Last week, Brookfield Properties sued the city over a denied application for 421a – the exemption that removes decades of property taxes on new residential buildings that qualify.
At first glance, the case looks like an attempt by New York’s most active developer to keep a monstrous property tax bill from landing on your doorstep.
However, a closer look reveals discrepancies between the city and the developers’ interpretation of the Affordable New York tax break. The separation could have legal ramifications for property owners who operated under the emissions reduction program, only to then be rolled back to the predecessor 421a.
The backstory is a doozy, but the action is simple.
Brookfield’s request for Affordable New York for the Eugene, briefly the city’s tallest residential tower, was denied by the city’s Department of Housing Preservation and Development for a reason not named in the lawsuit. Brookfield, represented by Rosenberg & Estis, filed a petition calling the decision “arbitrary and capricious and without a rational basis”.
But why did Brookfield need an affordable New York in the first place? Property records show the Eugene at 435 West 31st Street has been receiving 421a since at least 2018, a year after the rental began.
In New York City, 421a is the lifeblood of large residential projects. As a rule, builders apply before construction begins.
“A lot of people wouldn’t do the project if they didn’t know they were
Tax benefit, ”said Michelle Maratto Itkowitz, founder of real estate law firm Itkowitz PLLC.
Brookfield filed a second time, an indication that its tax break had been revoked.
The 421a program expired in late 2015 and was replaced by Affordable New York in 2017. The new program offered greater incentives, specifically a 35-year reduction in property tax instead of 10-25 years, but also required greater affordability. The old 421a required that 20 percent of the units should be affordable; the new version usually requires 30 percent.
A curiosity of 421a is that the developer can set the initial rents for standard market units, but as with rental stabilized units – the Rental Policy Committee – determines increases until the tax break expires.
But apartments in the new program can be deregulated if their rent exceeds a threshold – $ 2,816.38 per month in 2021. It’s a return to the luxury release regulation in the old tenancy law.
To prevent developers from switching back and forth between the two tax breaks, the city restricted applications for the new one to projects that hadn’t received the old one. But a building that hadn’t received 421a before Affordable New York went into effect could opt for the new program.
For the Eugene, that timing is in question.
Brookfield began construction in 2014, according to Open Data NY. Tax documents show that Eugene received 421a benefits as early as fiscal 2016-2017, which should have excluded him from application under the new law.
However, 421a applications require two submissions – preliminary and final. It’s possible Brookfield made a preliminary motion before the law was changed, and then made a final motion under Affordable New York. Herrick, Feinstein partner Brett Gottlieb, who is not involved in the case but investigated it at The Real Deal’s request, said the 2015-2016 benefits could have been applied retrospectively.
If so, Eugene would be eligible for the new 421a program, as Brookfield’s lawsuit alleges.
Even stranger, data from the state’s home and community renewal department and property tax records show that the city had already granted the new 421a to 435 West 31st Street, either inadvertently or in accordance with that interpretation of the law.
State agency shows the Brookfield building will get the old 421a in 2019, but the latest 2020 registration shows it will get affordable New York.
In a real estate tax law 2018-2019, the included 421a discount is referred to as “20 years”, which was the upper limit below the old 421a. From 2019 to 2021 the descriptor “20 years” will be omitted. It is on this year’s tax assessment again.
“So I know it has been revoked,” Gottlieb said, noting that the name change shows that the benefits of old 421a have returned to Affordable New York.
“Someone in HPD probably has that [new] benefit, ”said Gottlieb. “And then at some point they made up for it, most likely through some kind of audit.”
Gottlieb believes Brookfield may be eligible for the new 421a as long as the Eugene hasn’t received benefits prior to April 2017.
“It sounds to me that the mess isn’t theirs [new] Advantage, it actually took it away, ”said Gottlieb. “I believe HPD acted inappropriately by withdrawing benefits.”
Spokespersons for HPD, Brookfield and the attorney representing Brookfield declined to comment.
If Brookfield loses the case, the Eugene will likely revert to the old 421a. The annual cut would be the same, around $ 19 million, but would expire sooner.
A bigger threat to Brookfield is affordable housing regulations.
If the Eugene deregulated any units and then increased the rent – legally under Affordable New York – Brookfield could consider a rental increase lawsuit if the case is lost.
“I think that is the immediate and greater concern of the landlord at the moment – triple damage in the context of a (possible) rent increase lawsuit,” said Gottlieb, referring to a provision in the new rental law.
Itkowitz said something similar happened to a prospect in another Hudson Yards building. The tenant had been deregulated, but when Itkowitz leafed through Acris’s records, she found the building was registered for the old 421a. There had been a mix-up along the way.
“People were a little confused for a while – is it old, for example? Is it new – because it was so close, ”said Itkowitz. “Nothing put the answer on a silver platter.”
Contact Suzannah Cavanaugh