New York State Budget’s Impact on Real Estate

     The recently passed New York State budget has a number of provisions to address real estate issues that lawmakers had failed to address until now. Property owners, tenants and workers will be affected by the sweeping changes. Here is a breakdown of all the major provisions.

485x is the new 421a
Residential filings in the city have plummeted up to 50% year-over-year since the expiration of 421a, according to The Real Estate Board of New York (REBNY). The city-run property tax abatement program for developers known as 421a, that lapsed two years ago, has now been replaced by 485x. It increases the affordability requirements for rental apartment tenants as well as the wages for workers on projects that receive the tax benefit.
The new program gives up to a 40-year exemption on taxes (up from 35 years) and requires that the affordable units remain permanently affordable. It expires in June of 2034.
For tenants, projects of 100 to 149 apartments must keep 25 percent of units affordable for those earning a weighted average of no more than 80 percent of the area median income (AMI). For larger projects, the AMI number lowers to 60 percent of AMI. Projects with six to 99 units must have 20 percent affordable units at 80 percent of AMI.
For workers, wage requirements are required for projects of 100 or more units starting at $40/hour and increases 2.5% per year. For projects of 150+ units, for Manhattan south of 96th Street and on the Brooklyn and Queens waterfronts, construction workers’ compensation must be the lesser of $72.45/hour, or 65% of the prevailing wage. Workers in other parts of Brooklyn and Queens must pay $63/hour or 60% the prevailing wage.
Condos and Co-ops are now back in the new program, provided they are located outside Manhattan and have an average assessed value of $89/SF or less. The most recent version of 421a that expired in 2022 had excluded Condos and Co-ops.
Meanwhile, the bill also extends the construction deadline for the expired 421a program by six years. Developers who started building foundations before June 2022 now have until June 2031 to finish. This is estimated to affect about 80 projects that started construction on their foundations but hadn’t received their temporary Certificate of Occupancy.
REBNY has predicted that the new program will not create as much housing as 421a. However, the construction industry needed something passed since the burden of high property taxes on rentals had made it difficult to finance new projects. The city’s housing department needs to finalize rules to implement the new program and that could take several months.


Floor Area Ratio (FAR) Upsizing
The new bill removes the previous 12 FAR limit, or 12 times the lot size. While this does not automatically allow larger towers, this does allow the city to rezone for them. Current proposals from Mayor Adams include two new residential districts with FARs of 15 and 18. 
Any rezoning would trigger the city’s Mandatory Inclusionary Housing law, which states that any development that exceeds a FAR of 12 must have a minimum of affordable units as required under law.
The budget deal also excludes the bulkier residential projects from historic districts or ones that share a lot with artists (a nod to Greenwich Village preservationists).
Any building of more than a FAR of 12 would require the developer to offer buyouts to tenants of up to six months rent, or a new lease in a comparable apartment.

Good-Cause Evictions
City tenants can challenge evictions from rent increases of greater than 10%, or 5% plus inflation, whichever is less. Locations outside the city can opt-in. Landlords can still evict non-paying tenants or those that are nuisances. 
The exemptions list is long, however. Buildings built after 2009 are exempt from good-cause eviction for 30 years from time of completion. Apartments affordable to households earning 245% of the AMI are also exempt. Building owners with 10 or fewer buildings in their portfolio are also exempt, as are owner-occupied buildings with 10 or fewer apartments.
Both California and Oregon have enacted similar measures in recent years. The amount of carve-outs friendly to owners is numerous, but the new law’s impact for tenants remains to be seen.

Office Conversions
With office vacancies persisting, state lawmakers included new rules to allow office-to-residential conversions. Relying on the lifting of the FAR cap and new tax incentives, developers have a clearer path for these conversions. Terms include that 25% of the new apartments must be affordable at a weighted average of 80% AMI, and 5% at 40% AMI. Tax benefits range from 25 to 35 years depending on the filing date of the application. Tax exemptions generally start at 90% reduction of taxes in Manhattan south of 96th Street, and 65% outside Manhattan. All tax breaks phase out in the final five years.
The NYC Department of Housing Preservation and Development (HPD) will administer and oversee the program’s exemption. There will be prevailing wage requirements for building service employees for the duration of the exemption, except projects of fewer than 30 dwelling units or conversions with substantial government assistance.
Once completed, all affordable units will be subject to rent stabilization laws. The entrances must be shared between market rate and affordable units (no “poor-doors”). Affordable units must be spread throughout the building, and the mix of units (per number of bedrooms) must be proportional to the market rate units.

Basement Apartments
Fifteen community districts (of the city’s 59) will take part in a pilot program to allow the legal conversion of basement and cellar apartments. Standards are to be established in consultation with the FDNY, the DOB and the NYC office of Emergency Management. Units located in flood hazard zones will need to meet additional standards.
The program exempts any zoning changes from environmental review but does require a public hearing and City Planning Commission and City Council approvals. It provides amnesty for owners who convert these units and a right of first refusal to return for tenants who need to be removed while their units are brought into compliance.

Rent Stabilized Unit Improvements
Owners who renovate individual rent stabilized apartments can recoup a larger amount of the cost per the new state budget. Now, unit renovation costs of up to $30,000 (cap was $15,000) can be recouped for upgrades. If the unit was occupied for at least 25 years previously, the amount increases up to $50,000.
Rents on renovated units can be permanently hiked to 1/168 of the project cost in a building with 35 or fewer units, and 1/180 in larger buildings. For a $30,000 renovation, this translates to $166, or $179 per month per building size. For units vacant and units having had a previous tenant live there for 25 years or more, that $50,000 renovation translates to $347 per month in a smaller building, and $320 in a larger one.
Landlords are still skeptical of these new rules, arguing that they don’t go far enough to cover the high costs of actually renovating these units. REBNY had released a study in February of this year calling the 2019 rent stabilization law “disastrous,” stating that landlords couldn’t afford to make improvements to units.

Squatters
Many news stories recently have focused on squatters, and Albany has heard the complaints. The budget includes changes to state law that define what a tenant is. It specifically excludes squatters from the definition – those who intrude or otherwise enter a property and continue to occupy it without permission. Of note, another section of state law already specifies that a squatter does not have a landlord-tenant relationship. This new addition aims to address the current focus.

By Anthony Ottaviano Real Estate Solutions.