BBG News

Governor’s New Proposal Addresses Both Affordable Housing And Office Space Vacancies

Apr 12, 2023

By Zachary Nathanson 

On January 31, 2023, Governor Kathy Hochul took some steps to address the void in affordable housing in New York City.  In addition to the proposed extension to the Affordable Housing New York program (“421-a(16)”), and a far more restrictive replacement to the “J-51” program, the Governor also introduced a brand new proposed tax incentive for commercial conversions in New York City. 

The proposed Real Property Tax Law section 467-m, referred to as Affordable Housing from Commercial Conversions (“AHCC”), was created to address the dearth of affordable housing in New York City amidst a glut of vacant office space following the COVID-19 pandemic.  It has potential.  

 

Eligibility 

AHCC would provide an exemption from some real property taxes, other than for local improvements, for a three (3) year construction period, as defined hereinafter, and thereafter for nineteen (19) years (the “Restriction Period”).  AHCC benefits are more substantial in properties located south of 96th Street in Manhattan than they are elsewhere in the City. There are no geographic limitations set forth in the proposal. There are prevailing wage requirements for building service employees for the entire Restriction Period, even if the benefit is terminated. 

AHCC is only available to properties converting from commercial to rental residential uses, and must contain at least six (6) units.  Properties cannot convert to a hotel, for transient use, as a cooperative or condominium, or if the property is receiving other real property tax exemptions or abatements.  

Under the proposal, projects must commence (when construction “lawfully began in good faith”) between December 31, 2022 and December 31, 2032.   Completion of construction (defined as the issuance date of a Temporary or Final Certificate of Occupancy covering all residential space) must occur on or before December 31, 2038.  

 

The Benefit 

During the construction period – the period between commencement and completion, exclusive of any construction that occurs prior to three (3) years from the completion date – all AHCC properties would receive a 100% exemption from real property taxes, except for those regarding local improvements.   

For the 19-year Restriction Period, benefits would depend on the location of the AHCC property.  For properties in Manhattan south of 96th Street, the proposed benefit would exempt 50% of real property taxes, not including local improvements, for the first 15 years, and would phase out 10% per year thereafter.  Outside of that area in Manhattan, projects would be granted a 35% exemption of real property taxes, not including local improvements, for 15 years, and would phase out 7% per year thereafter.   

 

Affordability Requirements 

Under AHCC, the converted property must include at least twenty percent (20%) affordable units, in three or fewer income bands.  “Income Bands,” for the purposes of the proposal, is defined as the percentage of Area Median Income (“AMI”) adjusted for family size that is a multiple of 10%.   

Additionally, at least five percent (5%) of the total units must be at or below 40% AMI.  The weighted average of all income bands must not exceed 70% AMI, and no income band may exceed 100% AMI. 

Much like 421-a (16), AHCC properties must include a unit mix that either provides for proportional affordable and market-rate units, or provides affordable units of which at least 50% would have two bedrooms, and not more than 25% would have one bedrooms and studios.  Additionally, affordable units cannot be restricted to a specific floor or area.  Finally, affordable units cannot be rented to a corporation or other entity, and cannot be left off the market for an unreasonable amount of time.  HPD may also promulgate rules that affect marketing, monitoring and marketing bands. 

All affordable units must remain subject to rent stabilization through the Restriction Period and until such tenant vacates, even if the AHCC is denied or terminated.  The rent registration must designate units as “AHCC Program Affordable Housing Units.” Market rate units are not subject to rent stabilization, except to the extent they would otherwise be subject to stabilization requirements. 

The proposal does not include much in the way of detail regarding the applications or other filings that would need to be submitted.  Under the AHCC, HPD would promulgate application requirements.  The proposal does include a filing fee of $3,000 per unit, a portion of which would be paid at submission.  This filing fee would not apply to projects with substantial government assistance.  

 

Conclusion 

AHCC does not provide the same sizable benefit that 421-a(16) provided to new residential developments.  However, it does address a need.   The absence of a program which provides affordable housing, like 421-a(16), risks exacerbating already sky-high rents and crushing an avenue for construction of new affordable rental units.  Meanwhile, the new reality of remote work has resulted in a steady rate of office vacancies.  AHCC seems like a natural solution to both problems. 

 

Zachary Nathanson is an associate in the Firm’s Administrative Law department, and can be reached at 212-867-4466 ext. 253 (znathanson@bbgllp.com))

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