Last month, the New York legislature passed a bill granting property tax breaks for up to 40 years to affordable housing developments in New York City.
Legal professionals, especially those well-versed in state and local tax laws, must carefully analyse this new law called 485-x to fully comprehend its benefits and drawbacks for their real estate clients. While the law might present economic advantages, it also comes with strict compliance requirements.
Against an upbeat view, 485-x could spur interest from developers given the provision for tax exemption for 40 years on large-scale rental projects satisfying the law’s criteria. Coupled with the elimination of the 12 Floor Area Ratio cap for new affordable housing projects, this law might appear lucrative.
Yet, before making a leap, the law’s strict prerequisites – such as the stringent wage requirements for construction workers – must be scrutinized. The wage requirements are at their strictest for large developments in sought-after regions of New York City such as Manhattan below 96th Street and neighbourhoods like Williamsburg and Williamsburg East in Brooklyn.
The law mandates that the share of the development devoted to affordable housing increases with the project size, thus constraining the number of market-rate units that can be constructed in prime real estate markets. Such affordability obligations, applicable for the duration of the exemption, also encompass building service employee wage requirements.
Pertinently, the law stipulates that any development that benefits under 485-x cannot receive an abatement or exemption under any other law.
With higher interest rates and growing office vacancy rates, alongside falling commercial real estate value, the market forces might prove challenging. However, with rising rental rates and a residential vacancy rate of 1.4%, the market dynamics could tilt in favor of developers able to deliver new units at reasonable prices.
If a client embarks on a 485-x project, it is crucial to ensure compliance to avoid penalties that could entail fines, compel payment of property taxes that would have otherwise been exempt, or render them ineligible for future 485-x benefits on other projects.
Overall, the 485-x law presents newfound opportunities for developers amid a tough market for new construction. Yet, both legal and economic complexities call for measured consideration before embracing the benefits of this law.
The assessments offered herein do not necessarily represent the views of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.