How Much Housing Will Hochul’s New Deal Build?

This article was originally published on >April 23 at 5 a.m. EDT by THE CITY

Governor Kathy Hochul called the package of housing proposals approved by the Legislature Saturday as part of the state budget “a once in a lifetime housing deal.” 

Mayor Eric Adams said triumphantly that his administration had gotten everything it wanted as it tries to create an average of 50,000 new homes a year in hopes of achieving his moonshot goal of 500,000 units over the next decade.

Key provisions offer a tax break for new developments that guarantee some affordable apartments, speed the conversion of obsolete office buildings to residential use, increase the number of apartments that can be built in a single building and let landlords invest in renovating vacant apartments. 

But each one of those elements contains restrictions and requirements that make their impact highly uncertain.

“The new tax break is better than nothing,” said Daniel Bernstein, a lawyer at Rosenberg & Estis who specializes in incentive programs for development, “but whether it is going to be enough to produce robust housing development is unclear.”

Saturday’s vote to approve a budget containing the housing reforms comes after a 16-month struggle between the governor and mayor, who jointly proposed sweeping changes in current laws in January 2023, and the Legislature, which failed to enact a single one of those measures last year.

This year, the governor set aside highly controversial measures she had earlier proposed to force construction in the suburbs and set out to concentrate on help for the city. She also backed a severely weakened “good cause” anti-eviction law, allowing legislators who had made tenant protections a condition of their support for any other housing measures to get behind the package.

Caveats aside, there is no doubt more housing will be built thanks to the new laws.

“These are significant policy measures that will spur supply,” said Rachel Fee, executive director of the New York Housing Conference, an affordable housing policy group.

Replacement for 421-a

The most complicated calculations for developers will be the financial implications of the new tax credit, called 485-x. Offsetting high taxes on multifamily apartment buildings, it replaces a break called 421-a, which provided property tax exemptions up to three decades and still costs the city about $1 billion a year in forgone revenue.

New construction has plummeted since 421-a expired in June 2022.

Under 485-x, builders will have to agree to set aside either 20 percent of units in smaller buildings or 25 percent in larger ones at below market rents for people making no more than 100 percent of the Area Median Income of $140,000 for a family of three. The average AMI must be no more than 80 percent.

In addition, all projects with more than 100 units have minimum construction wage requirements of $35 an hour, with two sets of higher wages for large projects in Manhattan south of 96th Street and waterfront and adjacent areas of Queens and Brooklyn. Most of the tax breaks last 35 years.

But buildings with more than 150 units in Manhattan south of 96th Street and the Brooklyn waterfront will have even stricter rules. They must adhere to the highest wage scale and set aside 25 percent of the units as affordable at an AMI averaging only 60 percent. In return, they will get a 40-year tax break or five years longer than elsewhere.

Because of the rules for these large projects, “the new tax exemption program for housing production, 485-x, will produce less rental housing than its predecessor 421-a,” said James Whelan, president of the Real Estate Board of New York.

One bellwether of the impact of the tax break may be Innovation QNS, a $2 billion development in Astoria approved by the City Council in 2022 that has been moribund since 421-a expired. The project envisions 3,200 new apartments with an exceptionally high 45 percent of them set aside as affordable.

“The math was tight enough under the old tax break,” said Hal Rosenbluth, head of nearby Kaufman-Astoria Studios and a partner in Innovation QNS. “I am hoping the deal allows the math to come out right because this area needs economic drivers.”

The legislature also agreed to extend the deadline to 2031 from 2026 for competition of projects that had qualified for 421-a by getting their foundations in the ground before its expiration as long as they don’t use an option allowing rents for some affordable units to be 130 percent of AMI.

Bernstein notes that his clients have thousands of units in limbo with foundations poured but uncertain they could meet the 2026 deadline. If they can obtain financing they will be able to restart work quickly.

A provision that is designed to both produce housing and stabilize the hard-hit office market offers landlords who convert their office buildings to residential a 90 percent tax break on residential property taxes as long as they set aside a quarter of the apartments at an average of 80 percent AMI.

The Adams administration has estimated conversions could add 20,000 more units.

The key is that the sooner conversion starts, the longer the tax break lasts, an incentive to jumpstart office-to-residential projects. Buildings with permits issued by June 2026 qualify for 35 years but buildings that get a permit after June 2028 get only 25 years.

“That means you’ve gotta get going right now,” SL Green Chief Executive Marc Holliday said last week while discussing his company’s first quarter profits. “This isn’t wait-and-see.”

SL Green seems likely to file permits soon to renovate 750 3rd Avenue, built in 1957 and today only 15 percent occupied by tenants in one of the hardest-hit office corridors in Manhattan. It could produce about 500 units of housing.

“It will be great for the city, great for struggling office corridors where foot traffic has declined with the consequences for retailers and restaurants,” said Rob Schiffer, SL Green executive vice president for development. “Conversion takes that specific building out of the availability and any tenants remaining become tenants for other buildings.”

Yes to City of Yes

The legislature also allowed the city to use its land use review process to increase what is known as the floor area ratio or FAR cap, which for decades has limited any new residential building’s square footage to 12 times the area of the land. To comply with the new law, any new residential project bigger than 12 FAR must include affordable housing.

The Adams administration is already pursuing the creation of zoning that would designate areas with FARs of 15 or 18 through its City of Yes zoning proposal to build more housing in every neighborhood of the city, which is expected to reach the Council for a vote at the end of the year.

The link between the new housing package and The City of Yes plan is crucial.

“Proposals in The City of Yes to add more residential zoning capacity, especially in medium- and high-density neighborhoods, would not be enough to spur development without tax incentives passed in the state budget,” said Fee of the Housing Conference.

The most controversial change in the package — an increase in how much a property owner can spend to improve vacant rent-regulated apartments — could have the least impact.

The 2019 tenant-friendly rent reforms imposed a strict $15,000 cap on the amount that landlords can recoup for renovations and limited resulting rent increases to no more than $83 a month. Landlords have said the amount is inadequate to make the vast majority of units rentable when a long-term tenant leaves, so they just leave the unit vacant.

About 26,000 rent-stabilized units were vacant and not available for rent in early 2023, the most recent census survey of New York City’s housing found.

Over the loud objections from tenant groups and progressive Democrats angry at the first change to 2019 law reforms, the package increases the amount a landlord can recover on renovations to vacant apartments from $15,000 to $30,000 in most cases and $50,000 in some instances. It also imposes new paperwork requirements.

“The increases to the cap will provide minor relief to a small number of buildings, but the changes in the process are fraught with legal traps that will deter most property owners from using it,” said Jay Martin, head of the Community Housing Improvement Program, which represents owners of small and mid-sized rent regulated buildings.

For example, the cost of renovating a 750-square-foot one-bedroom apartment in Queens that had been vacated by a long-term tenant would be $111,000, according to an estimate by an owner with an extensive portfolio of rent regulated buildings who asked not to be named.

The amounts include lead paint abatement at more than $13,000 and work to upgrade, plumbing, and electrical systems and install a new kitchen and bathroom.

This owner said he was unlikely to renovate and lease any of his vacant units.

While the legislature gave the city flexibility on FAR rules, it continued to insist on dictating the details of other actions the Adams administration requested.

The city had asked for flexibility to legalize basement apartments and other so-called accessory housing units. The legislature only agreed to a pilot program on basement units in 15 of the city’s 59 community districts — with one in Queens, where the need is greatest, six in Manhattan, and four each in the Bronx and Brooklyn. None are in Staten Island.

So far there are no new estimates of how many new units each one of the changes will produce. And factors the state controls won’t ultimately be the only ones determining what landlords and developers will do.

“High interest rates remain the largest hurdle to future development,” said Brett Gottlieb, a real estate partner at the law firm Herrick Feinstein. “And construction costs are an enormous part of the cost picture.”

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