RPTL, the independent monitor will notify the comptroller (“Fiscal Officer”), as defined in the RPTL.
- Determine the Completion Date by obtaining the Temporary Certificate of Occupancy.
- Summarize the Contractor Certified Payroll Reports for the project in the form of the Certified Project Wide Certified Payroll Report, as defined by RPTL, which includes the total number of hours of construction work performed by construction workers, the aggregate amount of wages and employee benefits paid to construction workers for construction work and the average hourly wage.
- Compare the average hourly wage calculated above to the relevant average hourly wage set forth in the RPTL and recalculate the deficiency of such as prescribed in the RPTL, if any.
A certain level of uncertainty remains as to the form and nature of the reports that will be provided to the Fiscal Officer. My colleagues in the Real Estate Group at Marks Paneth LLP have been at the forefront of developing and negotiating the deliverables associated with this program, working alongside the New York State Society of Certified Public Accountants. As such, our professionals are equipped to help clients navigate the new filing process and take advantage of the New 421a Program.
Understanding the major changes in the New 421a Program is crucial when you are contemplating taking advantage of the real estate tax benefits the program creates for you. First, it is important to remember that under the New 421a Program, the real estate tax abatement period begins post-construction. Second, affordability restrictions will be for a period of 35 years in buildings with affordability requirements. Third, wage requirements for employees will be imposed on projects with greater than 300 units.
Additionally, once your New 421a Program begins, the affordable units and even the market units are subject to the Housing Stability and Tenant Protection Act of 2019 (HSTPA) that was recently passed in June of 2019. The affordable units in the New Section 421a Program went largely unaffected by the HSTPA. However, as a result of the repeal of vacancy allowances in HSTPA, as the law currently reads, no vacancy increase is allowable for the market units upon vacating of a unit, which was generally 18% to 20% under the former rent stabilization laws. As such, it is critical that developers consider high rent deregulation possibilities in the absence of the vacancy allowance.
Having an experienced advisor like Marks Paneth LLP to help you navigate these complex requirements can help ease the burden and allow you to focus on growing your business. As always, our advisors are here to help if you have further questions on this critical topic!