United States: 'Affordable New York': The Revival Of New Yorks 421-a Tax Exemption Program

The expired tax incentive program known as "421-a" has been re-established under new legislation with the recent passage of New York state's 2018 budget plan. The tax incentive program partially exempts new residential buildings from New York City's Real Property Tax in exchange for the inclusion of affordable units. The "new 421-a" is now officially known as the Affordable New York Housing Program.

Generally, the new program is available to new-construction multiple dwellings or homeownership projects with six or more dwelling units that commence construction between January 1, 2016 and June 15, 2022, and complete construction on or before June 15, 2026. Projects created through the conversion, alteration or improvement of a pre-existing building may also qualify for benefits under the provisions of Affordable New York provided they result in a multiple dwelling in which no more than 49% of the floor area consists of the pre-existing building.

Key aspects of "Affordable New York" which differ from the previous program include a longer tax exemption period of 35 years, and wage requirements for construction workers on large rental building projects of 300 or more units located south of 96th Street in Manhattan and in certain parts of Brooklyn and Queens. Previously, 421-a provided a shorter tax exemption period of 25 years, and did not mandate certain minimum construction wage requirements. Here is a closer look at the benefits available to eligible projects under the new program.

The Enhanced 35-Year Benefit

New rental buildings containing 300 or more dwelling units located in one of the three "enhanced affordability areas" under the new law may be eligible for an "enhanced thirty-five year benefit." This benefit provides eligible projects with a 100% tax exemption during the construction period (up to three years) and a 100% tax exemption for 35 years, except for the "mini-tax," which must be paid (the tax paid on the assessed value of the site prior to construction). These projects would be required to comply with the specific wage requirements applicable to the area and choose one of three affordability options outlined below. The requirements must be complied with for the entire "extended restriction period" under the new law, which is 40 years from the "completion date," the date on which the local buildings department issues the first temporary or permanent certificate of occupancy covering all residential areas of the building.

The "enhanced affordability areas" under Affordable New York are the (1) "Manhattan enhanced affordability area," which is the area located entirely south of 96th Street in Manhattan, (2) "Brooklyn enhanced affordability area," which is generally the area located within 1 mile of the waterfront and in Community Boards 1 and 2, and (3) "Queens enhanced affordability area," which is generally the area located within 1 mile of the waterfront and in Community Boards 1 and 2.

A rental project containing 300 or more dwelling units which is not located within an enhanced affordability area may still be eligible to receive an "enhanced thirty-five year benefit" provided it elects to comply with all the requirements. The projects that "opt in" would be deemed to be located within the Brooklyn enhanced affordability area or the Queens enhanced affordability area for the purposes of complying with the Affordable New York requirements.

To receive the "enhanced thirty-five year benefit" under Affordable New York, eligible rental projects must pay an average hourly wage to construction workers of at least $60 if the project is located in the Manhattan enhanced affordability area, and $45 if located in the Brooklyn or Queens enhanced affordability areas. Beginning in April 2020 and every three years thereafter, the minimum average hourly wage requirements will increase by 5%. The "average hourly wage" is equal to the aggregate amount of all wages and all employee benefits paid to construction workers for construction work divided by the aggregate number of hours of construction. At the applicant's option, the wage requirements will not apply if the eligible site is subject to a collective bargaining agreement. The city comptroller or analogous officer is charged with enforcing compliance with the wage requirements once the project is completed. However, failure to comply with the wage requirements will not terminate or revoke benefits received under Affordable New York.

Under the new law, the owner must have an "independent monitor" (a licensed accountant in good standing) to monitor compliance with these wage requirements. Within one year from the building's completion, the independent monitor must submit to the city comptroller a project-wide certified payroll report. A fine of $1,000 per week, up to a maximum of $75,000, will be imposed on the applicant if the report is not submitted timely. In the event the independent monitor's report shows that the required average hourly wage under the new law was not paid and the average wage is within 15% of the applicable wage requirement, within 120 days of submission of the report the owner must pay the amount of the deficiency to a third-party administrator (an entity approved by the city comptroller and recommended by REBNY and the BCTC), who will be responsible for distributing such payment to the construction workers. If the report shows the average wage is more than 15% below the required average hourly wage, the owner must pay the amount of the deficiency to the third-party administrator and a penalty of 25% of the amount of the deficiency will be imposed.

In addition to complying with the wage requirements provisions, the owner must comply with Affordability Option E, F or G below. These options require that a certain percentage of the rental units at the project is affordable to, and restricted to occupancy by, individuals or families whose household income does not exceed a certain percentage of the area median income (AMI), as follows:

  • "Affordability Option E" – Of the 300 or more dwelling units at the rental building, at least 10% of the units are affordable to households with incomes not exceeding 40% of the AMI; at least 10% of the units are affordable to households with incomes not exceeding 60% of the AMI; and at least 5% of the units are affordable to households with incomes not exceeding 120% of the AMI. These projects cannot receive any government grants, loans or subsidies other than tax exempt bond proceeds and four percent tax credits.
  • "Affordability Option F" – Of the 300 or more dwelling units at the rental building, at least 10% of the units are affordable to households with incomes not exceeding 70% of the AMI, and at least 20% of the units are affordable to households with incomes not exceeding 130% of the AMI. This option allows these projects to receive government assistance.
  • "Affordability Option G" – Of the 300 or more dwelling units at the rental building, at least 30% of the units are affordable to households with incomes not exceeding 130% of the AMI. This option is available only for projects located in the Brooklyn and Queens enhanced affordability areas. These projects cannot receive any government grants, loans or subsidies.

The 35-Year Benefit

Eligible rental projects in New York City which do not qualify for the "enhanced thirty-five year benefit" may receive a "thirty-five year benefit" which provides the project with a 100% tax exemption during the construction period (up to three years), and a 35-year tax exemption period during which there is a 100% tax exemption for the first 25 years, except for the mini-tax, which must be paid. During the remaining 10 years, the project is entitled to a tax exemption equal to the percentage of affordable units. These rental projects must comply with Affordability Option A, B or C below, for the entire restriction period of 35 years, as follows:

  • "Affordability Option A" – Within the rental project, at least 10% of the units are affordable to households with incomes not exceeding 40% of the AMI; at least 10% of the units are affordable to households with incomes not exceeding 60% of the AMI; and, at least 5% of the units are affordable to households with incomes not exceeding 130% of the AMI. These projects cannot receive any government grants, loans or subsidies other than tax exempt bond proceeds and four percent tax credits.
  • "Affordability Option B" – Within the rental project, at least 10% of the units are affordable to households with incomes not exceeding 70% of the AMI, and at least 20% are affordable to households with incomes not exceeding 130% of the AMI.
  • "Affordability Option C" – Within the rental project, at least 30% of the units are affordable to households with incomes not exceeding 130% of the AMI. This option is not available for projects located south of 96th Street in Manhattan. These projects cannot receive any government grants, loans or subsidies.

The 20-Year Benefit

Condominium or cooperative housing projects located outside of Manhattan may be eligible for a "twenty year benefit" which provides eligible homeownership projects with a 100% tax exemption during the construction period (up to three years), and a 20-year tax exemption period, during which there is a 100% tax exemption for the first 14 years, and a 25% tax exemption for the remaining six years, provided they contain no more than 35 units of which 100% of the units must have an average assessed value of no more than $65,000 upon the first assessment following the completion date, and each unit owner agrees in writing to maintain the unit as his or her primary residence for at least five years from the date of acquisition.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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