Legislative revisions to the 421-a tax exemption program
The 421-a tax exemption program was created to stimulate new construction of residential property throughout New York City. However, in December 2006, Mayor Bloomberg signed Local Law 58 (“City Law”) which proposes to amend Article 11 of the Administrative Code of the City of New York and significantly revise the 421-a program. Among the proposed changes the “Geographic Exclusion Area” (“GEA”) has been expanded. The GEA currently includes part of Manhattan from 14th Street to 96th Street. Under Local Law 58 the GEA has been expanded to include most of Manhattan, parts of Brooklyn and parts of Queens.
Pursuant to the City Law, in order for projects within the GEA to be eligible to receive 421-a benefits they must be constructed with either substantial government assistance or provide “affordable housing.” In addition, the City Law provides that only the first $65,000 of an apartment’s billable assessed value will receive exemption benefits regardless of where a project is located. This exemption cap will increase by three (3%) percent compounded annually. Also, 421-a benefits will no longer be available for projects containing less than four dwelling units. The new changes were expected to become effective December 31, 2007.
However, on August 24, 2007, Governor Spitzer signed legislation which further changes 421-a (“State Law”). Moreover, the State Law delays the majority of the proposed changes to the 421-a statute until July 1, 2008. The Governor must sign one further piece of technical legislation which clarifies the major changes to 421-a before the State Law can take effect. The State Law makes the following significant changes:
- The State Law expands the GEA to include all of Manhattan, larger portions of Brooklyn and Queens than was set forth in the City Law and includes portions of Staten Island and of the Bronx, as well.
- All projects within the GEA that commence construction after June 30, 2008 will only be eligible for 421-a tax benefits if the project receives substantial government assistance or sets aside at least twenty percent (20%) of the units for affordable housing or the developer for the project has purchased negotiable certificates prior to December 28, 2007.
- The State Law changes the required area median income for projects within the GEA depending upon whether the project is carried out with substantial government assistance and the size of the building.
- The “As of Right” twenty-five (25) year benefits which are currently afforded to projects within a Neighborhood Preservation Area (NPP) or an area eligible for mortgage insurance provided by the Rehabilitation Mortgage Insurance Corporation (REMIC) is eliminated. However, projects located in these areas will still be eligible to receive twenty-five (25) year 421-a benefits so long as the project receives substantial government assistance or at least twenty-percent (20%) of the units are set aside for on-site affordable housing. This provision will take effect on December 28, 2007.
- As of December 28, 2007, no new written agreements for negotiable certificates will be issued. Existing certificates will not expire and can still be used.
- Certificates purchased from an agreement entered into between December 28, 2006 and December 27, 2007 will be eligible for 421-a benefits so long as construction commences on or before June 30, 2008. If a written agreement was entered into prior to December 28, 2006, construction must commence on or before June 30, 2009 in order for the project to receive 421-a benefits.
- There will be a community preference to purchase or rent the affordable units given to residents of the community board where the project is located.
- Affordable rental units located in the GEA must remain rent stabilizes for thirty-five (35) years after completion of construction.
- Buildings with more than fifty (50) units that commence construction after December 27, 2007, must pay prevailing wages to all building personnel who work at least eight (8) hours per week, however there are exemptions based on the percentage of affordable units in the project.
- A boundary commission will reassess the GEA every two (2) years.
- Commercial, community facility, or accessory use space that is eligible to receive 421-a benefits and occupies its own tax lot will be subject to the $65,000 AV cap.
Projects that commence on or before June 30, 2008 will be subject to the current 421-a law. Projects that commence after that date will be subject to the more stringent requirements described above. A project is deemed to have commenced on the date following the issuance by the New York City Department of Buildings of a building or alteration permit for a multiple dwelling on which the excavation and the construction of initial footings and foundations commence in good faith. Accordingly, excavation of a project site is not sufficient to meet this standard.
Developers should be sure to maintain detailed documentation including, but not limited to, photographs of the site, daily logs, bills, invoices, and payments evidencing the type of work performed on each date during the beginning of the project. These procedures will ensure that a developer will successfully establish the exact commencement date of construction in the event it becomes necessary to do so.
For more information about the changes to 421-a, please contact Steven R. Hochberg at shochberg@sbchlaw.com, or Heather R. Ohlberg, Esq. at hohlberg@sbchlaw.com. Both Mr. Hochberg and Ms. Ohlberg may also be reached at (212)681-6500.