Whole new world: How NYC values 421a, 485x sites now

When Gov. Kathy Hochul resuscitated a near-death development market two weeks ago, brokers’ phones started ringing. And they haven’t stopped.

“I’ve got back-to-back calls today with developers,” Dan Marks, CEO of commercial brokerage TerraCRG, said late last week. “They want to see opportunities that either qualify for the [421a] extension or the 485x program.”

Hochul’s housing deal added five years to the completion deadline for projects vested under the expired 421a tax abatement and created a new program for rental development, 485x.

The extension gives new life to stalled 421a projects, while 485x should kickstart project filings, which have fallen precipitously since 421a expired in June 2022.

James Nelson, head of Avison Young’s tri-state investment sales, called both policies a “much needed lifeline.”

“It takes the ambiguity out of the market,” Nelson’s colleague Erik Edeen added.

The question now is how much the new laws will raise the price of development sites.

“A lot of the conversations we’re having are, ‘Here’s where we think values are,’” Marks said.

Valuations can’t be assessed in broad strokes, brokers say, because each program has its own gradations. There are three tiers of 485x, not all options of 421a are eligible for the 2031 deadline, and the respective programs operate under different regulations.

“You couldn’t just say [485x] is better than 421a or worse,” said Patrick Madigan of Avison Young. “There’s a lot of variance.”

Nevertheless, The Real Deal, through conversations with brokers, developers and 421a experts, sketched out which sites figure to be the most desirable and fetch the highest price per buildable square foot.

Here’s what we found: 

Land values rise from ashes

Avison Young broker Edeen, whose team is updating all of its project and land valuations, said “of the ones we’ve done so far, they’ve been positive.”

Brokers and developers frequently cited $200-$250 per buildable square foot as a rough estimate of what 421a sites traded for when there was still time to complete construction.

Ben Carlos Thypin, CEO of brokerage Quantierra, pointed to Carlyle’s June 2023 purchase of a two-tower Gowanus site at 267 Bond Street and 498 Sackett Street as “the end of the old market.” (The deal happened before Hochul announced an alternative to 421a for the neighborhood.)

Carlyle paid $100 million, or about $260 per square foot.

As the 2026 deadline grew nearer, brokers say the value of sites vested for 421a plummeted, because lenders wouldn’t finance projects that might not be finished in time.

Take 459 Smith Street, a Gowanus parcel that recently sold. Neighbors called their Assembly member’s office in May 2019 complaining of loud pile driving, according to Brooklyn Paper. Yoel Goldman’s All Year Management was putting footings in the ground before June 2022, a necessary step to qualify the site for 421a.

But when the property traded in February, photos taken by BLDUP showed little if any work had been done since on the proposed 900-unit project.

“It would have been very difficult to finish such a large project by the [2026] deadline,” Sean Kelly, partner at brokerage Ariel Property Advisors said.

That’s why Canadian buyer H&R REIT was able to nab the site for about a 50 percent discount, paying $76 million — about $120 per buildable square foot.

Worthless no more

Some developers who missed out on 421a pivoted to condo projects, which still enjoyed a property tax break. That buoyed those land values.

But for owners of sites zoned for mandatory inclusionary housing, which requires affordable rentals, the disappearance of 421a was brutal.

“In locations where it was not quite suitable for a condo and there was no tax abatement, the land value oftentimes was near zero,” Edeen said. 

“They were worthless,” echoed Sam Charney, whose eponymous firm has tapped the 421a abatement on multiple projects and pivoted to condo development on others.

As the deadline to finish construction approached, stalled sites drew less interest. Some brokerages advised clients against selling them at all.

Then came 485x.

“Now that the tax abatement is there, if you’re in an MIH zone, now you can do something,” Marks said.

Kelly pointed to two sites in contract that had not qualified for 421a but could work under 485x. Both will trade at about $200 per square foot, he said.

No love for 130 percent

Not all 421a-vested sites were treated equally by Hochul’s housing deal. 

Those vying for affordability Option A or B get the extension to 2031. The options are differentiated by the percentage of affordable units and what qualifies as affordable.

Option B requires 30 percent of apartments to be affordable: 10 percent at up to 70 percent of the area median income and 20 percent at up to 130 percent of AMI. Under Option A, affordability is deeper: 10 percent of units at 40 percent of the AMI, 10 percent at no more than 60 percent of the AMI and 5 percent at 130 percent of the AMI.

Developers’ favorite flavor of 421a was Option C, which required that 30 percent of units be affordable at 130 percent of AMI. It allowed for higher rents than A and B, prompting critics to ask “affordable for whom?”

Hochul’s budget does not extend the deadline for Option C sites — a win for 421a opponents and a concern for developers with little more than two years to wrap construction.

“If those owners are not going to get their act together right now, they’re going to lose the project’s value altogether,” said Eli Guttman, a tax abatement specialist at Metropolitan Realty Exemptions.

Size matters

The 485x program’s new wage requirements will factor heavily in land values.

Whereas 421a only required prevailing wages on projects of more than 300 units, 485x ropes in projects with 100 or more.

Bigger projects must offer higher pay. On developments of 150 units or more, construction workers must get wages and benefits worth $72 per hour, or 65 percent of the prevailing wage, in Manhattan south of 96th Street and on the Brooklyn and Queens waterfronts, and $63 or 60 percent of the prevailing rate in other parts of Brooklyn and Queens.

That wage floor falls to $40 an hour for projects of 100-149 units.

Bigger developments demand more labor, exacerbating the cost differential, particularly compared with 421a. Higher expenses will translate to lower values for those project sites.

“I think you’re gonna see a tiered scale, a simple x-y axis: As wage and construction costs rise, you’re gonna see land prices go down,” Charney said.

“At the end of the day, the people that are really going to be affected are the big developers,” Guttman said.

Apples and oranges

Developers thinking of buying sites have some math to do as they compare 421a-eligible land to 485x properties. (Sites eligible for 421a cannot opt for 485x, and vice versa.) The prevailing sentiment is that 421a sites are worth more, all else being equal.

The Legislature baked in deeper affordability requirements for 485x. That could boost values for 421a sites eligible for the five-year extension, even though on 485x sites, developers have 10 years to finish building.

Take mid-sized, 485x projects, on which developers must make 25 percent of units affordable at 80 percent of the AMI.

Option B under 421a — the highest affordability level that is also eligible for an extension — requires 30 percent of apartments be made affordable. 10 percent can top out at 70 percent of AMI; 20 percent at 130 percent. 

Comparing the two on those affordability metrics, 421a projects get higher rents.

But there’s a caveat: 421a requires all units to be rent-stabilized during the tax benefit period; 485x only applies the provision to affordable units. So in time, a 485x building would pull in more revenue than a 421a building so long as market-rate rents rise faster than rent-stabilized rents, which is a certainty.

And yet, Guttman says 421a projects eligible for an extension under Option B are likely to trade for more than 485x sites for projects of 100 units or more.

The reason: The market will weigh the expense of prevailing wage under 485x more heavily than the eventual revenue boost from market-rate units. Not only that, but 485x’s affordable units remain income-restricted forever, while 421a’s become market-rate when their tax break ends.

“I believe those [421a] projects will go up in value,” Guttman said.

The value differential is likely to be greater for larger projects eligible for 485x that can only fetch 60 percent of the AMI and demand those heftier wage floors.

“It’s a no-brainer that if you can get a property that is vested [for 421a] when you’re doing a large project, this will definitely make a lot of sense,” Guttman said.

Small projects, big demand

Across the board, industry observers say the market will assign the highest value to the smallest tier of 485x-eligible sites.

For those projects, which have six to 99 units, there are no wage requirements. Coupled with non-stabilized, market-rate rents for 80 percent of units, the framework allows for more lucrative projects, which will attract higher bids from developers.

“That six to 99 range, that’s going to trade at probably the highest dollars per square foot on the market,” Charney said.

“I think pricing on those is similar to what we saw a few years ago before the abatement expired,” Marks offered. To wit, the $260 per square foot that Carlyle paid before the market turned.

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Insiders expect the perks baked into the smallest 485x tier could reshape the city.

Even now, Guttman said, developers are getting creative, considering breaking big projects into two buildings, each with fewer than 99 units, to avoid the large-project tier.

“Not only will people build smaller buildings, people will shy away from bigger construction,” he said.