Parking garages all over the city are closing to make way for residential condominium developments. This past Saturday, the Champion garage at 227 W. 58th St. between Seventh Avenue and Broadway closed its doors. This garage and the adjacent building at 229 W. 58th St., formerly a hotel, will be demolished by Extell Development to make way for the foundation for a residential condominium. The work will be executed prior to December 28 to allow those who purchase the condominiums to qualify for 421-a tax abatements on the real estate taxes for the residential units.

During the past few years, Extell has assembled a number of sites in the area, and it is proceeding in the demolition of several small office buildings to make way for more residential condominium towers. Directly across from Carnegie Hall, the company is demolishing an assemblage around 147 W. 57th St. A third site is one block north; the company will also build a condominium tower on the former home of the Hard Rock Café.

As debate rages in the state Legislature in Albany about a revised version of the popular tax abatement program, residential developers around the city are rushing to get their foundations in the ground before the current version of the program expires at the end of the year. Construction is now slated for more than 100 sites throughout the city for new residential condominiums. No matter what compromise is reached in Albany, developers agree that the new version of the program will not be as generous as the current one.

“The uncertainty of the 421-a legislation continues to drive construction and development, causing everyone to rush to get foundations in before the end of the year,” the senior partner in the real estate department of Stroock & Stroock & Lavan, Ross Moskowitz, said. “Although not the intended objective, the loss of 421-a benefits in its present form, especially outside of Manhattan, will result in less projects being built and a corresponding reduction in the number of affordable units being constructed.”

The 421-a tax incentive program was created in 1971 to spur housing development. Under the program, housing developers within designated areas are given tax incentives to develop housing. The program has helped fuel the construction of more than 110,000 apartments in New York City.

In 1985, the city decided to tweak the program, changing the rules to require developers to build affordable housing in order to qualify for the tax benefit. A number of developers have built affordable housing and sold the transferable 421-a tax certificates, or credits, to developers who build market-rate condominiums throughout the city, and these discounts are passed on to buyers, lowering the price of the units. Today, many of the residential condominiums being marketed in Manhattan, Queens, and Brooklyn offer buyers this abatement from the 421-a tax incentive.

Last December, the mayor signed legislation that contains major reforms to the 421-a tax incentive program, which will become effective December 28.

Many industry leaders, including the Real Estate Board of New York, believe the changes in the 421-a certificate program will have negative effects, including fewer new buildings and a significant reduction in the pricing of land for residential development sites.

“The changes in the 421-a certificate program will alter the development landscape in one way or another,” a principal at Eastern Consolidated, Alan Miller, said. “The period of ground-up building that we have been in the midst of for the past decade or so has spoiled everyone in the industry, as we all feel it will go on forever. As Warren Buffett once stated regarding the up cycles, ‘Historically, these things end painfully.'”

“Getting rid of the 421-a program as its exists currently will absolutely have an effect on land pricing in the downward direction. If developers can no longer pass along the significant tax savings to the consumer condominium buyer or rental housing projects, then these builders will no longer be able to pay as high a price for the land,” he added.

The president of Jackson Development Group, Neil Jeffrey Weissman, said: “With respect to the changes in the 421-a program, one of the biggest drawbacks is the reduction in affordable housing to be created. The elimination of the certificates, which allowed affordable housing to be built off-site, and most often in the outer boroughs, was a very cost-effective way of producing affordable units for real working families. The biggest problem of the loss of these programs is the potential inability of the low- to mid-income buyers being hit with an additional $400 to $500 a month tax increase, thus making it very difficult for the average couple to make their monthly payments. The ability to purchase condominiums or homes always comes down to one basic factor — how much are the monthly carrying costs, and are they affordable?”

A principal at Muss Development, Jason Muss, said: “Our 865-unit Oceana project in Brighton Beach would never have gotten built without 421 tax abatement, so to say that the program has cost the city hundred of millions of dollars gets it exactly backwards. The city at the end of the day will collect almost $10 million a year in property taxes from our project alone, not to mention the revitalization, jobs, and housing that the city has benefited from there and so desperately need elsewhere to accommodate 1 million newcomers.”

“The reformations of the 421-a program will likely impact the industry in several ways,” the COO of Citi Habitats, Gary Malin, said. “Developers may not pursue 421-a if there is significant financial downside to moving the required 20% affordable housing on site coupled with the reduced tax benefits. Developers may be forced to lower unit prices as a result of the lost tax benefit to prospective buyers, which may, in turn, reduce land values.”

Investment sales brokers are now busy marketing a number of sites that might allow a developer to access the 421-a benefit and begin construction before the end of the year. Massey Knakal Realty Services has been retained for the sale of a development project in the Flatiron section of Manhattan. The midblock site at 39-41 W. 23rd St. between Fifth and Sixth avenues is currently occupied by a parking lot. On the site, a developer can build a 21-story, 90,677-square-foot mixed-use residential building with ground floor retail. According to real estate sources, the property could fetch close to $400 a developable square foot.

In a few weeks, the sale of a development site will close on Second Avenue and East 85th Street. With demolition permits obtained and complete possession of the site, the purchaser of this 105,000-square-foot, 21-story residential condominium at 305 E. 85th St. must work to get permits and foundations in place to make use of the 421-a certificates that are available for the site. Industry leaders said they expect that the development site sold for about $425 a developable square foot.

This past weekend, I had the opportunity to visit many of the sites that are in various stages of demolition and construction, all hoping to qualify for 421-a tax abatement. A number of these sites are on the East Side, including the former home of Metropolitan Café and the adjacent Columbus Bakery, on First Avenue between 52nd and 53rd streets. On Second Avenue between 49th and 52nd streets, demolition is scheduled for at least four new condominium developments. Condominiums are planned for sites on 51st Street between First and Second avenues, 50th and 52nd streets and Second Avenue, 249–253 E. 50th St., and on the corner of East 49th Street and Second Avenue. Other sites I viewed were one block from the NYU Medical Center at Second Avenue and 33rd Street, and 13th Street between Second and Third avenues.

Not everyone is predicting a doomsday scenario. “The effects of the 421-a change has not affected the land prices in Manhattan to date,” the president of the City Investment Fund, Thomas Lydon, said. “Perhaps the development community feels the state Legislature will not approve it in a timely basis or that a phasing-in or changes in the law will be negotiated before the end of the year.

“In any case, if it does pass its current form, I expect land prices in most of Manhattan to be only negatively affected in the short term. With the current sales market showing great strength in the first quarter of 2007, developers will pro forma future sales to offset the tax increase. However, in some of the areas of Brooklyn and Long Island City affected by the change, the same pricing power does not exist, and I would expect land prices to fall off 10 to 15%,” he said.

A principal at the Hudson Cos., David Kramer, said: “We’re taking a wait and see approach on any potential transactions inside the extended exclusion area — if we’re not able to start construction by the end of the year — until we see what happens with the state Legislature. If the current proposal is enacted without any change to the assessment methodology for new condominiums, I expect you will see a large spread between the bids and ask for new land deals.”

The president of the Phipps Houses Group, one of the nation’s largest not-for-profit developers, owner, and manager of affordable housing, Adam Weinstein, said, “The main drawback of the 421-a program is that it came at the price of tax inefficiency. The 421-a certificate program has never been the best bang for the taxpayer’s buck, from the government’s perspective. To wit, a dollar of foregone municipal tax revenue translated into 20 to 30 cents of affordable housing equity. From the government’s perspective, that’s a high price for the efficiency of delivery of affordable housing.”

Another prominent real estate leader who prefers to not be identified said, “As to the reductions in prices for condos, I’ve never met a market rate developer who wasn’t all of a sudden going broke because of any adverse change in the law.”

I concur with Mr. Miller, who said that “with the rush and crush that is forthcoming in order to make the 421-a certificate useful, it will indeed make for interesting times over the next eight months as people scramble to erect these buildings on time.”

Mr. Stoler, a contributing editor to The New York Sun, is a television broadcaster and senior principal at a real estate investment fund. He can be reached at mstoler@newyorkrealestatetv.com.