If 421-a expires, non-Manhattan developments could be hardest hit

As the days creep closer to the Jan. 15 deadline for the real estate industry and construction unions to come to an agreement on wage rates at construction sites that receive the 421-a tax abatement, some stakeholders are already preparing for the repercussions of the tax break’s potential expiration next month.

If the program does expire, it will not significantly affect high-end developers in Manhattan or high-valued parts of the outer boroughs, but potential development projects in emerging neighborhoods will suffer, experts told City & State.

“If you are anybody else, you’re probably either dead in the water or you’re going to be in a position where you’re forced to go back and either renegotiate with your bank or your seller,” said Kenneth Fisher, a land use and real estate lawyer. “In emerging neighborhoods, and I would use Crown Heights as an example, you simply can’t sustain the rents if you have to basically take the first $700 to $1,000 a month and apply that to taxes. It’s just not enough to support the operation of the building, the acquisition costs and the financing. So, those are the neighborhoods which will see development come to a halt.”

A recent report by New York University’s Furman Center for Real Estate and Urban Policy found that the expiration of the 421-a tax break could lead to a disruption in the supply of housing by market-rate builders, but likely would not disrupt construction in areas currently dominated by condominium development, like Manhattan.

The report also found that even if construction costs increase, the development of rental housing could become more expensive.

Earlier this year the state Legislature and Gov. Andrew Cuomo failed to reach an agreement on the 421-a tax abatement, which provides a tax break on new buildings to encourage development and spur affordable housing. Then, just before the end of the 2015 legislative session, Cuomo announced the tax break would be extended for six months while the construction unions and real estate industry come to an agreement on pay rates for workers.

After six months of negotiations, it’s been reported that discussions have stalled and people involved are increasingly preparing for no deal to be reached.

However, the two parties insist they are still negotiating and are hopeful of reaching a compromise.

“These are ongoing, good-faith negotiations and we are not going to discuss them publicly,” Jamie McShane, a spokesman for the industry group Real Estate Board of New York, said in a statement. “The negotiations mark a great opportunity to engage in frank and honest discussions about how we can build much more affordable housing, ensure construction workers are treated fairly and create job opportunities for residents of the city.”

Gary LaBarbera, the president of the Building and Construction Trades Council of Greater New York, offered a similar assessment. LaBarbera, whose organization is negotiating directly with REBNY on 421-a, said meetings are scheduled and that he wants the program to continue.  

“Really all I can say is that we are meeting,” he told City & State. “We are negotiating. It is our goal and our hope that we will be able to reach an agreement. The negotiations have to this point been in what I would consider good faith.”

If 421-a expires, the state Legislature and the governor will have to take up the issue once again. Observers were hesitant to guess how negotiations within the Legislature will play out, given the changes in leadership and recent arrests and trials of former Assembly Speaker Sheldon Silver and former state Senate Majority Leader Dean Skelos.

“What we’ve seen thus far is even with a tremendous amount of effort from both the real estate development companies and the construction trades that the issue didn’t move last session,” political consultant Hank Sheinkopf said. “It tells you that it’s not clear how this will be resolved.”

Sheinkopf also said the successful conviction of Silver will only make lawmakers more wary of a deal.

One state lawmaker briefed by the building unions in recent weeks said the two sides had been close to reaching a deal. The lawmaker said that discussions had centered on project labor agreements with different wages depending on where the work takes place. A number of state lawmakers declined requests for comment.

The uncertainty of 421-a’s future has created a lot of “angst” in the development community, Fisher said.

“Ithink that there will be many people who are looking for an agreement to be in their stockings Christmas morning because they don’t like uncertainty,” he said. “But I think the ripple effect of the uncertainty will continue to be felt regardless of what the outcome is.” 

Senior Correspondent Jon Lentz contributed to this report.

Correction: An earlier version of this post misquoted Kenneth Fisher as saying the first $700,000 a month in rents would be applied to taxes in an emerging neighborhood like Crown Heights if 421-a were to expire. In fact, he said the first $700 to $1,000 a month would be applied to taxes in the theoretical scenario.