The 421-a Program: Market-Based Changes

The 421-a residential tax exemption program, which provides a significant real estate tax exemption for new residential construction projects, requires that buildings receiving the tax exemption must complete construction without “undue delay” – defined as within 36 months for the majority of projects.  Until recently, projects were permitted to exceed this 36 month limitation for a few reasons, including strikes or “unavoidable labor stoppages,” “industry-wide shortages of construction materials” and fires or other casualties.  In light of the credit crisis and resultant problems obtaining financing for construction projects, many in the industry had been pressuring the City to include financing delays as a consideration, and in June, the City’s Department of Housing, Preservation and Development (HPD), modified their rules that regulate the program to permit projects experiencing delays in financing to also qualify for an exemption from the 36 month rule.

However, as some in the press and the industry have noted, the language of the amended rules leaves room for some discretion on the part of HPD in determining which delayed projects still meet the standards for eligibility.  The new rule states that the “inability, despite diligent and continuous efforts, to obtain financing for the construction of such project” and “mortgage foreclosure proceedings” are now considered legitimate reasons for a delay that prevents completion within 36 months – meaning projects experiencing such delays can still be eligible for a 421-a tax exemption.  It’s not entirely clear what will constitute a “diligent and continuous effort” in the eyes of HPD – as some have pointed out, a developer may take a several month break from applying for financing, since there may be simply be no financing available.  Will they still qualify as having made a “continuous effort” to obtain financing?  At this point, HPD is making this determination on a case by case basis, and the only way to know is to apply for the tax exemption.

Additionally, the 421-a program is set to expire on December 28, 2010.   When the program was last renewed in 2007, major changes were enacted, several of which were designed to take advantage of the many new residential construction projects occurring city-wide to stimulate the creation of housing.  It is still unclear whether the program will be renewed again, but if it is, it seems logical that further changes to the program may take place to account for the significant changes that have occurred in the economy and the New York City real estate market since 2007.  

Also relevant, ‘stalled buildings bill’ soon to be a law?