Buy The New 421-A or The Old?
Buy The New 421-A or The Old?
A look at North East Brooklyn
I recently presented a building valuation (100% complementary, BTW), and one of the stakeholders pushed back, saying that I had overlooked a key component. He said I didn’t consider how value changes across the different 421A programs. Most buildings trading hands today with tax abatements have either the ‘older’ 421-a abatement that expired in 2016 or the ‘newer’ program 421-a called Affordable Housing New York (AHNY) that ran its course from 2017 to 2022.
The older 421-a program offers 15-year tax abatements. These abatements work by exempting nearly all the buildings’ assessed values for the duration of the abatement period. In year 11 of 15, there is a ‘sunsetting period’ where the exemptions burn off in increments of 20% each year. That can translate to an annual doubling or tripling of property taxes. Under this program, there are no rent caps upon initial building delivery, and the owner can claim market rents when entering the property into service. But, for the life of the abatement, every single unit in the building is rent stabilized and must remain anchored to that original rent.
421-a AHNY is different from the older program in two powerful ways. First, the property tax abatement can last up to 35 years with 100% exemptions on the assessed value of the building (minus the value of the land) for the first 25 years and an exemption equal to the % of affordable units in the latter ten years. Second, the program thinks of affordability differently. Instead of keeping all apartments rent stabilized it requires only that a certain percentage, between 25% and 30%, of units intentionally have lower rents. The most popular option for developers who leveraged the AHNY program was usually to pick “Option C” and keep 70% of the building units as market rate, standard units and reserve the remaining 30% of apartments for affordable, lower rent apartments typically at 130% of AMI. That means investors can price most of the units in AHNY projects according to market demand and capture the upside.
As I alluded to in a previous newsletter issue, 421-a tax-abated properties are valuable to investors because they represent a portion of the ~20,000 units in multifamily investment property that are or can become exempt from any rent regulation, be it Good Cause Eviction (GCE) or Rent Stabilization Law (RSL). The question is, then, which kind of abatement is more accretive to buyers/investors?
Some investors may value 421-a AHNY buildings more highly. Out of the 25% of units these properties place under rent stabilization, the discounts to market value may appear modest. After all, developers can choose Area Median Income (AMI) bands of 130%. According to NYC’s HPD website, 130% AMI equals ~$140,000 / year income for a single person and allows 1-bedroom apartments to charge $3,800 monthly. On the other hand, putting units in rent stabilization for 35 years is a long time. Who knows what market rents could grow to in 35+ years? Though paying $3,800 for 1-bedroom apartments may seem expensive, over 2,000 1-bedroom apartments with rents equal to or greater than $8,000 / month, or double the allowed AMI cap for Option C 421-a AHNY, have been rented through Street Easy through today. In other words, the AMI cap works to limit gross rental income for some projects.
So, which kinds of buildings will hold more value?
I looked at North-East Brooklyn sales in the past five years to answer the question. I picked Northeast Brooklyn because it is a hotbed for new development. Besides knowing the market well, I chose the area because it is eligible to take advantage of the profitable Option C 130% AMI AHNY program. That program is not eligible anywhere in Manhattan south of 96th Street. While that leaves many areas to develop, Northeast Brooklyn is a good area because of the many properties built there using 421-a in the last ten years as a proportion of overall development activity in NYC. Also important to note, I excluded a few $100m+ sales that I think are less accessible, and more rarified opportunities to buy 421-a multifamily. With the exclusion of theses (1 Eagle Street, 248 N 8th St, 247 N 7th St) and a few others, we get the below data set of properties for review.
The sales data suggests that it is accretive to buy buildings without abatements altogether.
The data shows that the median property with no tax abatements sold for 36% more per unit than the one with an abatement. No-abatement-properties sold for 10% more than those with 15 yr abatements. On a price-per-foot basis, the non-abatement properties sold for a 43% premium per foot than those with tax breaks.
Williamsburg also displays this trend. In Williamsburg, non-abated units sold for double those with abatements. Further, buyers paid more than double the price per square foot for non-abatement buildings than for 35-year abatement properties. Investors were also willing to pay more for non-abated properties than 15-year abatement properties.
The data told a different story in Bushwick, where the median number of units across property types (35 Yr Abatement, 15 Yr Abatement, No abatement) was lower. Buildings with tax abatements sold for more than properties without abatements on a per-unit basis. The reverse was true when looking at price per foot. Investors paid more per square foot for buildings with no tax abatements than those with 421-a programs. The premiums investors paid for each unit in buildings with abatements is surprising because smaller properties contain certain property tax protections independent of tax abatements. Because of how the tax code is structured, smaller buildings (10 units or less) have caps on yearly property tax increases. In other words, smaller properties should benefit more when skipping the abatements and paying higher taxes in exchange for uncapped rents. It’s the reverse with larger multifamily projects because they do not have the baked-in tax increase protections that smaller properties do and must manage their taxes closely.
In perspective, the median sales price per unit for multifamily in Bushwick in the last five years is closer to $237.5K.
All new construction units sell for double that Price Per Unit or even three times that Price Per Unit when looking at properties with no tax abatements. There is a demonstrated value in buying these new construction properties, and you shouldn’t wait for the entire market to catch on before jumping in.
Reach out if you would like to get the full comps list and a more thorough explanation.
I am bullish on NYC Multifamily.
Call me at 212 658 1471
Best Regards,
Romain
Sources: Property Shark Sales Data