Transforming Spaces: Analyzing 467-m and Its Impact on Office-to-Residential Conversions in New York

Written by: Charlie Beaudoin

Context

New York City is currently experiencing its worst affordability crisis in the past two decades. Half of the city’s households are currently rent burdened, indicating that many individuals and families cannot comfortably afford housing [9]. In an effort to combat this challenge, the Department of Housing Preservation and Development passed the 467-m Act, which will provide incentives to convert existing office space to residential [3]. This article will explore the durability of these incentives, the feasibility of commercial conversions, and the level to which this plan coincides with Mayor Adam’s “City of Yes” plan outlined in his 2023 proposal.

Affordable Housing Incentives

The 467-m Act, approved by State legislation in April, adopted the Affordable Housing From Commercial Conversions Tax Incentive Benefits (AHCC Program Benefits) to provide real property tax exemptions for commercial conversions [6]. For a building to be considered eligible, it must contain six or more units, has a construction commencement date before June 30th, 2031, and a construction completion date by December 31, 2039. [6]. With respect to affordability, 25% of the available units must be registered as affordable at a weighted average of 80% of the Area Median Income (AMI) or below. Given that the city’s goal is to grow the affordable supply quickly, the strongest benefits will go to developers who start construction by 2026 [5]. The breakdown of these tax exemptions in regard to construction is as follows:

2026 - 35 Year Tax Exemption

2028 - 30 Year Tax Exemption

2032 - 25 Year Tax Exemption

Feasibility of Commercial Conversions

Regarding the financial feasibility of these opportunities for developers and investors, it is important to examine the economic basis for these conversions. The full market value of New York City office buildings fell 16.6% by 2022 [3]. With the only current opportunistic market being class A, which still remains a risky proposition, developers may be more likely to consider class B and C conversion to residential by utilizing 467-m as opposed to converting to Class A.

As it stands, substantial office-to-residential conversions are currently underway. 160 Water Street (pictured below), otherwise known as the Pearl House, is the most prominent example thus far of an office-to-residential conversion in New York City. The project introduced 588 residential units, proving to be an expansive milestone for this market. This project utilized the “As-Of Right Conversion of Older Buildings” city mandate, making existing commercial buildings eligible for residential use [7]. As the city expands its legislation with 467-m, will this be the first of many redevelopments we see in the marketplace or just a unique opportunity in a time of drastic uncertainty?

Mayor Adam’s “City of Yes”

In the fall of 2023, Mayor Adam held a press conference outlining his plans for the “City of Yes for Housing Opportunity” [8]. This proposal outlined a timeline and strategy to incentivize conversions and affordable housing development. The City estimated that office-to-residential conversions could produce 20,000 homes for 40,000 New Yorkers in the next decade [8]. As the demand for housing continues to rise, 467-m is a key action taken by the State legislation as it coincides with the “City of Yes” plan that Mayor Adam described. There is hope that this will create sufficient motivation to facilitate the increase in supply the city hopes for.

Takeaways

The 467m Act is a step in the right direction to incentivize landlords and developers to create more supply of affordable housing in a time when the demand for office space is questionable. Landlords will invest in opportunities that will generate the best risk-adjusted returns. Therefore, more relaxed regulations and tax incentives could create more appealing opportunities for these groups. It will be exciting to see how 467-m impacts future investment and if it will create sufficient feasibility to generate the redevelopment it was designed to.

Sources:

[1] Brenzel, Kathryn. “City rolls out rules for 485x, office-to-resi tax breaks.” The Real Deal, 2024, https://therealdeal.com/new-york/2024/10/07/nyc-proposes-rules-for-485x-467m-property-tax-breaks/

[2] Brenzel, Kathryn. “Housing Deal Finally Passes; Here are the Details.” The Real Deal, 2024, https://therealdeal.com/new-york/2024/04/20/housing-deal-finally-passes-here-are-the-key-details/

[3] DiNapoli, Thomas. “DiNapoli: NYC Office Market Will Take Years to Recover From Pandemic.” Office of the New York State Comptroller, 2021, https://www.osc.ny.gov/press/releases/2021/10/dinapoli-nyc-office-market-will-take-years-recover-pandemic#:~:text=The%20full%20market%20value%20of%20New%20York%20City,decreased%20demand%20brought%20on%20by%20the%20COVID-19%20pandemic.

[4] Holliday Smith, Rachel. “A Tenant’s Guide to 421-a, the City’s Biggest Tax Break for Developers and Landlords.” The City, 2022, https://www.thecity.nyc/2022/02/11/a-tenants-guide-to-421-a-the-citys-biggest-tax-break-for-developers-and-landlords/

[5] “HPD Launches Comprehensive Tool For 467-m Initiative.” NYC HDC, 2024 https://www.nychdc.com/newsroom/hpd-launches-comprehensive-tool-467-m-initiative

[6] “467-m: Affordable Housing from Commercial Conversions.” NYC Housing Preservation and Development, 2024, https://www.nyc.gov/site/hpd/services-and-information/tax-incentives-467-m.page

[7] Jonas Roche, Daniel. “In the Seaport, Gensler’s Pearl House marks the largest ever office-to-residential conversion in New York history.” The Architect’s Newspaper, 2023, https://www.archpaper.com/2023/12/seaport-gensler-pearl-house-office-to-residential-conversion-new-york-history/

[8] “Mayor Adams, DCP Director Garodnick Unveil Proposal to Convert Vacant Offices to Housing Through City Action, Outline Next Step in "City of Yes" Plan.” NYC Office of the Mayor, 2023, Mayor Adams, DCP Director Garodnick Unveil Proposal to Convert Vacant Offices to Housing Through Cit | City of New York (nyc.gov)

[9] Shapiro, Eliza. “Half of N.Y.C. Households Can’t Afford to Live Here, Report Finds.” The New York Times, 2023, https://www.nytimes.com/2023/04/25/nyregion/affordable-housing-nyc.html

More about the Author: Charlie Beaudoin