The Rise of 99-Unit Buildings: A Tax Abatement Strategy

By Robert Khodadadian*

When the state introduced the 485-x tax abatement program, the reaction from New York City developers was swift and unsurprising. The program offers tax relief for rental projects that include affordable housing. However, there’s a critical catch: buildings with 100 or more residential units must pay prevailing wages. This requirement significantly raises labor costs.

The result? Developers quickly pivoted to a formula that avoids the threshold. Enter the era of the 99-unit building.

Why Developers Are Transitioning to 99-Unit Buildings

Suddenly, developments that might logically consist of 300 or 400 units are being carved into clusters of 99-unit properties—sometimes even sitting side-by-side, virtually identical. It’s become something of a punchline in the real estate press. However, while this workaround may be effective short-term, it’s far from efficient or sustainable. There’s a better way forward, and it lies in the smart use of tax lot structuring.

Understanding the Core Motivation Behind the 485-x Workaround

At its core, the 485-x workaround is about cost control. By staying under the 100-unit threshold, developers can avoid the obligation to pay prevailing wages, significantly reducing costs. But this workaround creates architectural inefficiencies. Separate buildings require duplicated systems—multiple lobbies, elevators, HVAC units, fire safety infrastructure, and roof systems. Such redundancies waste both capital and rentable square footage.

Recently, investors and lenders have begun to question this rationale. Why fund several segmented pads when a single, unified building would be more cost-effective to construct, operate, and finance?

A Smarter Alternative: Tax Lot Flexibility Within a Single Building

In New York City, there’s a crucial distinction between zoning lots and tax lots. A zoning lot defines what can be built, while within that zoning lot, developers can create multiple tax lots. Each one is legally distinct, with its unique treatment for taxes and program eligibility. This is typically done through a condominium declaration, even when the entire project is intended as rental.

Here’s where it gets interesting. By dividing a building into separate “condo units,” each with its own tax lot, a developer can effectively segment the project for strategic benefit. This approach keeps the whole structure under one roof while optimizing each part.

Practical Applications of Tax Lot Structuring

Consider a 180,000-square-foot mixed-use project. Structuring it this way unlocks multiple advantages:

• Condo Unit A: 99 residential rental units utilizing 485-x benefits

• Condo Unit B: 30,000 square feet of retail space qualifying for ICAP (the Industrial & Commercial Abatement Program)

  
  

This setup ensures the residential units retain their 485-x eligibility. Meanwhile, the retail square footage—exceeding the 12% commercial cap—is treated separately. The retail condo could also be sold or recapitalized independently. This approach provides financial and operational flexibility without the costly duplication that comes with separate buildings.

Creative Structures Within Residential Components

Developers can also get creative within the residential component. For example:

• Condo Unit A: 99 rental units with 20% affordable housing, qualifying for 485-x

• Condo Unit B: 50 market-rate units, fully taxed

  
  

This structure allows the project to partially participate in 485-x while limiting the affordable housing and wage obligations to a single segment. Market-rate units remain unrestricted, and each component can be financed or operated independently.

Alternatively, consider a hybrid rental/condo approach:

• Condo Unit A: 99 rentals utilizing 485-x benefits

• Condo Unit B: 40 for-sale condos on the upper floors

  
  

This model anchors construction financing through stable rental income while unlocking condo sales at premium pricing. It allows for flexibility without rent stabilization or affordability requirements placed on the condo units.

Established Practice, Not a Loophole

Projects like Waterline Square have already leveraged this model, stacking multiple uses vertically under one roof. Each segment has its own tax lot, financing structure, and ownership model. The city’s housing agency, HPD, even permits and encourages applications utilizing “one or more” tax lots per site. This strategy isn’t new; it’s simply underutilized in the 485-x era.

Advantages of Building with Tax Lots

Building several smaller buildings forces developers to replicate costly infrastructure and operational systems. These duplicated systems consume usable space and inflate construction costs. A single larger building, carefully structured with multiple tax lots, eliminates these redundancies. This results in more efficient layouts and lower per-unit costs.

The rise of 99-unit buildings is an understandable reaction to the market. But as capital becomes selective and projects more intricate, developers need smarter solutions. Tax lot structuring provides a legal, scalable, and investor-friendly strategy to build at scale. It allows developers to avoid the full burden of 485-x’s prevailing wage requirements without sacrificing quality or efficiency.

It’s time to shift from workaround to strategy. By embracing this innovative approach to tax lot structuring, developers can position themselves for future success in New York City’s competitive real estate market.

Conclusion

The 485-x tax abatement program has changed the landscape of real estate development in New York City. While the rise of 99-unit buildings may seem like a workaround, there’s an opportunity for developers to adopt smarter strategies. Implementing tax lot flexibility within single buildings is a game-changing approach. It offers a pathway to build effectively, efficiently, and sustainably in an evolving market.

The time for adaptation is now. Embrace the future of real estate development with strategic insights and innovative solutions to thrive in today's environment.

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