On April 20, 2024, the New York State Legislature enacted the long-awaited $237 billion budget for Fiscal Year 2025 (the FY 2025 Budget). Housing reform is the centerpiece of the FY 2025 Budget, given the bipartisan nature of the on-going housing affordability and vacancy crisis—especially in New York City. Last year’s FY 2024 Budget notably lacked affordable housing commitments and failed to replace the Real Property Tax Law § 421-a tax incentive for affordable housing development. The expiration of the 421-a program in 2022 without an immediate replacement had jeopardized the viability of housing projects throughout the State. A new Real Property Tax Law § 485-x, which modifies and replaces the previous 421-a incentive program, was enacted as part of the FY 2025 Budget, among several other noteworthy environmental and/or energy policy developments.

421-a: Affordable New York

Real Property Tax Law § 421-a was originally enacted in 1971 and has gone through several iterations since then. The most recent version of the 421-a program, the “Affordable New York Housing Program,” provided a partial real estate tax exemption for eligible new construction and served as a critical financial incentive to motivate the development of new affordable housing units within mixed-income development projects. For example, a majority (68%) of residential units constructed in New York City between 2010 and 2020 were built using the 421-a tax incentive. While the specifics varied by project location and size, the most common form of compliance with the former 421-a program was to reserve a third of a building’s residential units as affordable, meaning that rent could not exceed 30% of a household’s income, for households earning 130% of the area median income (AMI) for the neighborhood. Qualifying affordable housing projects were then generally entitled to a 25-to-35-year post-construction tax exemption from all real estate taxes except for local assessments and from the tax on the assessed value prior to commencing construction of the new building, plus an additional three-year tax exemption during the construction period.

Facing criticism that the 421-a program was both unnecessarily expensive and less effective than it could be in spurring affordable housing development, the State Legislature failed to renew it as part of the budgets for Fiscal Years 2023 and 2024. This legislative inaction left many development projects without a clear path to completion, because projects that had commenced construction during the eligibility period for the 421-a tax incentive were required to finish construction by June 2026 without further extension, and many were projecting their inability to meet that 2026 completion deadline.

485-x: Affordable Neighborhoods for New York

The FY 2025 Budget creates a replacement incentive program under Real Property Tax Law § 485-x, also called the Affordable Neighborhoods for New Yorkers Program. The 485-x program covers rental projects of 150 units or more located in one of two zones that encompass several discrete, tabulated areas in Brooklyn and Queens, or in any part of Manhattan south of 96th Street. The program offers an expanded real estate tax exemption period of 40 years (compared to only 35 years under the former 421-a program), in addition to the construction period exemption.

The new 485-x program also eliminates the top-tier affordability option based on 130% AMI, which had been accepted under 421-a. Instead, the 485-x program adopts a tiered approach that takes the weighted average of no more than three income bands based on percentages of the AMI, with no individual income band to exceed 100% of the AMI. The weighted average affordability requirement is set at either 60% or 80% of the AMI, depending on the number of rental units in the building. Buildings are required to maintain between 20-25% of affordable units depending on size and location of the buildings, though small projects (6-10 units) located outside Manhattan on lots smaller than 12,500 square feet have a less stringent option of either setting aside 20% of units as affordable or 50% units as rent stabilized. Notably, the affordability requirements under 485-x are permanent and will not be sunset like under 421-a.

The FY 2025 Budget also extends the project completion deadline for vested projects that were benefitting from the 421-a(16) exemption. Developers with vested projects that commenced after December 31, 2015 and on or before June 15, 2022 can now either apply for the new 485-x tax incentive or continue under the 421-a program, which had its completion deadline extended by five years to June 2031. Table 1 provides a comparison of the various 421-a(16) options and the new parameters under 485-x.

Answering in part to the labor lobby, 485-x also sets a minimum hourly wage for construction workers that varies by location and project size, as summarized below:

Table 2
Project Size	Geographical Restrictions	Minimum Hourly Rate (+2.5% annual)
100-149 units	N/A	$40.00/hour
150+ units	Zone A	Lesser of $72.45/hour, or 65% of the greatest prevailing rate of wages and supplements
150+ units	Zone B	Lesser of $63.00/hour, or 60% of the greatest prevailing rate of wages

In addition, eligible projects must make all reasonable efforts to spend at least 25% of their total costs on contracts with minority and women-owned businesses (MWBE).

Affordable Housing from Commercial Conversion Tax Incentive Program 467-m

In addition to 485-x, the FY 2025 Budget also adds Real Property Tax Law § 467-m, the Affordable Housing from Commercial Conversion Tax Incentive Program, to spur the conversion of existing buildings from commercial to residential uses. For conversion projects that reserve at least 25% of the planned residential units as affordable based on up to 80% AMI and at least 5% of residential units as affordable based on 40% AMI, with the weighted average for all income bands not exceeding 80% AMI and no single income band exceeding 100% AMI, the owners can expect to receive a 25-to-35-year tax exemption, in addition to the 100% real property tax exemption for up to three years during the construction period. But if a converted residential building includes commercial uses with an aggregate floor area exceeding 12% of the total floor area of that building, then the 467-m tax benefits would be reduced by a percentage equal to that excess commercial floor area percentage.

Environmental Initiatives & Funding

Aside from the new housing programs, the FY 2025 Budget also approves funding for a variety of environmental programs. The Budget allocates $500 million for the Clean Water Infrastructure Act for communities to upgrade aging water infrastructure; allocates $400 million for the Environmental Protection Fund, which is a source of funding for capital projects that protect the environment including purchasing land for the New York State Forest Preserve and restoration efforts throughout the State; and authorized the Renewable Action Through Project Interconnection and Deployment (RAPID) Act to facilitate the permitting of major renewable energy generation and electric transmission facilities by the Office of Renewable Energy Siting and Electric Transmission (ORES), which was also transferred from the Department of State to the Department of Public Service.

The FY 2025 Budget notably does not include two proposed programs: (1) the NY HEAT Act, which would have eliminated the State-subsidized “obligation to serve” requiring natural gas utility providers to install new natural gas connections within 100 feet of a pre-existing hookup upon customer request; and (2) the Climate Change Superfund Act, which would have required companies that have contributed to greenhouse gas emissions in the State to pay into a fund that would be used for climate change adaptive infrastructure projects.

The FY 2025 Budget provides solutions to several regulatory dilemmas that were hanging in the balance for several years, and housing reform took center stage with the extension of 421-a and the creation of 485-x and 467-m. While the FY 2025 Budget was mostly focused on housing, it also demonstrated the State’s commitment to environmental stewardship through significant allocations to longstanding programs and the adoption of new programs that attempt to facilitate New York State’s climate obligations under the groundbreaking Climate Leadership and Community Protection Act.

Thank you Russell A. Kivler from Hirschen Singer & Epstein LLP for his valuable input.