Although the 421a negotiable certificate program expired, there is still a small supply of grandfathered certificates that exist. There is also Inclusionary Housing Certificates, which can also benefit market rate developers.
Recently I had the pleasure of moderating a panel with Sol Arker of the Arker Companies, an affordable developer of over 5,000 housing units; Paul Korngold of Tuchman, Korngold, Weiss, Lippman and Gelles, LLP; and Alvin Schein of Seiden & Schein, P.C. Both Korngold and Schein are partners in firms specializing in the fields of the Inclusionary Housing Program and real estate tax incentive programs.
421a negotiable tax certificates provide 10 and 15 year tax abatements in Manhattan and the outer boroughs, respectively. Each apartment unit requires a certificate, and units must average 1,200 SF or less, otherwise additional certificates must be purchased. According to a chart provided by Paul Korngold, the abatement that one certificate can total up to is $71,429 in Manhattan and $174,771 in the outer boroughs over these time frames[MK1] . This is based on the present day abatement cap of about $75,353 in assessed value. Gold certificates, which allowed an unlimited abatement, are a thing of the past, as all projects today are subject to this cap.
The panel agreed that the savings were compelling for market rate rental developers, especially when current pricing is at about $40,000 per certificate. At a 7% discount rate, these certificates should be worth $53,741 in Manhattan and $107,644 for the outer boroughs, in today’s dollars. Developers need to act fast though as the panel believes that there are probably only one to two thousand certificates left in existence.
421a certificates are also a great selling point for condo projects. One residential broker in the crowd said end user buyers will take on a larger mortgage as a result of the savings, which in turn increases their buying capacity. Also, a 421a benefit can be the deciding factor between a competing condo project that does not offer this benefit.
Korngold also pointed out that the 421a program is not entirely dead. Only the negotiable certificates were ceased two years ago. Today, developers can get the benefit as of right in such neighborhoods as Bedford-Stuyvesant and Sheepshead Bay in Brooklyn; Astoria and Bayside, Queens. Rental developers should take note.
Another opportunity for market rate developers is to purchase inclusionary air rights for an R10 or equivalent site. By purchasing these rights off site, a developer can raise his FAR to 12.0 from 10.0.
The rights can be purchased from an affordable development within the community board or within a ½ mile radius. Arker explained that he produces these rights by building affordable projects and then transferring 3.5x of what he builds. He has built several projects at the request of market rate developers when the inventory might not already exist. The market rate developers will post a letter of credit as security for this type of forward sale.
Depending on the community board, inclusionary rights typically trade at $250-350/BSF, but Arker made the point that these rights trade at a steep discount to land values, which today can reach upwards of $1,000/BSF. He added that these rights go straight to the top of the building where sellouts can reach $3,000/SF or more.
Schein explained that inclusionary rights could be transferred to non-R10 sites but then the multiplier [MK2] factor could be reduced to 1.5x instead of 3.5x. This, he observed, made it virtually impossible for affordable developers to produce these rights, especially in the most expensive community boards.
Schein also spoke to the benefit of developers building their inclusionary on site. He spoke to the “triple dip” effect which includes a 25 year tax abatement, additional FAR and the ability to sell these inclusionary rights off site. Additionally, the developer can benefit from tax-exempt bond financing. However, the time and expense of this program only makes it worthwhile for a developer of a larger site.
In all, there was much agreement that the elimination of the 421a negotiable certificate program has been a great detriment to the City. One developer in the audience believes that it has stopped the creation of thousands of affordable units being built.
As the cost of land continues to rise and real estate taxes for a new development can reach 30-35% of income, it is virtually impossible for rental developers to build without an abatement. As a result, there is no doubt that there are less affordable and market rate units being built. Although some politicians initially argued they were giving away tax dollars, their views are sadly short sided, as having new buildings on the tax roll would come back in spades down the line when the abatements burn off.
Market rate developers should capitalize on what’s left of these abatements.
James P. Nelson
Massey Knakal Realty Services
James Nelson is a Partner at Massey Knakal Realty Services. Since 1998, he has been involved in the sale of more than 250 properties and loans with an aggregate value of close to $2 billion in the NY Metro Area. He can be reached at email@example.com or 212-660-7710.
To follow James on Twitter, please go to http://twitter.com/JamesNelsonMKRS or LinkedIn at http://www.linkedin.com/in/jamesnelsonmasseyknakal.