If you work in the New York City construction industry, you have probably heard about the “421-a” tax benefit program for real estate developers. However, what most people don’t know is that the policy now includes prevailing wage standards for construction contractors. Even though you might never be the one applying for 421-a tax benefits, construction contractors need to know whether the prevailing wage standard applies to them, and if so, how to comply with the rules.
Developers may claim tax exemptions for properties in New York City used for new construction of residential housing with at least some portion of the units reserved for below-market rate housing for eligible middle-to-low income households (“Affordable Housing”). This tax policy was based on Section 421-a of the Real Property Tax Law.
Section 421-a was enacted in 1971 to subsidize the New York construction industry during a period when the city’s population was declining by 85,000 people a year and residential construction was at an all-time low. Over the years, the legislature added Affordable Housing requirements for the 421-a tax benefits. “The Old 421-a” expired in January 2016, and the New York legislature codified a revised version of Real Property Tax Law § 421-which the administration calls the “Affordable New York Housing Program”, or unofficially, “The New 421-a”.
According to the New 421-a, the New York City Department of Finance (“DOF”) grants tax exemptions to developers. Developers can generally apply for a “20 Year Benefit” or a “35 Year Benefit” of property tax exemptions, depending on a number of factors including what percentage of their units are rented at below market rate, how many percentage points rents for those units are below market rate, etc.
If a project both (1) contains 300 or more units; and (2) is located in the “Enhanced Affordability Area”, the project can be an “Enhanced New Eligible Site” and the developer can apply to DOF for an “Enhanced 35 Year Benefit” – which is a very desirable exemption. If a developer receives an “Enhanced 35 Year Benefit”, then the developer can receive a 100% property tax exemption for the construction period plus an additional 35 years.
In Manhattan, the Enhanced Affordability Area includes all residential construction south of 96th Street. In Brooklyn and Queens, the Enhanced Affordability Area generally includes neighborhoods within one mile of the East River waterfront: Brooklyn Heights, Downtown Brooklyn, Vinegar Hill, Dumbo, Navy Yard, Boerum Hill, Williamsburg, Greenpoint, Long Island City, and Astoria.
If the construction is for a building with 300 or more units in the designated “Enhanced Affordability Area”, then the contractors must comply with the “Prevailing Wage”1 standards. In its first year of implementation after enactment in 2015, the Prevailing Wage for the Manhattan Enhanced Affordability Area was an average of $60 an hour, and the Prevailing Wage for the Brooklyn and Queens Enhanced Affordability Area was an average of $45 per hour. However, the Prevailing Wage is set to gradually increase in increments of 5% as of April 2020, and every three years thereafter.
The New 421-a also establishes a few exceptions to the Prevailing Wage for otherwise covered tax exemption applicants. The Prevailing Wage does not apply to (1) projects subject to a project labor agreement; (2) condominiums and cooperatives; (3) multiple family housing where at least 50% of the dwelling units are affordable housing restricted to residents with no more than 125% of Area Median Income.
Even if a given project is not bound by the Prevailing Wage because it is not in the Enhanced Affordability Area, but it has 300 or more units, a developer could still elect to comply with the 421-a Prevailing Wage in order to receive New 421-a benefits.
Compliance with the New 421-a Prevailing Wage Mandate
In order to receive tax exemptions under the New 421-a, developers must hire an “Independent Monitor” (a licensed accountant) to submit a “Project-Wide Certified Payroll Report” to the Comptroller within one year of the completion date of the construction project, to certify that construction workers were paid appropriately, and that construction workers were paid the Prevailing Wage where it applies. If the developer was required to pay construction workers the Prevailing Wage but failed to do so, the Project-Wide Certified Payroll Report must state the aggregate amount of the deficiency. If the Project-Wide Certified Payroll Report is not submitted to the Comptroller on time, the developer will be subject to a fine of $1,000 per week, with a maximum fine of $75,000.
In addition to the payroll report obligations of the developer, each contractor and subcontractor to a developer receiving New 421-a tax benefits must submit a “Contractor Certified Payroll Report” to the Independent Monitor no less than 90 days after the completion of their own work.2 If the contractor or subcontractor does not submit the Contractor Certified Payroll Report within 90 days, the Comptroller can fine the contractor or subcontractor $1,000 per week, with a maximum fine of $75,000.
Though a contractor may not have paid its construction workers the full Prevailing Wage, the statute contains mechanisms for contractors and developers to rectify the deficiency without having to incur any fines. If the construction workers were still paid an average hourly wage within 15% of the Prevailing Wage, the developer must pay to the “Fund Administrator” the difference between the Prevailing Wage and the wage actually paid to the construction workers (the “Deficiency Payment”). The Deficiency Payment must be made within 120 days from the developer’s submission of the Project-Wide Certified Payroll Report to the Independent Monitor. The Comptroller will then distribute the deficiency payment to the construction workers.
However, if the construction workers were paid an average hourly wage more than 15% below the Prevailing Wage, the developer will not only have to rectify the deficiency, but will also be subject to fines and civil penalties. In such cases, the developer will be subject to a fine of $1,000 per week, with a maximum fine of $75,000, until the deficiency is cured. The developer must pay the Deficiency Payment within 120 days from the date of the submission of the Project-Wide Certified Payroll Report to the Independent Monitor. The Comptroller can then distribute the deficiency payment to the construction workers and impose a civil penalty on the developer equal to 25% of the amount of the deficiency (unless the building was “the subject of a job action which results in a work delay”).
If construction workers were paid less than the Prevailing Wage, the developer applicant for the New 421-a tax benefits is generally obligated to pay for deficiencies in the payments to the workers, fines, and penalties. However, there is an exception in the case that the developer was the victim of the contractor’s (1) “fraud, mistake or negligence”; (2) “fraudulent or inaccurate contractor certified payroll reports”; or (3) “fraudulent or inaccurate project-wide certified payroll reports”. In such case, the developer can still be eligible for the New 421-a tax benefits so long as (1) the contractor or subcontractor must still cure the underpayment of the construction workers, and (2) the Comptroller determines “that the underpayment was the result of, or caused by, contractor fraud, mistake, negligence and/or for fraudulent or inaccurate contractor certified payroll reports and/or project-wide certified payroll reports.”
If you are a contractor or a subcontractor on a residential building project in the five boroughs, you need to know whether the Prevailing Wage Mandate applies to you. A smart owner would put this explicitly in the contract documents, but you cannot rely on the owner to inform you of your legal obligations. You should consult with an attorney to determine whether the Prevailing Wage Mandate applies to you on any new project.
Even though it is the owner/developer who applies for the tax exemptions, some of the obligations under the New 421-a law apply directly on the contractor or subcontractor. If the law applies, you may need to submit a Contractor Certified Payroll Report to the Independent Monitor within 90 days of completion of the project.
1 Note that in the context of this legal alert, the Prevailing Wage Mandate only refers to the wage standards set by the “New 421-a” – and does not refer to prevailing wages as defined by the New York Department of Labor.
2 Note that the Contractor Certified Payroll Report submitted by the contractor and the Project-Wide Certified Payroll Report submitted by the developer are two very different things; the latter is not just a summary of the former.