10/12/08

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Discouraged by 421-a changes, developers sell sites

Development site in the Lower East Side that is now back on the market.

While many developers have been racing to get started on projects before changes in the 421-a tax abatement take effect, another group has thrown in the towel, tripped up by the deadline and the faltering economy. As a result, dozens of development sites with approved plans for condominiums are on the market all over the city.

While some developers have always specialized in selling ready-to-build projects, and others float their projects on the market while working on them in case they can score a quick return, brokers agree that today, the number of such sites for sale is abnormally high.

Many in the industry said a slowdown in sales, a glut in condo inventory and tightened lending practices for both developers and would-be buyers make now an unattractive time to build, especially in fringe neighborhoods.

"I have 50 deals on my shelf right now with developers looking to sell their developments, whereas I might usually have eight," said Dan Clarke, founder of Central City Brokerage, a Manhattan-based firm. Four of those deals are in Long Island City, he noted, three in Williamsburg and 10 in or near Harlem.

Compounding the situation, developers and brokers said, is the new 421-a tax abatement law that takes effect June 30. If foundations for multi-unit buildings aren't started by then, developers will have to meet far stricter guidelines to receive 10 to 15 years of tax abatement.

The 421-a deadline for buildings with fewer than four units took effect in November.

"In Brooklyn, you did find that there were a lot of speculators during the good times," said Central City broker Andrew Parker. "Now a lot of them are distressed and looking to exit." Unfortunately, he said, these sellers need a deep-pocketed developer with a ready-to-go team, and many of those people already have their hands full.

Ira Krivit, a Massey Knakal broker marketing two properties with approved plans in Prospect Heights, agreed, although he said his area is still very viable. "Too often, sellers are too aggressive in terms of the reality of the marketplace, so there are a lot of things for sale that won't make it in time for the cut-off date." His firm is also marketing four approved projects near the Flatbush neighborhood of Brooklyn and four on the Lower East Side.

Developer Marshall Sohne, president of Columbia Street Partners, noted that buyers are becoming increasingly aware that the city's real estate market isn't immune to national trends. "There are high-rises in Miami right now that are black. People see all that, and they get scared."

Sohne has several projects underway around the city. He put his 211 Columbia Street property — a parcel with approved plans for an 11-story apartment building — on the market but didn't find a buyer. He said he's considering building townhouses there instead because they're taxed differently, and can be done a few at a time.

Overall, recent Department of Building statistics indicate there has been a major slowdown in residential construction: The number of new residential building permits issued citywide took a nosedive last quarter, to only 581 permits. In contrast, the department had issued between 842 and 1,845 new residential building permits every quarter since 2002, the earliest figures provided.

In Manhattan, new residential building permits for the first quarter of 2008 were down to just 20, a 33 percent drop compared to the first quarter of last year. In the Bronx, new permits were down 64 percent to 79 permits; in Brooklyn, down 50 percent to 147 permits; in Queens, down 39 percent to 236 permits; and in Staten Island, down 21 percent to 125 permits.

Under the new 421-a law, affordable units must remain so for 40 years, up from the previous 20 years, and they can no longer be built off-site from the building to which they are connected. In addition, the "exclusion area" is vastly extended beyond central Manhattan, the only place where developers have traditionally been required to make 20 percent of their building affordable to those earning less than 60 percent of the area median in order to receive the tax exemption.

Arguing that the incentive had become a "giveaway of hundreds of millions of dollars," the Pratt Center for Community Development lobbied to have the boundaries extended to cover all of Manhattan and portions of the outer boroughs. And indeed, the new and wide exclusion area was drawn up during the peak of the boom years, when fringe neighborhoods were being priced as if they were among the city's hot neighborhoods. Gentrification seemed inevitable just about anywhere.

Now, however, with the sobering reality of a down market setting in, many of those fringe-but-gentrifying areas aren't looking like they can bring in luxury prices anymore. Developers have said they are essentially deprived of a financial incentive to build because of the stricter restrictions placed on them by the new 421-a law and are reluctant to move forward.

Justin Stern, a managing member of Manatus Development Group, which specializes in affordable housing throughout the city, said the high-end areas of Manhattan wouldn't be affected by the 421-a expansion, where the tax exemptions were just a "cherry on top." But buyers and renters in areas like Long Island City, Crown Heights and Harlem, he argued, can't take on that extra cost.

Stern, like a handful of other developers, runs a brisk side business expediting the 421-a process for other developers looking to make the deadline. Stern said that many developers, especially the more inexperienced ones, don't have the skill and contacts to navigate the approval process fast enough to make the deadline.

And with only a few banks lending, he noted, financial institutions can be choosier about which projects are financed.

"The main issue is, the rental models don't work," said Stern. "Any time you build a condominium, the bank needs to see a rental backup [plan]. Rental models especially do not work without the tax exemption."

For his part, Brad Lander, director of the Pratt Center for Community Development, disagreed about the effect of the new 421-a. "This is an utterly disingenuous argument that developers make because they like to cry about the need for public subsidy," he said.

"People have overpaid for land; they imagined that the cycle would continue longer than it has, and priced [their apartments] at unrealistic prices. The very fact that they're selling at the very time they could be building and getting 421-a benefits puts a lie to their argument," he said.

Mark Fischler of Fischler Properties just sold a vacant lot on East 2nd Street and Avenue B with approved plans for a six-story, three-family residence. Fischler said after a bidding war, a developer paid over the $3.6 million asking price and plans to add more apartments to qualify for tax benefits.

Fischler said that while smaller buildings have traditionally been undervalued, the city recently started assessing all properties at full-market value. Now, he said, what would recently have been $10,000 in annual taxes has turned to $60,000, and without a tax abatement, such a project would no longer be worthwhile.

He also said he's in contract on a bigger Lower East Side development site with 421-a benefits already in place.

While Fischler said properties in the Lower East Side and East Village are selling easily, often after bidding wars, the market has caused him to avoid other areas where he's previously invested heavily, like the Bronx. "Those fringe areas are scary. I feel there's a big correction due, and if you buy in a great area, then it stays great, but in these other areas ... people are in for rude awakenings."

If ready-to-go properties don't sell, and developers are unable to get the financing they need to finish construction, what effect does this have on communities? Opinions differ.

"If those sites lay vacant … it's not what neighborhoods want. The trick is, neither is out-of-scale luxury development with no neighborhood amenities," said Lander. "There's no doubt that there are some places where if you get a couple of those sites on one block and a few foreclosures, you definitely could see blocks sliding back into hard times."

Stern had a much more dire assessment of the impact if the exclusion area isn't reduced when the law is reviewed this December. "Certain areas should have been left out because it's not justified. Because it will kill, will stop what would have worked as condo projects," he said. "It leaves blight, it leaves vacant lots, it leaves underutilized property."

Clarke of Central City Brokerage added, "It might take a couple years for the market to digest the problems that now exist."

He continued, "None of them are earth-shattering. I think anybody developing anything here, with a little patience, will be rewarded."