Stephen G. Kliegerman
President of Development Marketing
Louise Phillips Forbes
Park Avenue Office
By: Julie Satow
Kenneth Horn has one eye trained on the clock and the other on his construction workers. He is rushing to get his foundation in the ground for a condominium development before December, when a lucrative tax break will expire.
"We have no doubt we'll finish it in time," says Mr. Horn, president of Alchemy Properties Inc., which is building an 18-story condo at East 77th Street and Second Avenue.
Mr. Horn is not alone. Over the next several months, close to two dozen projects are expected to come online as developers work within a five-month window to start their foundations before it's too late. Among those working feverishly to be in the ground by year's end is the Angel Group, which is building two projects on Second Avenue: a rental building in the East 50s and a condominium in the East 70s. "Our foundations will be in the ground in time to receive the tax exemptions," says developer Robert Bagdadi.
New rules effective Jan. 1, 2008
At issue is a New York City tax program, known as 421-a, that provides market-rate developers with a 10- to 15-year exemption from increases in property taxes resulting from their work.
The City Council has changed the program effective Jan. 1, 2008, to limit it to builders that set aside one out of every five units as affordable housing. Developers who build a substantial part of their foundations before then will be grandfathered in.
The program is critical because it can save condominium buyers as much as $100 a square foot in taxes, and it translates into lower rents for tenants.
"I am seeing a lot of developers trying to beat the deadline," says Stephen Kliegerman, executive director of development for brokerage firm Halstead Property. "If they get the tax exemption, it will give them a leg up."
It is too early to know exactly how many projects are being rushed, but experts say the situation is similar to 1986, the last time the 421-a program was tweaked. Then, the city restricted the eligibility of projects below 96th street, and in the year leading up to the change, developers built an astonishing 12,000 new condominiums.
"The only other time I can compare this to is back in 1986, when tons of foundations went into the ground," says Andrew Gerringer, head of development for Prudential Douglas Elliman.
Under the current 421-a program, developers must buy certificates fromf builders of affordable housing to be eligible for the tax exemption. In the last several months, certificate prices have surged to $15,500 from $13,000, says Wayne Heicklen, co-chair of real estate department at Pryor Cashman.
"It is a feeding frenzy," says Jose Rivera, a partner at law firm D'Agostino Levine & Landesman, referring to the certificate sales.
Landowners have also been cashing in on this rush. Properties with construction plans in place and certificates are being traded for high prices.
"I am actively looking at properties to buy, and it is a huge consideration whether I could get the project in the ground by year's end," says David Von Spreckelsen, director of acquisitions and development for Toll Brothers.
But not all developers can beat the clock, and some projects may not get built. Ron Moelis, who owns two properties in Brooklyn, had hoped to develop them into condominiums with help from the 421-a program.
"I am not going to get them done in time, and I really don't know what I'm going to do," Mr. Moelis says. Without the tax break, he fears that condo buyers won't pay enough for him to make a profit.
Once changes to the 421-a program are complete, land prices and condominium prices will drop, say experts. There will be "a Mexican standoff" between sellers who expect to get the same price for land even without the tax break, and buyers who will balk, says Louise Phillips Forbes, a broker at Halstead. Condo prices will also fall as buyers resist higher prices.
CERTIFICATE PROGRAM 101
Under the current 421-a program, the city gives affordable housing developers a tax exemption for each unit they develop. This exemption is in the form of a certificate, which affordable housing developers then sell to market-rate developers. The certificates' sale provides affordable housing builders with a much-needed cash infusion. The certificates allow market-rate builders to provide lower rents or a tax exemption for condo buyers.
The new 421-a program eliminates these certificates and substitutes a $400 million fund to be doled out to builders who set aside 20% of their units for low-income buyers or renters.
Sunday, March 04, 2007