Whitepaper Spring 2022

SPRING

WHITEPAPER

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TABLE OF CONTENTS

04

Founders Letter – Spring 2022

05

Completion Guarantees in Ground Leases: What Are They Good For?

06

What Lies Below, Part 2: City Infrastructure

08

Hotel to Residential Conversion

12

What to Know About NYC Mandatory Inclusionary Housing

16

Securing 421-a(16) Tax Exemption eligibility

20

A New Landscape For Gowanus

Rubin Isak & Lev Kimyagarov

by Dena Cohen

by Jan Cermak

by Andrew Setiawan

by YuhTyng Patka

by Anna Martynova

by Elana Kapul

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FOUNDERS LETTER – SPRING 2022 Rubin Isak & Lev Kimyagarov

In this invaluable and crucial issue of our Development

One thing that has proven invaluable is our Due Diligence

Whitepaper, you will read and learn about the complexities

Accelerator Package® (DDAP) we put together for all

of Completion guarantees on Ground-leases, potential

our exclusive assignments. This is a password protected

construction impacts of adjacent buildings and city

cloud-based data-room that has been carefully curated to

infrastructure, Hotel to Residential conversions, a detailed

include everything a developer needs to make an informed

look at Mandatory Inclusionary Housing in NYC, and how

proposal.

to secure the 421-a abatement for your project before the mid-June 2022 deadline.

The DDAP® is unique to Development Site Advisors® and was created after speaking with countless active

The local political landscape has new leadership with

developers, architects, attorneys, and property owners,

Mayor Eric Adams and Governor Kathy Hochul at the

on what they would like to see from a broker, that did

helm. The 421-A replacement dubbed 485w was taken out

not exist in the marketplace. We solved for that and are

of the recently passed NYS 2023 Budget, leaving a lot of

delighted to offer it to you. We are sure this tool will help

uncertainty for property owners, developers, and more

make the complex, easy.

questions on how to solve our housing shortage issues.

We continue to provide property owners, developers, and attorneys alike with quality knowledge and information

We know you will enjoy this issue and guarantee it will be of value to you.

related to the development site asset class.

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RUBIN ISAK

LEV KIMYAGAROV

Managing Principal and Co-Founder

Managing Principal and Co-Founder

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COMPLETION GUARANTEES IN GROUND LEASES: WHAT ARE THEY GOOD FOR?

by Dena Cohen, Partner, Herrick, Feinstein LLP There is no shortage of discussion among lawyers about the

under a ground lease does not timely complete the new

utility of completion guarantees. In a typical development

building, the landlord’s remedy against the guarantor is

ground lease, the landlord selects a developer to construct

generally to sue for the cost of completing construction. A

new or substantially refurbish property and then operate

lawsuit against a completion guarantor is hardly an ideal

that property for the production of income. Once completed

remedy and probably not what the landlord envisioned

and rented, the newly constructed building becomes

when it demanded the guarantee.

collateral for the tenant’s long-term rental obligation (usually 99 years). Given the importance to the landlord of the new building, the landlord will want to be very careful in its selection of a developer to lease the land and will only consider experienced developers who are prepared to commit to build the new structure within a reasonable time period and to stand behind that commitment with ″skin in the game.″ One way a developer may demonstrate commitment is by delivering to the landlord a completion guarantee; i.e., a guarantee from the sponsor of the project or a credit worthy equity partner, that the new building will be completed and operating when promised.

What does all of this mean for the landlord? Since the tenant is likely a limited liability entity without substantial assets, has the landlord essentially given the tenant an option between the time it signs the lease and the time it closes on a construction loan? The answer is – sort of.

But the option need not be free and can be structured to deliver enough compensation to the landlord to make the risk worthwhile and impose enough stress on the tenant to make sure the lease obligations are taken seriously.

Instead of demanding a completion guarantee before the developer is prepared to deliver one, the landlord could approach the problem by looking at its end game. Since

When a completion guarantee is used, there is usually

the purpose of the completion guarantee is to provide

some tension between the landlord and the tenant about

security for the tenant’s long-term rental obligation under

the timing of its delivery. In most cases, the tenant will

the lease, the landlord might require substantial upfront

be obtaining a construction loan and expects to deliver a

rental payments and/or staggered prepaid rental until the

completion guaranty to the lender at the closing of the loan

completion guarantee is delivered. The prepaid rent could

at which time it would also provide a similar guaranty to the

be applied after completion of the new building providing

landlord (the interplay between the guaranty delivered to

built in security. If the project does not succeed, it probably

the lender and the guaranty delivered to the landlord is a

won’t pay for the cost of completion, but it may provide the

separate discussion beyond the scope of this article). The

landlord with a comfortable financial cushion while it seeks

closing of the construction loan almost always occurs after

a new tenant.

the ground lease is signed. The guarantor will not want to make an unconditional commitment to the landlord to construct a new building costing tens of millions of dollars before a construction loan has been secured and all of the equity is in place. Given this reality, how can a landlord ensure that it will get the building it bargained for? It’s worth mentioning that as a practical matter, a completion

DENA COHEN Partner

guarantee does not actually translate into completion by the tenant of a new building, let alone on time. If the tenant

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WHAT LIES BELOW, PART 2: CITY INFRASTRUCTURE

by Jan Cermak PhD PE, Principal, Mueser Rutledge Consulting Engineers

Fig. 1 - NYC Subway and Utility Construction near Elm Street, ca. 1900 (Source: NYCPL)

Most owners and developers that have developed sites in New York City realize the importance of understanding potential impacts of adjacent buildings, other structures and city infrastructure on their developments plans. These impacts may have significant influence on what can be reasonably designed and constructed on any site.

The New York City Building Code includes a chapter (Chapter 13) that is fully dedicated to Safeguards During Construction and Demolition. This chapter discussed requirements for protection of adjacent buildings and infrastructure.

Additionally, the NYC Department of Buildings follows more specific requirements for protection of historic and landmark structures.

Fig. 2 - 1904 IRT Subway Plan (Source: nycsubway.org)

Developers and owners are typically familiar with challenges of construction in dense urban setting next to existing buildings, retaining walls or building backyards. Negotiating access agreements with adjacent property owners is something that is often undertaken in the very early stages of design process. While these are typically prepared and negotiated by specialty real estate attorneys, engineers should review the technical language of such agreements (e.g., criteria for vibrations and building movements). The technical conditions of access agreements can significantly impact the design and construction.

New

York

City

has

extensive

infrastructure

which

includes both above grade and below grade works (Fig. 1). New construction may have potential impact on such infrastructure. When considering interaction with any development, the NYC Building Code requires that whenever construction is within 200 feet of NYC subway or other railroad tunnels/structures, an approval and permit needs to be obtained from the authority having jurisdiction over the tunnel/structure. The presence of transportation infrastructure is generally easy to identify. However, establishing limits and depths of below grade tunnels and other transportation structures can be a challenging and often requires some research (Fig.2 is an example of historic subway map showing subway location and profile).

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and permit is required from NYCDEP. Fortunately, there are historic and other records of City Water tunnels that allow us to determine whether this review is required. Water tunnels are in most cases deep enough not be impacted by typical building foundations. However, NYCDEP may also require an approval for construction adjacent or near other critical inrastructure, such as, large sewers. Since the location of such critical infrastructure is not well defined by NYCDEP, it is sometimes difficult to determine whether their review will be required or not. This uncertainty makes it difficult on some sites to evaluate impacts of critical infrastructu re during the initial site studies.

In addition to NYCDEP, there are other utility companies such as ConEdison, National Grid or Empire City Subway that

are

responsible

for

maintaining

underground

electrical, gas and steamline conduits. These utilities may also impact construction on a site and review/approval of utility companies may be required. For instance, Fig 4 shows a regulator found along steamlines in NYC. A large vaults was found next to that regulator and required redesign of Fig. 3 - NYC Water Tunnels (Source: NYCDEP)

the building cellar.

As noted earlier, the presence of city infrastructure can influence what can be constructed on a site and may have major impact on the construction costs and schedules.

Additonaly, the approval process requires time to complete.

The agency review make take weeks to several months.

Hence, it is important to consult with engineers and other professionals that have local experience with similar developments to understand this potential impact on site development. This can be often done in the very early stages of evaluating feasibility of developing a site.

Fig. 4 - CodEd Steamline Regulator

In addition to rail/subway infrastructure, approvals may be required from agencies overseeing roadway tunnels and structures.

In recent years, new laws took effect to protect critical sewer and water distribution infrastructure requiring review of

JAN CERMAK PhD, PE, Principal

NYCDEP. When excavations or foundations are exceeding certain limits and a site is falling within 500 feet horizontal distance from the centerline of any water tunnel, an approval

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HOTEL TO RESIDENTIAL CONVERSION

by Andrew Setiawan, Associate in Development Site Advisors

The global COVID-19 pandemic has undeniably transformed the way people live and work. The sudden drastic decline in airplane passenger traffic in relation to tourism and businesses has slammed NYC’s hospitality sector these past years. 4Q 2021 Manhattan occupancy rate was 69.2% compared to 30.1% in 4Q 2020 according to PWC lodging index. The surge in occupancy benefitted from the loosened COVID-19 protocols which enables hospitality and commercial sector to be more fully function. However, these numbers were still below the pre-COVID level where occupancy rates may reach north of 90%. Hundreds of city hotels were forced to close due to the pandemic and many of them are in the brink of filing bankruptcies where other numerous hotels are encumbered with debt while trying to stay afloat. Hotel owners and their creditors may incline to search for alternative uses for their buildings such as residential conversions. The current environment provides an opportunity for residential developers to convert older hotels to residential rentals and even condominiums.

Non-residential to residential conversions is not a new concept as the regulation of such permit was already enacted back in 1981. Article I Chapter 5 “Residential Conversion within Existing Building” was adopted to allow conversions to certain buildings in specific areas and was enacted due to an increase in illegal residential conversion. This chapter is applicable for properties located in Manhattan CD 1,2,3,4,5 and 6, Brooklyn CD 1,2,6 and 8 and Queens CD 1 and 2 erected prior to December 15, 1961. In addition, properties in Manhattan CD 1 in the area south of Murray Street and its easterly prolongation and the Brooklyn Bridge erected prior to January 1, 1977. The regulation eases the zoning restriction for residential conversion of older or obsolete non-residential buildings that requires substantial reinvestment.

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Hotel or non-residential conversion under Article I Chapter 5 to residences shall be permitted only in districts where residential use is allowed by the district such as R-zoning or C-zoning with residential equivalents. Moreover, residential conversion on Manufacturing district is allowed by special permit or by authorization or in special M-district with residential equivalents like M1-6D in Garment District.

Conversions within C6-1G, C6-2G, C6-2M, C6-4M, M1-5B,

two-bedroom would need three typical hotel rooms. A high-

M1-5M and M1-6M would be permitted only by special

profile conversion includes the partial conversion of the

permit. The properties converted per this section will not

Waldorf Astoria from hotel to residential – a hotel bought

be subjected to residential floor area limitations, open

by Anbang Insurance Group for $1.95 billion in 2014. A hotel

space ratio, rear yard requirements and minimum distance

which opened in 1931 had over 1,400 guest rooms which is

between windows or walls. Instead, those residential

now converted to 375 residential condominiums and 375

requirements will be superseded by ZR 15-112 (Light and Air

renovated hotel rooms. New residences will range from

Provisions) and ZR 15-12 (Open Space Equivalent). Without

studios starting at $1.7 million to four-bedrooms starting

the residential floor area limitations, hotel buildings with

at $18.5 million – Curbed. The 1922-era Excelsior Hotel at

a total floor area on the zoning lot exceeds the maximum

45 West 81st Street sold for nearly $80 million in December

floor area of residences, such floor area excess may

2021 to a developer who specializes in converting buildings

be converted to residences in its entirety. Light and Air

to residences. High vacancy rates together with ballooning

Provisions states that every dwelling unit will be subjected

expenses would force hotel to close during COVID-19.

to Section 277 of the Multiple Dwelling Law which requires

Located in R10A zoning, residential conversion would

less light and air for legal windows (less than 10 feet

be ideal with residential rents fetching $75-$80/sf and

compared to 30 feet required under the residential zoning).

condominium sell outs averaging to north of $1,800/sf.

Open Space Equivalent would require the converted building to have at least 30% and up to a maximum of 50% of the gross roof area to be accessible and provided for residential recreational use. Developers in turn, would not need to demolish the excess floor area and would not need to shave off the rear portion of the building for rear yards. Economically speaking, it will facilitate the residential conversion that might otherwise not meet residential bulk

COVID-19 pandemic has been wrecking the hospitality industry. Residential conversion of pre-1961 hotel buildings through Article I Chapter 5 could be a solution to limit the economic hardship. Zoning flexibility would be key as it will clear path for an economically feasible conversion which will unlock underlying value of properties and help the city return to an expanding economy.

zoning requirements.

For non-residential buildings, hotel could be the best suit for residential conversion compared to offices because of its floor lay out. Individual hotel guest rooms have its own window, bathrooms, wall separation and the whole floor is connected via corridor – a typical residential layout.

Compared to offices which often adopt wall-less open

ANDREW SETIAWAN Associate

floor plan and deeper inefficient layout for residences. A typical 500-600sf one-bedroom conversion would need a combination of two typical 250-300sf hotel rooms while

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WHAT TO KNOW ABOUT NYC MANDATORY INCLUSIONARY HOUSING

by YuhTyng Patka, Duval & Stachenfeld LLP

With the recent rezonings in Gowanus and SoHo, there is

Program and applications for both MIH and VIH must be

a renewed focus on New York City’s Inclusionary Housing

submitted to HPD.

Program, and Mandatory Inclusionary Housing (MIH) is of particular interest to developers seeking to develop in these newly rezoned neighborhoods. This article explains what MIH is and provides a primer on what is required and what to expect in the MIH application process in New York City. It also provides an overview of the city’s Voluntary Inclusionary Housing (VIH) program.

MIH ELIGIBILITY Participation in MIH is required for all residential development projects in rezoned neighborhoods such as Gowanus and SoHo. MIH is also required for a private rezoning seeking to build an apartment building on a particular site that is otherwise zoned for non-residential use. Thus, developers cannot escape MIH if they wish to

INCLUSIONARY HOUSING OVERVIEW

build on a rezoned site or a rezoned neighborhood. There

Inclusionary Housing is a zoning benefit program that

site is not required to participate in MIH and eligibility

encourages development of permanent affordable housing

requirements for such MIH exemptions are discussed

in exchange for providing the developer the zoning benefit

below.

are some limited exceptions where a project on a rezoned

of increased residential floor area, or, in other words, the ability to build a larger apartment building or build an apartment building at all. The zoning benefit is commonly referred to as “inclusionary air rights.” The two types of inclusionary housing in New York City are MIH and VIH. MIH is of particular interest to developers seeking to develop in these newly rezoned neighborhoods (for reasons further discussed below). With MIH, providing affordable housing

MIH REQUIREMENTS Each MIH project must select an MIH option which dictates the amount and level of affordability provided to a project to satisfy MIH requirements. The NYC Zoning Resolution provides up to four different MIH Options. They are:

is the quid pro quo for the city’s approved rezoning for

1.

Option 1

residential development. In the case of VIH, developers

2.

Option 2

permissible floor area on a project. VIH and MIH are

3.

Deep Affordability Option

programmatically very similar with similar application and

4.

Workforce Option

provide affordable housing in exchange for additional

closing procedures. The New York City Department of Housing Preservation and Development (HPD) is charged with implementing and enforcing the Inclusionary Housing

These options differ in the amount of affordable floor area that must be provided. They also differ in the level of required affordability and in other, more minor ways. The MIH Options range from 20 to 30% of required affordable

Developers cannot escape MIH if they wish to build on a rezoned site or a rezoned neighborhood.

floor area that require an average weighted Area Median Income (AMI) ranging between 40 to 115%, depending on the MIH Option. However, the available MIH Options for a project site is neighborhood specific as determined by the New York City Council. Refer to the NYC Zoning Resolution

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What to Know About NYC Mandatory Inclusionary Housing

to determine which MIH Options are available for a project

Additionally, a developer can file an appeal with the Board

site. In addition, a 5% increase is added to the required

of Standards and Appeals (BSA) to reduce the amount of

amount of affordable floor area if the developer chooses to

affordable floor area required or the amount of payment

provide affordable units off-site.

into the Affordable Housing Fund. The developer must show, and the BSA must find, that the current MIH requirements

EXEMPTION FROM MIH REQUIREMENTS The NYC Zoning Resolution allows smaller projects to be

pose an “unnecessary hardship” on the developer, with no reasonable possibility that the current existing MIH requirements would bring a “reasonable return.”

exempt from MIH requirements. Small projects that contain no more than 10 units or no more than 12,500 square feet of residential floor area are exempt from MIH. Smaller

APPLICATION PROCESS

projects containing 11-25 units or with between 12,501 and

As noted above, MIH and VIH applications are submitted

25,000 square feet of residential floor area are eligible to

to HPD. The application requires the developer provide

make a payment to the Affordable Housing Fund in lieu of

information to HPD and the local community board about

providing affordable floor area. The payment amount is

the developer and the proposed project. HPD reviews the

calculated by multiplying the amount of affordable floor

building plans in detail to ensure compliance with MIH

area the project would have been required to provide by

requirements. In addition, the developer must submit the

a dollar amount determined annually by HPD. This dollar

project’s financial information to HPD. This allows HPD to

amount is neighborhood specific.

confirm that the developer has the financial wherewithal to complete the project and that the project will be financially sustainable after construction completion. Once HPD is satisfied with its due diligence, there is a closing where the applicant enters into a VIH regulatory agreement or an MIH restrictive declaration. The closing document outlines the requirements that the developer (and subsequent owners) agrees to abide by. At the closing, HPD issues a Permit Notice to the developer applicant. The Permit Notice is presented to DOB to clear relevant zoning objections. The developer cannot obtain a building permit until they have received the Permit Notice from HPD at the VIH or MIH closing. And thus, the developer cannot begin worthwhile construction on their project until HPD has approved the developer’s VIH or MIH application.

The VIH or MIH application is submitted to HPD when the applicant has DOB-ready plans. Those plans must also be submitted to HPD for review and approval. The timeline for each application is dictated by different factors unique to each project. However, the application process generally takes 6 – 12 months from application submission. The

Photo credit: William Alatriste

HPD closing is often simultaneous with the construction closing because both HPD and the construction lender seek

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What to Know About NYC Mandatory Inclusionary Housing

confirmation that the project is being properly funded and can obtain the proper building permit.

VIH/MIH + 421-A PROJECTS Overlapping dual programs of 421-a and VIH/MIH on a single project is permissible and often expected of a developer.

VIH ELIGIBILITY AND REQUIREMENTS As mentioned earlier, VIH and MIH have very similar programmatic and application requirements. However, there are a few important distinctions to note. VIH is only eligible for sites zoned R10 or R10 equivalent (the highest density zones in the city). As its name infers, in VIH the developer volunteers (rather than being mandated) to provide affordable housing at a generating site in exchange for additional floor area at the compensated development.

The affordable units required under each program can simultaneously satisfy the affordability requirements of both programs. When one program requirement differs from another (e.g. AMI level, minimum unit size), the stricter requirement prevails. For example, a 421-a Option C project, which requires 130% AMI, overlapping with VIH, which requires 80% AMI, is required to provide 80% AMI for the affordable units due to VIH’s comparatively stricter requirement.

The generating site (loosely defined as the building where

As both New York City officials and developers continue seeking

the affordable housing is located) does not have to be the

new sites and neighborhoods to rezone in order to spur

same as the compensated development (loosely defined as

residential development, the Inclusionary Housing Program,

the building where the zoning benefit is utilized). The “zoning

particularly MIH, will become a mainstay in New York City

bonus” of increased floor area generated by affordable

development.

housing can be purchased from another developer of VIH affordable units, commonly referred to as “certificates.”

Bonus floor area can be transferred from the generating site to a different compensated site, provided the generating site and compensated site are in the same community board or in adjacent community boards within a half mile radius from one another. The amount of additional floor

YUHTYNG PATKA

area generated by the affordable housing is determined by

Esq.

an applicable ratio. The ratio range is 1.25 to 3.5, dependent upon several determining factors including location, public or private financing, and new construction or rehabilitation.

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SECURING 421-A(16) TAX EXEMPTION ELIGIBILITY

by Anna Martynova, City5

As a part of the proposed 2023 FY budget, New York State Governor Kathy Hochul released the details about the new program called Affordable Neighborhoods for New Yorkers (“ANNY”). The program is proposed to replace the existing 421-a(16) Tax Exemption that is approaching a sunset date on June 15, 2022. Although the deadline is only a few months away there is still time for new projects to secure eligibility for the program.

ANNA MARTYNOVA

CONSTRUCTION COMMENCEMENT DEADLINE

PROJECTS APPLYING FOR INCLUSIONARY HOUSING (IH)

Per 421-a(16) Tax Exemption requirements, construction for

Projects opting in to Inclusionary Housing Program do not

eligible multiple dwellings must commence on or before

require approval from the IH unit to receive an SOE and/

June 15, 2022.

or foundation permit. Nonetheless, we strongly encourage

Construction commencement would be considered the date upon which excavation and construction of initial footings and foundations lawfully begins or, for an eligible conversion, the date upon which the actual construction

documenting construction commencement with photos and/or special inspection report to avoid any potential challenges that the Agency could raise in regards to construction commencement date in the future.

of the conversion, alteration, or improvement of the preexisting building or structure lawfully begins.

ELIGIBLE DOB PERMITS

THE NEW PROGRAM AFFORDABLE NEIGHBORHOODS FOR NEW YORKERS (“ANNY”)

A project could meet 421-a(16) construction commencement deadline if it receives one of the following permits and commences work on or before June 15, 2022:

The new program is proposed to be available for the projects

1.

New Building (NB) permit;

that did not receive 421-a(16) Tax Exemption benefits and

2.

Alteration Type 1 (ALT 1) permit;

3.

Alteration Type 2 (ALT 2) permit issued in conjunction with an NB, Foundation permit (FO), or ALT 1 permit (if the permits are issued under the same job number);

4.

commencing construction between June 15, 2022, and June 15, 2027. Please note that the program is subject to further approval by the Senate and Assembly. Although it’s possible the conversions from the old program to the new one would

Foundation permit (FO) issued earlier than either an NB or ALT 1 permit issued under:

be allowed, it is safer to ensure your projects are eligible

• the same job number as NB or ALT 1 permit

offering higher rents for affordable units. It is currently not

• a different job number that indicates the FO permit

for the existing 421-a(16) Tax Exemption program that is clear if ANNY program will be passed as proposed.

is being issued in conjunction with said NB or ALT 1 permit

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Securing 421-a(16) Tax Exemption Eligibility

AFFORDABILITY OPTIONS

TAX BENEFITS

•

Rental developments with over 30 units – 25% Affordability º 10% of the units @ 40% AMI º 10% of the units @ 60% AMI º 5% of the units @ 80% AMI

•

•

Rental developments with less than 30 units – 20% Affordability º 20% of the units @ 90% AMI

Rental developments º 100% Tax exemption for up to 3 years for construction period º 100% Tax exemption for 25 years post construction completion º For the last 10 years, the percentage of the tax exemption would be equal to the affordability percentage

•

Condo/co-op developments º 100% of the units @ 130% AMI replacing the

•

Condo/co-op developments º 100% Tax exemption for 40 years post construction completion

current 421-a program’s use of property assessment

RESTRICTION PERIOD •

Rental developments with over 30 units º Permanent affordability

•

Rental developments with less than 30 units º Affordability component must be maintained for 35 years after construction completion

•

º 100% Tax exemption for up to 3 years for construction period

MINIMUM WAGE & LABOR REQUIREMENTS Projects located in Prime Development Areas (PDAs) fka Enhanced Affordability Areas (EEAs) would require the following established rates to be paid to construction workers: •

Condo/co-op developments º Affordability component must be maintained for 40 years after construction completion

Rental projects with 300 or more units º $63/hour minimum in Manhattan º $47.25/hour minimum in Brooklyn/Queens º 5% increase after year 1, and then every 3 years thereafter The following projects are not subject to the minimum wage requirement:

PROGRAM DURATION •

ANNY program would be set for five years after the expiration of 421-a(16) Tax Exemption: º Construction commencement: June 16, 2022 – June 15, 2027 º Construction completion: June 15, 2031

•

Condo/co-op developments

•

Rental developments with 50% or more of the units allocated to affordable housing at up to 80% AMI

•

Rental developments with Project Labor Agreement (PLA)

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Securing 421-a(16) Tax Exemption Eligibility

º For projects with over 30 rental units MIH

THE MAIN CHANGES •

option 1 would have very similar affordability/

Deeper Affordability

AMI requirements to ANNY program.

º Although the newly proposed ANNY program

º For projects with less than 30 affordable units

will be offering tax benefits that are similar to

VIH program would have similar affordability/

the existing 421-a(16) Tax Exemption, it will

AMI requirements to ANNY program.

have deeper affordability options for the rental projects.

•

•

º Small rental developments could benefit from

Rents

a smaller percentage of the units that would

º The rents under the new program will be

have to be allocated to affordable housing while

capped at 90% AMI which will reduce the rents

having the highest allowed rents/AMI level

that could be charged for the affordable units

under the new program.

significantly.

•

Affordability Restriction Period º The affordability component for the developments with over 30 rental units would require to be permanently affordable.

•

Better Homeownership Option º The new program is proposed to provide more benefits for homeownership projects and contains an option for 100% affordable homeownership projects to receive tax benefits.

Projects under with less than 30 rental units

•

Homeownership projects º The new program is proposed to offer better property tax benefits for homeownership projects - a 40-year benefit period at 100% tax exemption. º 100% of the units in the building can be sold to applicants @ 130% AMI. This option offers the highest AMI option.

Please find on the next page a summary of the options offered by each program.

WHICH PROGRAM WOULD WORK BEST? If ANNY is adopted as proposed the projects listed below could benefit from the program:

BROWNFIELD PROGRAM UPDATE

•

Recently HPD announced that Brownfield Tax Credit Program is now available for developments with an affordable component.

Please note that this program would not be considered to be a form of Substantial Government Assistance and all 421-a (16) Tax Exemption options would be available to Brownfield Tax Credit Program participants.

Projects opting in to Inclusionary Housing program º The affordability requirements of the newly proposed program closely align with the affordability requirements of the Inclusionary Housing Program.

See options on the next page

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Affordability Option

Property Size

Type

Affordability Requirements

Restriction Period

Tax Benefits

PROPOSED AFFORDABLE NEIGHBORHOODS FOR NEW YORKERS “ANNY”

Option A

> 30 units

Rental

10% of the units @ 40% AMI 10% of the units @ 60% AMI 5% of the units @ 80% AMI

Permanent affordability

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) First 25 years @ 100% of the AV; 3) final 10 years @ Affordability %

Option B

> 6 & < 30 units

Rental

20% of the units @ 90% AMI

35 Years

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) First 25 years @ 100% of the AV; 3) final 10 years @ Affordability %

Option C

> 6 units

Homeownership

100% of the units @ 130% AMI

40 Years

40 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) First 40 years @ 100% of the AV

421-A(16) TAX EXEMPTION

Option A*

Option B

> 6 & < 300 units

> 6 & < 300 units

Rental

10% of the units @ 40% AMI 10% of the units @ 60% AMI 5% of the units @ 130% AMI

Rental

10% of the units @ 70% AMI 20% of the units @ 130% AMI

35 Years

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) First 25 years @ 100% of the AV; 3) final 10 years @ Affordability %

35 Years

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) First 25 years @ 100% of the AV; 3) final 10 years @ Affordability %

Option C*

> 6 & < 300 units

Rental

30% of the units @ 130% AMI

35 Years

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) First 25 years @ 100% of the AV; 3) final 10 years @ Affordability %

Option D

> 6 & < 35 units

Homeownership

Units’ average Assessed Value (AV) no more than $65,000 upon 1st year following completion

35 Years

20 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) First 14 years @ 100% of AV capped at $65,000 AV/unit; 3) final 6 years @ 25% of AV capped at $65,000 AV/unit

Option E*

> 300 units

Rental

10% of the units @ 40% AMI 10% of the units @ 60% AMI 5% of the units @ 120% AMI

40 Years

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) 35 years @ 100% of AV

Option F

> 300 units

Rental

10% of the units @ 70% AMI 20% of the units @ 130% AMI

40 Years

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) 35 years @ 100% of AV

Option G*

> 300 units

Rental

30% of the units @ 130% AMI

40 Years

35 Year Benefit: 1) 3 Year Construction Period @ 100%; 2) 35 years @ 100% of AV

*please read the details regarding the Brownfield Program Update on the previous page

developmentsites.com / 19

A NEW LANDSCAPE FOR GOWANUS

by Elana Kapul, Director, Development Site Advisors

One might assume that an expansive metropolis like New York City would buckle under the pressure of a global pandemic. But the resiliency of New Yorkers is mirrored in the strength of the development community. Despite all the challenges, and there are many of them, New York came back very strong.

One might assume that an expansive metropolis like New

the renewed enthusiasm of the developer’s community is

York City would buckle under the pressure of a global

undeniable. The numbers show close to a 7 times increase

pandemic. But the resiliency of New Yorkers is mirrored in

in activity in the area, which saw very little development

the strength of the development community. Despite all the

for a long time. All these proposed plans should bring

challenges, and there are many of them, New York came

over 6,050 new dwelling units to the neighborhood. That

back very strong.

represents about 70% of the planned 8,500 units that this

″We are very bullish on New York″, says Steve Krasman of Slate Property Group, ″We see concessions are really burning off in prime areas, rents are up to pre pandemic levels. We’re having occupancy in high 90% range.″

rezoning should create — quite an impressive number.

These much-needed units will help in elevating a critical shortage of housing in the city as well as fully reshape the look and desirability of this neighborhood.

Similarly, Sam Charney of Charney Companies LLC has a

Granted, every aspect of this rezoning project has already

very optimistic view on the future market. ″We saw massive

been discussed ad nauseam. After all, it took over 10 years

amounts of value in NY, and said if everyone is running

to build consensus for what Gowanus should become, and

away from NY, we want to be here. It really wasn’t rocket

to go through all the steps of the ULURP process, numerous

science, just thinking about the fundamentals of the NY

lawsuits and opposition. Now, upon completion of the 120-

market, understanding that the NY economy is the most

day Article 78 filing period — when a petition can be filed

diverse economy in the world.″ So it looks like the future of

to challenge an aspect of the rezoning and annul it — the

the development sector, and the real estate industry as a

ambitious vision of hundreds of people and organizations

whole, is bright and thriving.

involved in this process will finally be transformed into reality.

One of the strongest examples of this progress is what’s

Multiple sizable sites have been purchased or secured

going on in the Gowanus neighborhood of Brooklyn. After

with contracts even before the almost unanimous vote by

the long awaited and highly contested major rezoning

City Council had approved this rezoning. Many developers

was finally approved on November 23, 2021, there was

like Tavros and Charney Companies, Domain Properties,

an impressive spike in the number of new buildings and

Property

demolition filings. In the short span of 5 months since the

Monadnock Development and others took a significant

final approval, there have been 35 new building and 12

risk by getting involved ahead of time and purchasing

demolition filings. In comparison, in 2018 there were only

properties in anticipation of the rezoning getting approved.

6 new building filings throughout the whole year, in 2019 -

The highest transaction in Gowanus so far is 318 Nevins

only 4 filings, and in 2020 there were 7 new building filings

Street which has been traded for $102,000,000 and has

within the rezoning area. The effect of the rezoning and

closed on December 30, 2021.

20

Markets

Group,

Avery

Hall

Investments,

developmentsites.com

A New Landscape For Gowanus

Now that the risk of rezoning denial or further delay has

Hochul, known as ANNY, Affordable Neighborhoods for

been mostly eliminated, many owners expect that the

New Yorkers Tax Incentive (dubbed 485w), seems to be

potential value of their properties within the rezoning area

a sensible replacement of the 421-a program. It appears

will keep climbing. However, according to Nicholas R. Silvers

that the goal is to continue creating affordable and mixed-

of Tavros Capital, who owns major projects in Gowanus,

income housing by providing a deeper level of affordability

a multitude of issues will put pressure on the values. For

for rental projects, and unlike the 421-a program, it also

example, soil conditions and concerns about flooding,

creates a new homeownership option which may increase

“construction costs are high, limiting the amount that you

the development of condominiums to spur affordable

can build down, a lot of your mechanicals have to be above

homeownership. With 485w being removed from the 2022-

grade. There are strict regulations about how much parking

2023 NY State budget, we must wait and see how this plays

you have to deliver per site... At the end of the day, those

out in the political landscape.

types of costs are limiting the values for sites,” he states.

There is another major concern right now that is on everyone’s mind: the looming expiration of Affordable New York, also known as the 421-a program that is set to sunset on June 15th of this year. ″The city has a real interest in seeing to it that the program works... because that’s how affordable housing is unlocked,″ explains Mitchell Korbey, Partner with Herrick, Feinstein LLP, “And without the program, it’s impossible, really, to build affordable housing and extraordinarily difficult to build rental housing

The conclusion we can draw from all the above-mentioned activity, whether on its way or still in the planning stages, is that development in Gowanus is poised for strong and robust growth; it will continue, as long as developers are incentivized to build.

at all.″ The new proposal by New York State Governor Kathy

ELANA KAPUL Director

Photo: Randy Duchaine/Alamy

developmentsites.com / 21

SPRING DEVELOPMENT WHITEPAPER

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developmentsites.com / 23

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