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What Does the New 421a Mean for Developers and for Communities?

By: Moses Gates

November 13, 2015

The Furman Center this week released an important examination of the financial implications of the new 421a real estate tax abatement program. The controversial 421a program was renewed and revised this past summer in Albany.

The Furman Center this week released  an important  examination of the financial implications of the new 421a real estate tax abatement program.

The controversial 421a program was renewed and revised this past summer in Albany. The new 421a real estate tax break expands the length of the tax exemption, eliminates the benefit for high-end condominium developments, applies the same requirements citywide, and creates new affordability options for developers, outlined below (there is an option B as well, which is designed to be used in conjunction with other HPD programs):

Option                                            Old Program:              Option A                     Option C
Affordability Levels:                 20% at 60% AMI         10% at 40%            30% at130%AMI
                                                                                              10% at 60%
                                                                                              5% at 130% AMI
Full Exemption Length:            11-21 Years                25 Years                           25 Years
Partial or Phase-Out Length:   4-8 Years                   10 Years                           10 Years

The Furman Center study is timely because a large portion of the new development in the city will be done using a 421a tax abatement, but new developments in areas that will be zoned for Mandatory Inclusionary Housing will combine the benefits of both programs.  The City's current Mandatory Inclusionary Housing proposal was developed using assumptions from the older version of 421a, but should now be understood and modified to reflect the increased benefit levels given to developers by the new 421a program.

ANHD's main takeaways from the Furman Center's report are:

1) The new program is more lucrative for developers: The report analyzes twomodels: the stabilized net operating income (NOI) yield, and the unleveraged internal rate of return (IRR). The NOI yield measures the return at a snapshot in time just after the project is completed, while the IRR is a more sophisticated tool, used by most developers, which measures the long-term financial gain. While the NOI yield improving or declining varies depending on the market the report states, in regards to rental developments "in all cases the unleveraged IRR improves."  The Real Deal,when reporting on the study, puts this more simply as: "it would likely drive up developers' profits."
 
2) The additional exemption length matters: The main reason the IRR improves across the board, while the NOI yield varies, is the longer benefit provided by the exemption. In Manhattan below 96th street, the exemption goes from a 12-year full benefit with an 8-year phase-out, to a 25-year full benefit with a 10-year partial exemption. Outside of the old GEA, the exemption goes from an 11-year full benefit with a 4-year phase out, to a 25-year full benefit with a 10-year partial exemption. Because of this additional length, most of the additional profit accrues on the back end of the development, benefiting larger and more sophisticated developers.
 
3) In most areas of the City, affordable development will be at 130% of AMI - or $2000+ rents. The Furman study compared the NOI yields and IRRs of the old program to Option A (10% at 40%, 10% at 60%, 5% at 130%), as well as to Option C (30% at 130% AMI) in all markets studied. For reference, the Housing Development Corporation currently sets 130% AMI rents for 1-bedroom apartments at $2,065 and 2-bedrooms at $2,483, and 421a rents could legally be even higher.
 
While Option C is not allowed in Manhattan below 96th street, in all other markets - including strong markets such as Downtown Brooklyn - Furman found that the unleveraged IRR is better for Option C. The report states that "Option C generates more rental revenue than Option A as long as market rents do not exceed $120 per square foot" - or about $10,000/month for a 2-bedroom apartment.
 
It should be noted that this is only for an unleveraged situation - developers borrowing could change calculations, and Option A also allows for access to 4% Low-Income Housing Tax Credits for large buildings, which option C does not. But it appears clear that most housing constructed outside of Manhattan below 96th street, where Option C is disallowed, will be the 130% AMI level, with $2000+ rents.
 
For the complete Furman study, CLICK HERE

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