421-a deal brings more anxiety for real estate developers

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Construction in Soho. (Torbakhopper)
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For months, real estate developers across New York City have been on edge, growing more anxious as the weeks ticked past. The source of their unease? Renewal of the 421-a tax incentives—a program that provides the underpinning for virtually all rental housing production in the five boroughs—was caught in Albany gridlock.

That dynamic might have ended last week with a last-minute accord between lawmakers, an all-smiles press conference and, on Friday, a signature from Governor Andrew Cuomo. But developers are still worried—some, perhaps, moreso now.

The 421-a law Cuomo enacted gives rental developers a lot to like, including considerably longer periods without taxes. But it comes with a giant caveat: If representatives for real estate developers and construction unions do not come to an agreement on wages by the end of the year, the program will end altogether.

Experts say that could squeeze rental housing production, drastically reduce the number of affordable apartments built and undermine Mayor Bill de Blasio’s ambitious housing plan, which aims to create 80,000 affordable homes in a decade.

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Even if that scenario is avoided, though, it doesn’t change the fact that developers are unable to plan projects now. Executives say they will work furiously in coming months to get already-planned buildings into the ground before the end of the year, hoping to lock-in tax breaks under the existing program. That continues a pattern that’s been happening all year.

But planning any other rental projects, at this point, seems to be out of the question, some developers said. There’s no way to figure the cost of a project without clarity on what workers will be paid—or if there will even be a 421-a program.

“There’s no way to know anything,” David Schwartz, a principal at Slate Property Group, said Monday. “We don’t even know what the issues are. We don’t know anything, and it’s impossible to make that gamble, because it’s not possible to build rental without 421-a.”

Like other developers, Schwartz said all projects he takes on at this point will have to be condominiums. That won’t change until there he knows iwhether the program will exist come January and, if so, what wage requirements will be added. In the meantime, Schwartz said, four or five rental projects that are in the pipeline will be scrapped for condominiums. All five would have included between 20 percent and 30 percent affordable housing, and would have produced between 750 and 1,000 apartments.

“We’re only looking now at condo projects. We’re not looking now at any new projects that could have any rental component, any affordable component,” Schwartz said. “We have to invest our money now and we won’t get it back if no deal is made.”

The 421-a program has existed since the 1970s, when it was created as a way to spur growth in an increasingly bleak, crime-ridden city. Since then, it has grown to become a central component of how real estate developers plan their projects. Last year, 421-a accounted for more than $1.1 billion in forgone tax revenue. That has helped make it the target of some affordable housing advocates, who argued the program failed at what is now seen as its main function: Creating affordable housing.

The changes signed into law last week—largely based on a plan developed by the de Blasio administration—will mandate that all projects build affordable apartments, setting aside between 25 percent and 30 percent of the units for that purpose. Developers will be given three options, each tailored for different types of housing markets. The changes ban most condos and co-ops from receiving the abatements, with some exceptions that are meant to protect small, reasonably-priced projects in the outer boroughs. And the tax breaks will now last for 35 years, up from a maximum of 25 years.

The fate of all those changes are in the hands of two special interests groups: The Real Estate Board of New York, which represents the city’s biggest developers, and the Building and Construction Trades Council of Greater New York, which represents numerous construction unions. The new laws says leaders from both organizations must sign a “memorandum of understanding” by the end of the year for the program to continue.

Exactly what that entails is somewhat unclear, perhaps by design. The law mandates the agreement cover “wages or wage supplements” for buildings with more than 15 units. The law also allows for wage schedules based on the number of units, size of overall projects and geographic locations within the city.

That languages gives real estate some room to cut a deal that may not hurt the bottom lines of as many developers as, say, a citywide prevailing wage mandate. That would essentially be a requirement to hire union. REBNY leaders are said to detest the concept and had considered it a non-starter in discussions with lawmakers in Albany. They say the costs run high, with prevailing wage for carpenters on heavy construction jobs topping $94 per hour with benefits.

While some developers routinely pay that much, it is a not a figure that sits well with a number of firms building in the outer boroughs. It would be a death blow, some say, to many affordable housing developers.

“I’m concerned that anything that will increase the cost side of that equation will immediately result in fewer affordable housing units being built,” Jolie Milstein, president of the New York State Association for Affordable Housing, said of changes that the negotiations may bring. “More expensive construction means fewer affordable units to solve the crises we’re facing in the city.”

There are many potential deals that could be worked out between REBNY and the building trades. There could be a living wage scale, which would set a minimum pay that’s far less than prevailing and would have little to no impact on big-time developers. There could be a mandate to pay a prevailing wage in Manhattan and a living wage elsewhere. The unions could give something back, perhaps cutting down on rules that developers consider onerous.

Steven Spinola, the outgoing president of REBNY, and Gary LaBarbera, the building trades president, issued a joint statement last week, apparently a sign they’re starting on amicable terms. They said they “look forward to working together to craft a long-term, comprehensive plan to ensure that a reformed 421-a program can maximize the creation of affordable housing in New York City for years to come” and that they “look forward to partnering over the next months to structure a program that works for the real estate community, and works for the hard working men and women who build affordable housing in New York City.”

Both sides have an interest in coming to a deal and would likely need to have flex to reach one. Ed Ott, a labor expert at CUNY who used to be the executive director of the New York City Central Labor Council, said he’d never encountered a law that’s contingent on two interests groups coming to terms. He said an accord was certainly possible, and noted this is far from the first time developers and the trades have negotiated.

“This may be an opportunity for everybody to get their issues discussed. It’s interesting. It has possibility,” Ott said Monday. “I think everybody’s got something to gain and something to lose here. So it sounds like a pretty good situation for them to work it out.”