On June 25, 2015, New York legislators approved a deal to extend the 421a tax abatement program by four years with some significant changes. The extension is contingent on the Real Estate Board of New York and the Building and Construction Trades Council of Greater New York reaching an agreement on wages for workers employed at sites benefitting from the 421a program. If no deal is reached in the next six months, the program will expire.

New York City's 421a tax program was enacted on July 1, 1971 to provide a ten-year property tax exemption for any new construction on under-utilized or vacant land. The 421a tax abatement program allows developers of multifamily residential construction to exempt the increase in the assessed value of property resulting from improvements over a certain number of years. Multifamily residential buildings are subject to some of the city's highest tax rates.

The program was renewed in 1977 after it proved to spur residential construction and provide a significant source of employment. In 1984, the city created a Geographic Exclusion Area (GEA) from 14th to 96th Street that required any new residential construction in the area to include a certain percentage of affordable housing units to receive 421a benefits. Over time, the GEA expanded to include all of Manhattan and portions of the outer boroughs.

Developers of market rate units within the GEA could still receive an exemption by purchasing negotiable certificates from other developers that constructed affordable housing outside of the GEA, usually in low income areas. Critics of this program asserted that the use of offsite housing certificates defeated the purpose of 421a by concentrating affordable housing in low income areas, instead of promoting affordable housing within the GEA. No new certificates have been issued since July 1, 2008, but certificates can still be purchased on the private market directly from developers who constructed affordable housing units before that date.

Controversy ensued in 2013 after several developers of luxury condominiums within the GEA received 421a benefits even without constructing onsite affordable housing units within their new developments by purchasing negotiable offsite housing certificates. Opposition to the 421a program further increased when developers created separate "poor door" entrances for onsite affordable housing tenants in luxury buildings, effectively segregating affordable housing tenants and luxury tenants.

Under the current 421a program, owners of multifamily residential properties are eligible for a maximum of 25 years of property tax exemption of the increase in value of the property resulting from the newly constructed improvements on lots that, within three years before construction, are:

The 421a abatement provides the property owner with several years of a complete property tax exemption, followed by a gradual phase out back to the full amount of the property tax. For example, under a 25-year exemption, the property owner would receive 21 years of a full exemption followed by a four-year phase out period with each year having a proportionate decrease in the exemption amount.

The current GEAs include all of Manhattan and certain regions in the outer boroughs. For projects within GEAs, developers must comply with additional affordable housing requirements. Typically, 20% of the units must be affordable.

The program also contains an assessed value cap that limits the maximum benefit available to each residential unit. Any amount above of the cap does not receive the exemption. The cap does not apply to projects that contain 20% affordable units or that receive substantial government assistance.

One of the greatest benefits of the 421a tax program is that it allows developers to pass on the property tax savings to purchasers of cooperative and condominiums units, therefore lowering the net cost of ownership. Property taxes on multifamily residential units in New York City can be prohibitively expensive, so the program allows purchasers a chance to buy otherwise unaffordable units.

The bill recently approved by lawmakers extends the current plan for four years and:

However, the new program is contingent on the Real Estate Board of New York (REBNY) and the Building and Construction Trades Council of Greater New York (BCTCGNY) reaching a wage agreement for workers employed at sites benefitting from the 421a program. Labor organizations advocate that projects receiving 421a benefits should pay a prevailing wage, while developers counter that increased labor costs may make projects economically unviable.

Developers are hesitant to begin new projects until they are assured that the 421a program will continue. Until a deal on wages is reached, developers may focus their efforts away from constructing rental projects, which face higher tax rates than condominiums and cooperatives. Developers may potentially challenge the plan's delegation of legal authority to two private entities, REBNY and BCTCGNY.

Mayor Bill de Blasio claims the changes could result in the creation of an additional 24,000 affordable housing units over the next decade, almost double what was estimated to be produced under the current plan. The Mayor recently announced that in 2015 over 20,000 affordable units were preserved or created. However, the 421a program costs New York City an estimated $3.3 billion in tax revenue over the course of a decade. The program cost the city $1.1 billion in 2015 alone.

Counsel for developers should ensure that any current projects begin construction in time to receive 421a benefits under the current program before its potential expiration. Counsel should also anticipate the need for alternative plans for projects that cannot begin construction in time to receive 421a benefits under the current plan. Due to the uncertainty of the continuation of the program, many developers are shifting away from future projects that could be adversely impacted.

Without 421a tax exemptions, many construction projects may not be financially viable, particularly rental properties that face higher tax rates within GEAs. In response, some believe developers may begin to look outside the GEA for new development opportunities, where tax rates are lower.

Counsel for developers and labor unions should advise their clients of the potential problems facing new construction projects if the 421a program lapses. Concerned parties should continue to monitor developments until a wage agreement is reached or until the program is set to expire in late December 2015.