Commercial Property Owners’ New York City Property Tax Break—Deemed Essential to Multifamily Development—Expires. Will It Ever Return?

Michael Allen, Principal 954.740.6240 | michael.allen@ryan.com

The mad rush to qualify projects is over, and with the property tax break 421a now expired, New York developers must confront the possibility that it will never come back. The 421a program was generally considered to be a “stop-gap” measure to make up for the fact that multifamily properties are taxed at higher rates than other properties in the city. This underlines that New York City’s real property assessment system is out of step with the rest of the country that generally has lower real property tax rates if they are not uniform across all property types. To make any change and overhaul the property tax system will take considerable political will. There is no hint of that for now.

Governor Kathy Hochul has floated a replacement program, dubbed “485W,” but it sank like a lead balloon in Albany. State lawmakers showed little appetite to revive or replace the tax incentive for New York City multifamily construction, and the issue is not expected to be addressed until the next legislative session—if then. Last week, Mayor Eric Adams reiterated that he believes state lawmakers will figure out how to adjust affordability thresholds to secure approval of a reformed tax break.

In the immediate term, industry experts expect the number of applications for new apartment buildings to plunge, as it did the last time the tax break lapsed. Developers who scrambled to complete their projects’ foundation footings, a requirement to qualify for the incentive, will either move forward with construction or flip the site to another builder. Those who missed the deadline will likely continue to hold and wait for a new tax break or broader tax reform. Such a wait-and-see approach does nothing to expand the tax base and increase tax revenues for the city.

Many experts anticipate that the 421a tax relief and another controversial housing issue, “good cause evictions,” will both resurface when state legislators return in January. In the meantime, developers may opt for fully subsidized affordable housing or market-rate condo projects, but the loss of the tax incentive will mean far fewer middle-income units.

Some housing advocates have argued that the city would be better off increasing direct subsidies for deeply affordable housing, but that could leave a dearth of new housing for working-class and middle-income earners. A recent report by New York University’s Furman Center for Real Estate found that a majority of multifamily units built between 2010 and 2020 were beneficiaries of 421a. This has been a very popular program among developers, with an estimated 80 building applications filed in the past 12 to 18 months in Brooklyn alone in hopes of qualifying for the 421a tax break before it expired. The last time developers did that, in 2015, some were not ready to build and just “mothballed” their new foundations until they were ready. But they cannot do that this time. When the Legislature revived the tax exemption in 2017, it required that excavation and construction of initial footings begin “in good faith,” and construction must be completed on or before June 15, 2026. Obviously, the completion date really puts a lot of pressure on owners and developers to deliver.

City Comptroller Brad Lander and some housing groups have called on city and state officials to instead focus on reforming the city property tax and assessment system, which is the subject of a lawsuit that alleges the system undervalues homes in affluent neighborhoods and disproportionately burdens communities of color. In that case, New York’s highest court recently granted the plaintiff permission to continue its legal challenge to the city’s property tax system. While the De Blasio Administration supported the idea of reforming property taxes, it opposed this lawsuit, maintaining that change should be done solely by state lawmakers, not the courts. Mayor Eric Adams has said that he supported previous efforts to litigate the city’s property tax system. But a spokesperson for City Hall recently indicated that while the administration is committed to reforms, “changes to the property tax system should be pursued through the legislature, not the courts.” The spokesperson subsequently retracted the statement.

Where are we now? As a knowledgeable commentor remarked: “Everyone recognizes there’s a problem, and yet nothing really is getting done.”

What is the likely impact of losing this 421a tax break in the city?

  • For the short term – The rush to file before the termination of this tax benefit may juice supply of new housing units but probably not enough to outstrip New York City’s outrageously high demand for housing, so values are unlikely to fall on account of the termination of the benefit.
  • For the intermediate term – The expiration of this tax benefit is expected to reduce the number of newly constructed housing units. With the supply of new units suppressed, rents (and therefore values) of the existing housing stock will rise.
  • Regarding development sites – The value of development sites may decrease because they will no longer be profitable in some instances, but development sites are few and far between and do not typically have overassessment problems because development sites are usually improved and are valued in their existing use, not for potential future use.

Ryan will continue to monitor the situation as it develops and report back via this newsletter as warranted. In the meantime, please contact our New York City office with any questions as to the loss of this tax break and/or its impact on pending or future assessment appeals.