NYC Developers' Sneaky Loophole to Bypass 485-x Tax Incentive Limits

The 99-Unit Cap and Its Consequences

Under New York's revived 485-x tax incentive, developers are encouraged to build affordable housing, but there's a catch: once a project hits 100 units, they must pay construction workers at least $40 an hour and increase affordable units from 20% to 25%. This has led many developers to cap projects at 99 units to avoid these requirements.

The Condo Structure Workaround

At a recent Bisnow conference, developers and real estate advisers discussed a potential solution: splitting a single building into multiple condo units under New York tax code. This would allow them to pay full taxes on units not within the condo and get exemptions on the rest. "I don't think it's a loophole," said David Shamshovich, partner at Belkin Burden Goldman.

However, the Department of Housing Preservation and Development (HPD) has pushed back, arguing that the rules prevent segregating affordable and market-rate units. Shamshovich contends that separate tax lots with 199 units are "perfectly within the statute."

Industry Skepticism and Lender Hesitancy

Many lenders are wary of this approach because HPD could shut it down. "Our banks are like, 'You need to personally guarantee that you're going to get that tax abatement,'" said Hal Fetner, President and CEO of Fetner Properties. "We're not going to do that because we're a little nervous about where the 99-unit buildings go."

The 99-Unit Trend

The market has already seen a surge in 99-unit buildings. In Q2, 52 out of 172 proposed buildings were between 50 and 99 units, 208% above the historical quarterly average since 2008, according to the Real Estate Board of New York.

"The 99-unit question is the question that always has the bull's-eye on its back," said Andrew Staniforth, co-Head of Development at MAG Partners. "Is this allowed? Is it not allowed? Is it a loophole?"

Land Costs and Future Outlook

Panelists at the Times Square Marriott Marquis suggested that the easiest way to build bigger is for land costs to come down. Sellers are currently valuing properties at maximum zoning floor area, but developers argue that's unrealistic under 485-x. "Somehow those two have to converge," Shamshovich said.

In the first half of the year, 485-x deals made up 70% of development site sales, with 106 trades at an average of $211 per buildable square foot, according to Ariel Property Advisors.

Despite the challenges, some developers remain optimistic. "You're going to start to see some more 100-plus-unit buildings coming out of the ground," Fetner said.