Tag: tax

The 421-a tax exemption is a significant real estate incentive program in New York City aimed at encouraging the development of new residential buildings and promoting affordable housing. This program offers property tax breaks to developers who include affordable housing units in their new projects. By reducing the tax burden, the city incentivizes the creation of more housing options, particularly for low- and moderate-income residents.

This post addresses the specifics and benefits of the former 421-a program, which has been recently discontinued. However, it remains relevant as a handful of buildings still benefit from the tax exemption. Extensions have been granted for ongoing unfinished projects, and the state now offers a replacement program labelled 485x (with different parameters). 

What is the 421-a Tax Exemption?

The 421-a tax exemption, also known as the Affordable New York Housing Program, provides a partial property tax exemption for qualifying new residential construction projects. Developers receive this tax break in exchange for setting aside a portion of the units in their buildings as affordable housing. The program aims to stimulate the construction of new housing and address the city’s affordable housing shortage.

Key Requirements of the 421-a Tax Exemption

1. Affordable Housing Requirement:
   • Developers must allocate a percentage of the total units in the new building as affordable housing.
   • The specific percentage and affordability levels depend on the location and size of the project.
2. Location:
   • The program applies to new residential developments across New York City, with varying requirements based on different zones and neighborhoods.
3. Duration:
   • The tax exemption can last for up to 35 years, depending on the specific terms of the agreement and the project’s compliance with affordability requirements.
4. Construction Deadline:
   • Developers must complete construction within a specified time frame to qualify for the tax exemption.
     

Benefits of the 421-a Tax Exemption

• Tax Savings: Developers can significantly reduce their property tax liability, improving the financial viability of their projects.
• Increased Housing Supply: The program encourages the construction of new residential buildings, adding to the city’s housing stock.
• Affordable Housing: By mandating a portion of affordable units, the program helps provide housing options for low- and moderate-income residents.

Case Study: A Mixed-Use Development in Brooklyn

Let’s look at a case study to understand how the 421-a tax exemption works in practice.

Scenario: ABC Development Company plans to build a new mixed-use residential building in Brooklyn, consisting of 100 units. They aim to benefit from the 421-a tax exemption to improve the project’s financial feasibility.

• Planning the Project: ABC Development decides to set aside 30% of the units (30 units) as affordable housing. These units will be rented to tenants with incomes at or below 130% of the area median income (AMI).
• Applying for the Exemption: ABC Development submits their project plan to the New York City Department of Housing Preservation and Development (HPD) for approval. They outline the total number of units, the number of affordable units, and the targeted income levels for affordability.
• Receiving Approval: After reviewing the application, the HPD approves the project, confirming that it meets the requirements for the 421-a tax exemption. ABC Development can now proceed with construction.
• Construction and Leasing: ABC Development completes the construction within the required timeframe and begins leasing the units. The affordable units are rented to eligible tenants at reduced rents, while the remaining units are rented at market rates.
• Tax Benefits: With the 421-a tax exemption in place, ABC Development enjoys a significant reduction in property taxes for up to 35 years. This tax break enhances the project’s profitability and helps offset the lower rental income from the affordable units.
  

Outcome: ABC Development successfully leverages the 421-a tax exemption to create a mixed-use residential building in Brooklyn. The project not only adds 100 new housing units to the city’s supply but also provides 30 affordable units for low- and moderate-income residents. The tax savings help make the project financially viable, benefiting both the developer and the community.

421-a tax exemptions do not only concern rental buildings. A handful of condominiums (new developments) have benefited from this program, therefore extending the tax exemptions to the individual owners of the units. These tax exemptions remain with the unit, and any subsequent buyer will also benefit from them until expiration.

BARNES New York has assisted clients in buying units in 421-a approved buildings, and can curate a list of options for interested buyers, whether for primary residence, pied-a-terre, or investment purposes. 

Conclusion

The 421-a tax exemption is a vital tool in New York City’s efforts to address its affordable housing crisis. By incentivizing developers to include affordable units in their new residential projects, the program helps increase the supply of housing options for residents across income levels. Understanding and utilizing the 421-a tax exemption can be a win-win for developers and the community, fostering the development of vibrant, inclusive neighborhoods. 

BARNES New York is your ideal real estate partner to assist with many scenarios for your real estate project, including the 421-a tax exemption. Please contact us to learn more.