Council looks at 421a changes.

The 421a program needs tweaking agree housing experts and builders. The program, which was designed to spur affordable housing by generating transferable real estate tax benefits for market and luxury rate housing, has a number of changes under study.

Affordable housing developers want market rate builders to buy certificates before they can pull a building permit, and they want a formula to set the price per certificate, which has decreased as more affordable units have been built.

On the market developer's side, there are two bills that Mayor Rudolph Giuliani has brought to the City Council. One would change what is known as an underutilization test for the planned luxury site from 20 percent to 50 percent of the assessed valuation, and the other proposal would permit the certificates to be used in 15 FAR districts, a provision that expired in October.

"The underutilization is the most important change, and is a significant improvement in the program," said Kenneth Lowen-stein, counsel to Weil Gotshal & Manges, who represents developers.

This change would broaden the number of sites available, explained Steven Spinola, president of the powerful Real Estate Board of New York (REBNY), whose members include builders of all kinds of housing.

Market builders feel they should be able to use the certificates to rehabilitate old manufacturing buildings, such as those in Tribeca and along some of the Brooklyn and Queens waterfront, for instance, where the buildings would not qualify for the J-51 program, also up for renewal.

"With J-51, you have a complete abatement and exemption, but there is a heavy bookkeeping and audit process, and the J-51 has a prohibition for buildings that get zoning variances, but the 421a doesn't," explained Jay G. Seiden a partner with Seiden & Schein, who represents builders on both sides seeking benefits.

"If you win the variance on a waterfront parcel, you can project out a very nice benefit, get the 421a and not have to rip down the building," Seiden said. "That reduces construction costs enormously."

Under the current 20 percent test, buildings currently on the site to be redeveloped with market housing have to be worth less than 20 percent of the value of the land.

"There are a lot of sites that don't meet it," said Seiden. "You don't find that 20 percent [low building to land value] anymore." And as sites like those in Chelsea are rezoned to provide redevelopment opportunities, the problem worsens.

There is also a floor area (FAR) test, which means the current building has to be smaller than the maximum commercial FAR, but less than 20 percent of what the residential FAR could be on the site. If that is also changed to 50 percent, Seiden continued, then sites where there are fairly big but obsolete buildings can come down, and the new buildings could qualify for the benefits.

So for instance, if there was a six-story building of 60,000 square feet, and the residential zoning on the qualifying date (which goes back three years prior to construction) allowed 120,000 square feet, under the proposal, the builder could use a 50 percent test to meet that requirement.

But under existing law, the zoning would have to allow construction of 300,000 square feet, which is five times 60,000 square feet. "So if it changes to a 50 percent test, then it opens more sites," said Seiden.

Any increase in the construction of market rate housing goes towards the development of more affordable housing.

Under the 421a 10-year exemption program, the city real estate taxes are never reduced below what was being generated at the site before the redevelopment, and even while diminished, the so-called mini-tax remains in place, and the rest of the building's assessed valuation can increase through the exemption period. That means the city never loses, and only encourages the creation of more value to each property.

Under another city program, known as the 80/20 program, the developer creates the affordable units on site, so that 20 percent of the building is set aside for those making less than a set percentage of the area median income.

Keep in mind that for the 421a program, the market builder would have to buy one certificate for each apartment, and could obtain up to a 20 percent zoning bonus for buying the certificates.

The affordable housing occupants have an income between 55 percent and 80 percent of the area's median income, which comes to approximately between $30,000 and $40,000, and pay an average rent of $475 a month.

"We sell certificates to market rate developers who get tax abatements in the exclusionary zone, and we build outside the zone to generate the certificates," said Ron Moelis, a partner with L&M Equities, which builds affordable housing.

The exclusionary zone is the area below 96th Street in Manhattan - a rule of the program that expires next July. All other sites in the city can generate affordable housing certificates.

The program for 421a started in 1988, and since then, according to Housing Preservation & Development (HPD) records, there have been 2,383 affordable housing starts, with 1,400 of those since 1997.

Last year, the city's housing boom created a record number of starts and completions under the program. The 3,150 market rate units generated 630 affordable units. In 1998, around the same number was constructed.

In the first year of the program, 1989, there were 339 affordable units created, and in 1990 there were 476 units. But by 1991, as the city felt the full depression, there were only 100 units built, and only 119 units the following year. After that, no affordable units were produced until 1997, when 81 units were produced. The following year, the market took off and 642 were produced.

The certificates are created on a five-for-one basis by the affordable housing developer, who obtains one per unit no matter what the size, so long as 50 percent of the units are two-bedrooms.

That, of course, has created another source of grumbling. Creating more one-bedrooms or even three-bedroom units costs more to construct. That means the program financially encourages the other 50 percent of the affordable units to become studios, which is not what HPD had hoped to see as a mix.

That problem can be addressed by tweaking the regulations, rather than a new law, sources said, and goes to the original intent of the financing of the affordable units.

Originally, the sales of the certificates were supposed to cover most of the cost of developing the affordable unit. But times have changed.

"People were paying in excess of $20,000 each for the certificates, years ago, and that has now dropped as low as $11,000," said Moelis.

Because the certificates were not covering the costs of construction, a fairly recent change was made to the 421a program so that debt could be carried on the affordable housing side, where the buildings could be rehabbed or constructed with less certificate money.

Still, "You have to sell a minimum of 50 percent in advance before you can secure adequate financing from a community-based lender," said Don Capoccia, a principal of BFC Partners.

And therein is a timing problem. The affordable builders say they have to sell to begin a project, and often are forced to take less money for the certificates, just to get going. The market rate builders, they say, take their time, shop around and don't have to make a commitment until their apartments are ready for occupancy.

Even if hundreds of units are on the drawing boards in Chelsea, for instance, those developers don't have to make a commitment for another two years or so, all while the affordable guys like Capoccia have hundreds of certificates on the market, waiting to begin a project.

"In my opinion, the program should be amended to require the market rate developers to purchase these certificates prior to the issuance a building permit by the City of New-York," said Capoccia. "They shouldn't be allowed to go forward before making the commitment. They are the linchpin of the affordable market."

The market rate developers worry that the affordable guy will get paid, and then not finish that project, stalling the transfer of the certificates. Those at HPD say that shouldn't be a worry, because no affordable housing developer has yet to go bankrupt or not finish a project.

Even so, the market rate builder needs someone dependable now, and that worry could also be eliminated by having the lenders hold the certificates in escrow, ensuring everyone gets their project and construction money.

Related Co., which has been a huge generator of both affordable and market rate housing, has its own inventory of several hundred certificates to sell, but doesn't have the financial pressures facing the smaller affordable developers, and can afford to take less money.

The difference of selling a 100 certificates for $11,000 versus $15,000 is $400,000. That's a significant amount of money for the affordable developer, but could mean merely one small apartment sold at a luxury condominium project.

As a percentage of their costs, the numbers are worse. The affordable developers say it costs them about $100,000 to $110,000 a unit to develop, generating five certificates, garnering between $50,000 and $70,000 a unit.

"That means more debt and equity has to be placed on die developments," said Moelis. "It's a production program, and the guy who builds his housing the cheapest can sell the certificates for less."

Moelis says the certificates may be worth $60,000 to $80,000 each, but that value "has no resemblance" to the value of the housing or the taxes the city is giving up. "The market rate guys are getting up to $80,000 on a net present value and are not paying for it," he said. "The city has an inefficient program, and they are giving up value."

Moelis suggests the city act as a clearinghouse to get a fair and reasonable value for the certificates. Others suggest creating a formula based on savings to the market rate developer.

According to the 1999 report "Reducing the cost of New Housing Construction in New York City," prepared by the NYU School of Law and Center for Real Estate and Urban Policy, it costs an average of $183,045 to create a mid-rise apartment and $342,261 to create a high-rise apartment, both the highest in the nation.

"The problem is that there is market competition for what the certificates are worth," agreed Spinola. "But in today's market, the certificates should not go down in value. The [real estate] taxes have gone up, and there's more of an exemption that can be had [by using the certificates.]"

There are also developers like Joshua Muss, who would like to see 421a market rate housing have better benefits when created in the outer-boroughs. "My guess is the definition of middle income housing, which I adjust daily, is $60,000 to $75,000 and up to $125,000. There is nothing available within that price range in the City of New York."

He would like to see deeper tax benefits for developers of about $3,000 or $4,000 a unit in the outer-boroughs, so they can charge half of what he estimates it would cost for market rate apartments. That would also encourage those making $125,000 to remain in the city.