New York's Tax Incentives Reshape Residential Development Landscape

Written by:

Steve Marcinuk

Date:

26 May 2025

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As housing affordability challenges persist nationwide, New York’s evolving approach offers valuable insights for real estate professionals across the country. Recent legislative changes have created a powerful combination of tax benefits and zoning bonuses that could transform the city’s residential landscape.

“Fifteen years ago, no new development in New York City happened without some sort of property tax incentive,” says Jason Hershkowitz, Partner at Belkin · Burden · Goldman, who has spent nearly two decades navigating the complex world of property tax incentives in New York City. Today, these incentives are fundamentally reshaping where and how affordable housing gets built throughout the city.

The Evolution of Incentives: From Market Rate to Affordable Housing

The landscape of property tax incentives in New York has changed dramatically during Hershkowitz’s career. “When I started, 421a didn’t require affordable housing at all,” he explains, referring to the long-standing tax exemption program that expired in 2022. “We had many fully market rate developments being built and getting the property tax incentive.”

Today, the picture is quite different. “The needs of the city have changed, the attitudes of the city have changed, and in many ways, rightfully so,” Hershkowitz acknowledges. “Now much of the focus is on providing affordable housing in order to get the property tax incentives.”

The successor to 421a, known as 485x, requires between 20-25% affordable units at either 60% or 80% of Area Median Income (AMI), depending on project size. “The affordability aspect of these programs is not an issue,” Hershkowitz notes. “Our clients are more than happy to work with the city and provide the requisite affordable housing.”

Construction Wages: The New Development Hurdle

While developers have adapted to affordability requirements, a newer challenge has emerged: minimum wage requirements for construction workers. Under the 485x program, these requirements apply once a project reaches 100 or more units.

“The biggest factor going into any decision right now are those minimum wages for construction workers,” Hershkowitz explains. “In most areas, we are seeing the vast majority of projects come in at 99 units or less in order to avoid wages.”

This creates an unintended consequence: “While it’s great to see projects going and being built, are we maximizing the available floor area? Are we maximizing the amount of affordable housing we could be producing if building a larger building wouldn’t come with those increased construction costs?”

Hershkowitz believes this issue warrants further discussion: “If we’re trying to incentivize development, this program actually could do better. We don’t want to wake up 10 years from now and wonder why there are only 99-unit buildings, and why didn’t we get more housing units out of this program.”

Citywide Zoning Bonuses: A Game-Changing Shift

Perhaps the most significant recent change is the expansion of zoning bonuses for affordable housing. Previously, these bonuses were limited to certain designated areas, either R10 districts or specifically mapped inclusionary housing zones.

“They recently amended the zoning resolution,” Hershkowitz explains. “Now it’s basically citywide. So whereas you were limited to these zoning bonuses in certain areas, basically every development is able to get the zoning bonus.”

This represents a fundamental shift in the city’s approach to affordable housing. “Previously, the focus was on certain areas, redeveloping areas, areas that might have been more industrial or more commercial. Now they’re saying, ‘Affordable housing belongs everywhere, so every development is eligible for it.'”

The combination of property tax incentives and zoning bonuses creates a powerful incentive package. “When you can get the zoning bonus and the property tax incentive, that combination is going to lead to more of these affordable housing projects,” Hershkowitz predicts.

The Rise of Office-to-Residential Conversions

While new construction faces challenges with construction wage requirements, another trend is gaining momentum: converting non-residential buildings to residential use.

“Right now, conversions are actually more popular than the new construction projects,” Hershkowitz reveals. “There are no construction wage requirements involved in the conversions.”

These aren’t small projects, either. “Most of the conversion projects we’re seeing are very large office buildings. We’re talking about 1,000 units, hundreds of units being created,” he explains. “It’s creating a lot of affordable housing as well.”

The conversion program offers a substantial tax exemption, but with a catch: “The amount of the benefit reduces after two years. So there’s a rush to get in and get started so that you can maximize the exemption benefit.”

Retail Space: The Overlooked Sector

Beyond residential development, Hershkowitz also works on commercial projects, where he sees an opportunity for policy adjustment. “The most recent iteration of the property tax incentive program for commercial spaces almost penalized retail space. It provided a smaller benefit for retail space.”

This approach may have made sense when the program was enacted around 2008, but times have changed. “In the world we live in today, with online shopping, retail is hurting,” Hershkowitz observes. “It makes sense to maybe revisit that at some point soon, and maybe it is worth incentivizing retail space, because I think that’s one area that could use it.”

Looking Ahead: Uncertainty and Opportunity

Several factors are creating uncertainty in the development landscape. Construction costs remain a concern, with potential tariffs adding another layer of complexity. “We’re talking about increased construction costs with respect to labor. I’m not sure how many of these projects can absorb further increases in construction work because of steel or supplies,” Hershkowitz notes.

Political changes may also be on the horizon. “In New York City, we have some elections coming up, so I think these are probably discussions that are more likely to happen then than right now,” he suggests, referring to potential adjustments to the construction wage requirements.

Despite these challenges, Hershkowitz remains optimistic about the future of development in New York City. “The zoning bonus and the tax incentive go so well together that they can really change the face of property development and residential housing in New York City.”

“It is an exciting future for development,” Hershkowitz concludes. “There are some details that need to be worked out, and that’s probably always the case, but we’re really excited, and we think that before too long, we’re going to see a lot of exciting development going up in all areas of New York City.”