Developers Rely on 421a to Finance Rental Construction

finance rental construction

Ever since the city revived the 421a program, many criticized the program for creating burdens on tax revenue. However, many others believe it is important for the current real estate industry. Developers state that in order to finance rental construction, help from the 421a program is necessary, due to high property taxes and land acquisition costs.

The Real Deal NY took a look at three financial breakdowns for developments in Brooklyn and Queens. The initial cap rate, a basic measure of return based on expected revenue and expenditures, was used to show how the new 421a program helps developers finance rental construction projects. The projected cap rate for a 130-unit project in Ridgewood is 3.5 percent without the abatement. With the new 421a tax abatement, developers estimate an initial cap rate that ranges between 3.6 to 5.3 percent. Fewer developers are willing to take the time and risk for limited profits on projects without tax benefits.

However, there are two factors the financial breakdowns do not take into consideration. First, the purchase cost of land may increase under the influence of tax abatement. Second, the breakdown does not consider the long term tax savings over the 35-year exemption period.

Hopefully, the Affordable New York program will encourage more rental constructions while offering more affordable units to the city.