The Real Estate Board of New York to The New York City Department of Housing Preservation and Development (HPD) regarding Proposed Rules to Implement 467 m and 485 x

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The Real Estate Board of New York (REBNY) is the City's leading real estate trade association representing commercial, residential, and institutional property owners, builders, managers, investors, brokers, salespeople, and other organizations and individuals active in New York City real estate. We appreciate the opportunity to submit comments on proposed rule changes related to the proposed rules to implement the tax incentive programs of 467-m for office to residential conversions [Affordable Housing From Commercial Conversions Tax Incentive Benefits Program (RPTL Section 467-m)] and 485-x for new construction [Affordable Neighborhoods for New Yorkers Tax Incentive Benefits Program (RPTL Section 485-x)] as enacted by the State Legislature in Chapter 56 of the Laws of 2024.

The proposed rules are an important implementation step following the adoption of the FY 24-25 State Budget, which created a series of housing supply tools, including 467-m and 485-x, for New York City to address its well documented housing shortage. In concept, these tools are designed to work within a zoning framework that enables conversions that include units with below market rents and encourages the development of mixed-income rental housing. Necessary reforms to that zoning framework are presently being discussed as part of the City of Yes for Housing Opportunity text amendment.

Unfortunately, the proposed rules for 467-m will limit utilization of the program due to even deeper affordability than what was required in the statute with the proposed 3% reduction per AMI band. Additionally, the requirement to pay real estate taxes as assessed as a commercial office building during the construction period effectively ensures that projects will be harder to finance. These two components of the proposed rule will require either more equity from the owner or result in higher mortgage costs, with both options ultimately leading to a higher cost per unit. These higher costs will make it less likely that an owner will use the incentive if they are converting, resulting in less affordable housing from conversions.

The numbers look worse for 485-x, which was already a challenging program to build under as it proposes significantly lower AMIs and significantly higher labor costs than prior versions of 421-a at a time when borrow costs have increased significantly. The proposed rules make challenging math even harder by imposing the 3% reduction per AMI band, similar to 467-m. In addition, the proposed rules do not provide any clarity on compliance with the construction wage requirements of the program, which are needed in order for the program to be utilized.
Enclosed please find more detailed comments and questions regarding the proposed rules. Thank you for your consideration of these points.

Setting of Affordable Rents

Achieving the maximum amount of affordability from projects that benefit from public programs is a laudable goal. However, if a project does not make economic sense, it will not be built and no new housing units - affordable and market rate - will come to market. Affordable rents need to be determined with this understanding.

The State of New York made a determination in the statute as to the affordability levels for projects utilizing the 485-x and the 467-m program. For 485-x, projects are required to range between an average of 60 and 80 percent AMI depending on project size (much below the affordability requirements in 421-a) and 467-m targets an average of 80 percent AMI and requires a set aside for 40% AMI units as well.

However, the proposed rules would deepen those levels by reducing each AMI band by 3 percent. This will have a significant impact on projects and deter utilization of these programs.

The affordable units in these buildings will have rents set below what is required to operate the building in the absence of market rate income. This challenge will grow over time because the affordable units will remain permanently affordable and only see increases based on annual Rent Guidelines Boards Determinations. At the same time, the cost of covering operating expenses and debt service will grow more rapidly given increases in taxes, insurance, and labor costs. Presently, the Rent Guidelines Board reported during the 2024 annual proceedings that average monthly rent for stabilized apartments is $1574 and average monthly expenses are $1664 per month. A 40% AMI rent for studios and one-bedroom apartments is already set below monthly expenses, as are 60% AMI units for studios.

Unlike many affordable projects that receive support from the City, projects seeking 485-x and 467-m benefits do not receive discretionary financial assistance from HPD. As a result, by reducing the income from affordable units, the proposed rules will only worsen the gap between income and expenses, stressing the financial feasibility of projects to proceed in the first place.

If HPD wishes to improve the ability of prospective tenants to access the low and very low-income units that are required under statute for these programs, then they should focus on improvements to the marketing and lottery process, not on stressing the financial feasibility of projects to proceed in the first place.

Marketing Handbook

The workbook filing window should be expanded beyond 12 months. 421a-16 allowed 15 months for extra-large projects. Delaying the filing of the workbook to occur within 12 months of Construction Completion will delay the housing lottery and result in affordable units sitting vacant after the building receives its first batch of TCOs.

Regardless, owners should be able to voluntarily establish lower initial affordable rents based on project and market specific factors. Finally, if an owner voluntarily establishes lower initial rents, the legal rent should be set based on the maximum permitted rent.

Payment of Taxes during Construction - 467m

Considerable time and effort was spent by stakeholders, policymakers, and agency staff discussing how office to residential conversions are different than ground up construction, with an emphasis on the need for flexibility in the design process given the financial complexities necessary for a conversion project. One of those unique challenges is the impact of property taxes during the construction period.

Paying taxes during the construction period as though the building were still a commercial office will pose an enormous challenge for the conversion project. Unlike new construction, the assessed value of the development site is based on a building that was in a different tax class and had a value more than what would be found on a site that had either been vacant or cleared for new construction. This tax burden has real impacts, increasing the cost of delivering the residential unit as the owner would need to cover the full tax burden of the prior use while not collecting rent for that prior use and paying for the materials, labor, and debt service of the loan to deliver on the mixed income apartments required by the program.

The City has various ways to create a mechanism that would allow conversions to occur at the scale imagined without sacrificing the ability to enforce and secure property tax payment from the owner for the construction period if the site ultimately does not comply with the requirements of 467-m. First, there is nothing in the State statute that precludes the City from requesting a notice at the start of construction, and each year hence, from a project stating that they are in the construction period and intend to certify under the program requirements of 467-m. The City, upon receipt of notice could defer payment of assessed value for taxes until the construction could be completed. Similarly, there is nothing in this statute, or any other statute to preclude the City from establishing a payment plan for payment of taxes. In this case, the payment plan could be that either no payment be made until the construction is complete or that a nominal amount is accepted to be paid, which satisfies the requirement that taxes owed are paid for the purposes of certification. In this case, the City could hold the full tax bill in abeyance with the condition that all will be due with interest if the project fails to qualify for the program. In addition, HPD is granted authority to impose a penalty, and could create a lien for the amount owed on the property if the project fails to meet the affordability or other requirements of the program.

Additional Comments relating to 467-m:

• 64-06 c) states that "all common areas…shall be open and accessible to the residents of all [units], including the residents of any affordable housing units." Please clarify that amenities that are paid amenities are not considered "common areas," such as fitness facilities operated by third parties.

• Given the distribution rules and the length of the lottery process, please clarify that prior to occupancy, an affordable apartment may be used for staging and/or leasing office, or other accessory uses such as "construction field office," with the understanding that all affordable units will be delivered by final TCO.

• Please clarify vesting as it relates to the permit types, whether the list provided is meant to mean that one must have one of the three permits, or whether an ALT-CO - New Building with Existing Elements to Remain is required and either a "DOB NOW Job Type: Alteration CO a. DOB NOW Work Type: General Construction" or "DOB BIS Job Type: Alteration Type 1 a. DOB BIS Work Type: OT - General Construction."

• The rules should make clear that a restrictive declaration shall be considered an agreement between HPD and the applicant for the purposes of satisfying the requirements of a regulatory agreement.

Additional Comments relating to 485-x:

• The proposed rules require applicants to make reasonable efforts to meet the participation goal for minority and women owned business enterprises. However, the proposed rules do not provide a clear framework for how an owner can satisfy this obligation and what documentation will be required to prove such reasonable efforts were taken. Please articulate in the rules what will be expected from an applicant as to what reasonable efforts will entail, to a similar level of clarity to what the state provides in regards to Article 15a.

• On the homeownership rules, there should be a mechanism at commencement rather than post completion to understand the building's likely property tax assessment. Otherwise, it will be challenging for a builder to proceed with pricing units and determining viability. For-sale product, especially affordable homeownership, is sensitive to a number of external factors in pricing, inclusive of common charges, expected maintenance, interest, and mortgage rates. For these same reasons, a one-year sales period, especially for larger projects is unrealistic. 421a had a similar restriction but that was for projects under 35 units; to impose such on a larger project would mean no project ultimately qualifies.

• Filing Fee - The rules state that "Very Large Rental Projects" must submit 25% of the applicable non-refundable filing fee with the initial workbook submission. For Very Large Rental Projects that include two or more eligible multiple dwellings on the same zoning lot that are constructed at different times, the 25% deposit should be paid based on the number of units contained in the workbook filing for each multiple dwelling rather than the aggregate number of eligible dwelling units on the zoning lot.

• Super's Unit - To be consistent with VIH and COYHO UAP, a super's unit located within a 100% affordable eligible dwelling should be considered an affordable housing unit instead of a market rate unit. HPD should encourage owners to incorporate on-site supers into 100% affordable buildings to help ensure they are operated and maintained to a high standard.

• The rules should refer to the "applicant" throughout as the primary responsible party, whether it is for the marketing monitor or otherwise, to reflect the practical realities of a variety of property ownership structures and ensure clear responsibility.

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