Decoding the "City of Yes"

Michael Vermut: Okay. We'll give it another 10 seconds and then I will turn off the poll. All right, pat, thank you for joining us and I will turn it over to you now.

Patrick Madigan: Michael. Thank you. Thanks for having me. Thanks for everybody who's attending as we are now sort of on the other side of the market digesting and beginning to implement C of Yes. So I thought it'd be fun to start with two metrics that are coming out of the market intel that help us understand how actionable this is in terms of how much of this is set into the market, how many transactions are based upon the implementation of 4 85 x. So to get a handle on that, we really look at have to look at ground up development trades. Most of these are going to be benefiting from one of the several complexities afforded by city of yes, UAP is probably the biggest factor. And then of course we have office to resi conversions, the scope of which has been expanded under city of yes. So development trades, we measure it in a few different ways.

We measure dollar volume, we measure buildable square feet, but I think the metric that really matters when we think about legislative passage and then the results there from is the number of transactions. And so here we can see 4 85 x 4 67 M passed in April of 2024 through the state budget process, we witnessed a sudden uptick in the number of transactions. Now I want to be very careful as we sort of set the table for this conversation to take a step back and say, Hey, this is correlation, not necessarily causation. And so what we have here is a market that was basically relieved in utilizing the 4 85 x tax abatement in lieu of the old 4 21 A here we saw a very sharp uptick. I think we can draw correlation and maybe even suppose that there is some causation there. As we go further on in time, the passage of city of Yes, December 6th, 2024.

The next quarter we see another surge, another uptick in the number of development site trades. And so again, being careful to separate correlation and causation. There's clearly something at play here. And so when we think about development sites, the first thing we think about is UAP. I'll get into that shortly, but I want take a moment just to move on to office to resi conversion trades. So 4 67 M passed with 4 85 x. Similarly, there was a sharp uptick in transactions on a dollar volume on a square foot basis. I think we should push through to the number of transactions, which tells a similar story, an uptick in transactions. Obviously some of those were very large from a dollar volume billable square foot perspective, hence the emphasis on the other slide. Here we have city of Yes passage, city of Yes effectively broadens out the scope of the flexibility for office to resi conversions, and so we've seen sort of a steady trickle of these deals.

I think we will continue to see more of these, but naturally it's hard to talk about either UAP without 4 85 x and it's hard to talk about city of yes without 4 67 M on an office to resi conversion. So with that, I'm going to jump quickly into just sort of high level the biggest talking points around city of gas where there's the greatest amount of buzz and probably the vast majority of applications. So the universal affordability preference is effectively for anybody who's unfamiliar with this, it is effectively a up zone or an application of voluntary inclusionary housing. Citywide with a few exceptions, R five designations don't get the benefit, but virtually all residential zonings have some upzoning that they're able to take today. This folds in well with 4 85 x. So 4 85 x is tax abatement that replaced 4 21 A. What we're seeing emerge in the market is a trend of 99 unit projects whereby the 4 85 x tax program demands that 20% of the floor area delivered in the new project is for affordable housing.

So the reason I say that folds in so well is when you look at this UAP chart, what you'll see is a recurring theme of roughly a 20% bonus. In some districts it's greater. In some districts it's maybe a little bit less, but for the vast majority of these sites, you're sort of in that relative window. So this was not done on accident. I think there was an anticipation that 4 85 x would be paired with the UAP. In fact, it's what makes it work. What is sort of difficult to extrapolate from this is how much of this is being used. And so some of this is anecdotal, right? We know the 4 85 x program is being put into place. Obviously that's a no-brainer. The UAP is not immediately apparent because we haven't seen a completed UAP project delivered yet. I can say anecdotally of the handful of contracts that we've put in handful of deals that we've put into hard contract for ground up development sites recently we are seeing an emerging trend of UAP driving the transaction. We speak directly to the developers. We have a pretty good sense of what they're going to do. UAP is being implemented in many of these projects, so only time will tell and show us what percentage of these projects actually carry this designation, but we feel pretty good about it.

Next up, we have a quick break for a poll and I'll give everybody 20, 30 seconds to click through here. What is your background? Real estate, professional attorney, finance, accounting or other?

Astrid Garcia: We'll give it a few more seconds before we close it, so make sure that you select a response and hit the submit button to register your answer. Alright, we're going to be closing it now.

Patrick Madigan: Alright, then we're off. Great. I next up is the easing of parking requirements. You have your inner transit zone where the parking requirements have been washed out completely removed. Look, many of these are very transit rich markets. Think of downtown Brooklyn has 11 subway lines that run through. Think of Long Island City. Think of Williamsburg. These are transit rich environments. Parking is nice to have in your project sometimes, but not always mandatory. This is helpful because developers don't necessarily need to build parking. If they can build on slab without a seller, it's much more cost effective. It hasten the pace of the project. All of this is good for development to have the optionality. I don't believe this precludes somebody from building parking, but certainly it removes the requirement. Then in the outer transit zone you have a lessened requirement and then beyond the greater transit zone, there's no change that's specific, but effectively this is all tied into how accessible is that project and is parking really required?

This is a great thing for development where it's not necessary office rezi conversions, right? So city of yes coming sort of dovetailing off of the back 4 67 M expanded the scope of where these office to resi conversions can be applied. Right now, they've moved the ball forward as far as a building that was built 1990 or earlier. Fantastic. You can use the maximum FAR if the project was built prior to 1997 and unlimited FAR up to the existing structure. It was built between 1978 and 1991 allowable up to the residential FAR within the designated zoning, and if the building's overbuilt, then you can fill in the balance with commercial. So effectively this is another step in the right direction where you have an existing building that's perhaps overbuilt. Now all of a sudden it has a real viable path forward to be served as an adaptive reuse.

Additionally, it can be used for rooming units, dormitories, supportive housing, so on and so forth. I think some of these other details will be accessible in the presentation that gets sent around, but I don't want to spend too much time on anyone in a particular area. Heightened setback easements are great. So as you sort of get into applying universal affordability preference, you may have a bulk issue, but being able to build a sort of water building where the setback doesn't occur until a higher floor is beneficial, it creates efficiency within the floor plates. It makes it more affordable for a developer to construct that project. And so all of these things are coming together holistically in a way that is very beneficial and spurring more development. I will say it's never been more challenging between the permutations of 4 85 x and all of the implications from city of yes, it's never been more challenging, more critical to really talk to a zoning council, get a zoning study If you're thinking about developing a project, all of those things are sort of required in a project, but it's almost more critical earlier on in the process to fully understand the real estate, at least from a transaction perspective.

And then finally we have, did we talk about Sliver law? I don't know if we did, but Sliver law has been, oh, here it is. It's the first bullet point. Sliver law has been eliminated. This is really beneficial because Sliver law prevented a lot of development that was already sitting and as of right, so previous to City of yes, if you had a site that had to go vertical to handle the density, if it was in sort of a let's think of a Long Island city or Manhattan or downtown Brooklyn and you had a 40 foot wide site, but it was an FAR of 10, you really couldn't build what you were air quote as of right allowed to build the elimination of Sliver Law allows all those projects to move forward. So in essence, a tax lot or a zoning lot that basically had to sit around and wait for a larger assemblage in order to tap all of its available ownable floor area now is independently viable. And so I think you're going to see a lot more infill of these sites. I think you're going to see more of these trade and I think you're probably going to see this freeing up a lot of what was otherwise artificially encumbered potential projects. So with that, I've said enough for a little bit and I will guess hand it over back to you and we'll wait for the q and a.

Michael Vermut: All right. Thank you for that update, pat. It's much appreciated. I'd now like to introduce David Rosenberg. David is council at Rosenberg and Estes where he leads the firm's New York City land use and zoning practice and is a member of the New York City Developers Group founded in 1975. Rosenberg and Estes is widely recognized as one of the New York City's preeminent real estate law firms providing full service representation and advice in every aspect of real estate. David's practice focuses on helping the firms clients navigate the intricacies of land use and zoning approvals and has been widely sought after as one of the city's leading experts on City of. Yes, David, thank you for joining us today.

David J. Rosenberg: Thank you Michael, and thank you for your team for having me over here and thank you for Pat. That overview of City of Yes saves me a lot of talking with you.

Michael Vermut: I'm sure we can still find something for you to talk about,

David J. Rosenberg: I'm sure. We'll,

Michael Vermut: So going off of some of what Pat was talking about other than building more affordable homes, the city of Yes is bringing many other big changes. What are some of those other important opportunities that people like our clients should really be paying attention to?

David J. Rosenberg: Yeah, so as Pat was saying, the affordable housing piece and the housing construction considering the city's housing shortages, that's been the major conversation about City of yes and for good reason, but it's not the only piece. City of Yes has been years of work across the board to get zoning out of the way of the city's other policy objectives. Right? Going back to 2023 with City of Yes for carbon neutrality to align some of zoning with New York City's climate goals, things like making it easier to install solar panels on a building or making it more viable to Recl building or bring the efficiency up to modern standards for any of the larger buildings that are there for economic opportunity for people with commercial sites making uses a little bit clearer. Things like zoning until a year and a half ago had classifications for things like shops and umbrella repair facilities.

I haven't seen either of those in a while in New York City. Those things were cleared out. A lot of those rules were just made simpler across the board. Then of course you get to housing opportunity, which is the big one, which really not just get zoning out of the way to allow the market to do its thing, but actually has these components to encourage the development of housing the city needs. UAP, the universal affordability and higher density districts being probably the big one that most of the people here are interested, but there are a couple of other big ones that are likely to result in degeneration of a lot of housing. So there's a smaller one, but surprising number of units that the city anticipates, it was things like the accessory dwelling units allowing people to turn their garages, basements, attics into additional apartments in one in two family districts.

Another big one that comes up is this idea of qualifying residential sites or transit oriented development, town center zoning, whichever term you want to use that allows people to take sites that people that until now have not had a whole lot of development potential. A lot of these are kind of low rise buildings. One, the kind of typical three story walk up with retail on the ground floor, some apartments above that people have thought for years you can't do anything with. All of a sudden now have very significant development potential with in some cases little to no affordability requirements. The other one that Pat started talking about that I think is really going to drive a lot of this is the office to Rezi conversion that is city sitting on millions of square feet of vacant and underutilized office space that we've already seen in the market. People are very interested in looking at and trying to find ways to convert to residential, especially in Manhattan where you have the 4 67 mtac exemption that is incredibly lucrative, especially as compared to 4 85 x. And so that's where we're seeing a lot of the capital start to flow and where the interest is and what occupies a lot of my time talking to owners and developers about what they can do.

Michael Vermut: And I guess playing off on the office conversions, because I know it's been a topic for a while, so I know the new rules are helping do the conversions. Can you explain in simple terms how these rules are making it easier for a building owner to change an office building into a residential use?

David J. Rosenberg: Yeah, so way to think about it is like this. If you have a commercial building, most commercial districts in the city allow residential use and they also allow those commercial buildings to be built significantly bigger than the residential buildings that are allowed on the same block in the same area. When you have that situation, you can't just go and convert your commercial building to residential because that creates various non-compliances with zoning because of the bulk of the building and in much of the city that has made it impossible historically, there have been two ways to convert these buildings from commercial to residential. For buildings that were built before 1977 and multiple dwelling law in many cases allowed them to be converted as of right zoning had another avenue for buildings that were built prior to 1961, there were about eight community districts or so across the city where you could convert them, keep the existing bulk in place and as long as you can meet the more relaxed light and air standards applicable to loft law and other types and those types of interim multiple dwellings you would be allowed to convert.

That's a very small slice of the underutilized office based in the city with city of, yes, the city is one, change the geography of that to make it apply citywide. Whereas it was really limited to parts of Manhattan and North Brooklyn and eastern Queens and Western Queens, sorry. Now it's available citywide and it's available for all buildings that were constructed up until sometime December, 1990. So we're talking about millions of new square feet that are now eligible to be converted with their existing bulk and allowing them to use the more flexible light and air standards that help address the parts that a lot of the office buildings just not meant weren't built to residential, make them hard. Some of us have seen the stories about buildings in lower Manhattan that have to create these large just big giant holes into the building to create light and air corridors and then try to put the weight and put the floor back in different parts of the building city of yes, makes all of that a bit easier by loosening up some of those standards.

Michael Vermut: Got it. Thank you. So turning back towards one of the things you were talking about before, which is the 4 67 M tax break. Since it is expensive to convert an office building to residential, how does the 4 67 M play into this and what benefit does it give to a property owner?

David J. Rosenberg: Yeah, so I think the way to think about, to give everyone a framework for this, let's think about 4 21 A, the old tax exemption that everyone kind of thought about when it comes to residential construction, the idea is you build housing, you commit to a certain percentage of that to be affordable housing, you get an exemption on the increase in the property value that comes from the construction that you do. The newer version of that 45 x similar thing requires more affordability at deeper levels for longer periods of time, but at its core is about the same issue. That's where you get, it also attaches these wage requirements once your buildings go above a certain height, which is why you hear this talk about 99 unit buildings starting to pop up all over the city. 4 67 M looks at it a little bit differently thinking that if you have an office building that you're converting, it's a building that already has substantial value. So it allows you to do the conversion and especially now we're talking about primarily this is particularly lucrative in Manhattan, still lucrative in some of the outer bars but not nearly as much as Manhattan. If you convert the building from commercial to residential and you provide 25% of the units as permanently affordable at 80% mi, you will have an exemption for 90% of the assessed value of the building depending on when you get your permits, it can be as much as 35 plus years.

And with that there are no wage requirements that come into play once you go over a certain size. So we're finding that this is particularly interesting to people, especially in Manhattan because of how lucrative it is, especially compared to 4 85 x.

Michael Vermut: Got it. So one of the things you were talking about here is the conversion of an office building just to straight up residential. However, city of Yes also allows for different kinds of homes in these converted buildings such as for seniors, students or people who need extra support. What are some of the other housing types and how might they help different groups of people in New York City?

David J. Rosenberg: Yeah, so that's part of this was also not just open up Class A apartments for everyone. Part of the thing that researchers have talked about is parts of the things driving the housing crisis in New York is that if you have four people in their twenties working in financial sector that one of them individually cannot afford rent for a one bedroom apartment, they're going together, they're getting roommates and they're kind of holding onto this housing stock of larger apartments. And so the city's looking at new types of shared housing, smaller units, not quite the days of SROs, but similar more congregate style housing that's going to allow these different housing typologies, more flexible rules for senior housing on apartment size that will allow more of it and across the board in most of Manhattan and downtown Brooklyn, completely eliminating the idea of a dwelling unit factor that set this artificial minimum of 680 square feet per unit and allows people to put, not just have bigger buildings but have more.

I know I've seen a question here in some of the q and a about are there things in the city of yes that are not just for the affordable housing developers? And the answer is yes. It's things like this, things like changes across the board to heighten setback regulations to allow a little more flexibility, changes to density calculations, the elimination of parking across the board. These are all things that make, even if you're not in the affordable housing business, even if you're just there making those kinds of developments easier. Things like getting rid of the sliver law. There's a lot here and many districts even without the affordable housing as part of City of, yes, you probably did get a slight up zoning on your floor area overall.

Michael Vermut: Got it. Thank you. So switching a little from this area, New York City needs more housing as everyone is aware, and the city of yes, as part of it is trying to look beyond just building large apartment buildings. They're also talking about something called missing middle housing in regular neighborhoods. What exactly is missing middle housing and why is the city trying to encourage more of these types of homes in the neighborhoods that normally just have one or two family houses?

David J. Rosenberg: So if you grew up like I did in South Brooklyn, mostly one in two family home neighborhoods, you walk around, but there are parts of there that small apartment buildings, three, four or five stories usually somewhere around subway lines in these commercial corridors where you have these kinds of ground floor retail stores with a couple apartments on top that has always been a part of New York City and that's always been true in these lower density neighborhoods. But 1961, when the city put the voting regime in, they basically said none of that can exist anymore. And the way that it ends up panning out is either your district that's one in two family homes and that's pretty much all you can build or you go into the medium and high density multifamily buildings that are occupied. Most of the discussion when we talk about these things, it's those units in between those parts where they can be part of a broader community with low density housing where it's a place where people, it's a great market for people looking to buy a starter home, a starter condo that has pretty much fallen out of favor in the city over the last 60 years because of the zoning restrictions that cities trying to bring back in with things like town center zoning, transit-oriented development that say in these parts of the city, even though yeah, zoning might be for a one or two family neighborhood, but on certain sites that are large enough that are part of these commercial corridors that are basically sitting on top of transit, we should be able to build low rise contextual multifamily housing over there.

And that is an area in just speaking with our clients that people don't even realize necessarily what they're sitting on. An example that I can give, and this is granted for probably an extreme case, but nonetheless of a family owned property up in the Bronx, one story retail, large parking lot because it's out, it's one of the areas further out from the city center, they'd always thought that they're going to keep it as one store retail, it's performing to some extent, unclear how much longer, but it's going. But there was no reason to ever look at doing something else because all you could really build was, yeah, it was a big lot, 35,000 square feet, but all that gets you is maybe one or two single family homes by the time you're all done does not make sense to lose the retail, go through the exercise of building and then selling those homes.

All of a sudden city of yes comes in this site happens to be one of those qualifying residential sites because it happens to actually not be all that far from a subway line. All of a sudden we look through it and the site they can build 38 apartments, fully market rate, minimal parking requirement, no affordability requirement and nothing's changed. They didn't have to go through a rezoning, you didn't have to go through a variance. This is all as of right. And that's a very significant change if you've been sitting on these properties for a long time collecting brand, not thinking about it.

Michael Vermut: Go

David J. Rosenberg: Ahead Michael. I thought,

Michael Vermut: Sorry, I must have. But so in torquing about the qualifying site. For anyone on here who is looking for opportunities and may actually have an existing one and just don't realize it, how would you know if you actually have a qualifying site that would fall under the missing middle housing option?

David J. Rosenberg: So best way to find out, call me. I'm happy to take a couple minutes, look at it and help you get the answer for it. And really that's the only way to get a definitive answer is to really go through in detail and see what it looks like. But broad strokes, things to look for. Are you a 5,000, do you have 5,000 square feet? Are you in a commercial corridor within a quarter mile of subway within a half mile of a subway station or quarter mile of rails? So I think Metro North, long Island Railroad, if you've got two of those things going for you, you may very well be sitting on a qualifying residential site and you should probably talk to me, one of my colleagues, talk to an architect and start thinking about what your options are there.

Michael Vermut: Got it. Thanks for that. So switching again to another area of city of Yas that I think would be important to many who have logged on is the Midtown South mixed use. So Midtown South has always been known for its businesses and factories, not really a lot of residential in the area. The new Ms MX plan wants to change this area into a lively mix of homes and businesses. Can you tell us about this big vision for mid times Midtown South and how it shows the city of yes idea of updating old rules for the future?

David J. Rosenberg: Yeah, so Midtown South for zoning nerds, this is really exciting. We're kind of at the end of the process now. It's in public review, it's at the last stages. The city council had the hearing at the beginning of this month. We expect a vote from the city council fairly soon, which means we're looking at final approval sometime in August. We're kind of at the end of it over here, but this has been a long time coming. There are about 40 blocks in Midtown. Generally you're talking about 23rd to 40th Street, fifth Avenue to eighth Avenue. That's kind of the rough contours of it. There are about four different sections there that for whatever reason, despite having some of the best transit access of any neighborhood right in the city, never allowed residential use since 1961 has been zone manufacturing. Parts of it are historically part of the garment district and the city's had various iterations over the years to try and protect the industry that just have not worked.

There's not much left there by way of manufacturing. And so all that's left is a bunch of old B and C office buildings that are largely vacant, mostly unworkable and nothing's happening. And what is worse of it is because you have that level of vacancy there and no residence is there, the streets are, when you walk in that neighborhood really early in the morning, really late at night on weekends, it's basically dead. There's nothing. This is a large part of the city with some of the best transit access right near the theater district, right near everything that you'd want to be right. It's surrounded by Hudson Yards on the one side, everything is there. You've got Port Authority, Penn Station, Madison Square Garden, and it's just dead. And that's just from lack of not having anything to keep something resembling a 24 hour community. And so Midtown South, finally the city is going to go and actually rezone this for residential.

But what's really exciting about it is that it brings in all of these elements of city of Yes that people have been talking about and actually puts it all into practice over here. So the first part of this is that the city is going to map the first R 11 in R 12 districts that we've ever seen. For whatever reason, state law has historically limited residential density in New York City to 12 FAR. Some weird exceptions coming to that, but it's across the board 12 FAR. That has been the rule forever. Albany has finally allowed New York City to lift that cap, provided that it's subject to inclusionary housing and a couple of other rules for certain sites. But now we're going to be able to see residential buildings with as high as density as 18 FAR, to put that in perspective. That is central business district Manhattan level density, the kinds of density that we were talking about before where commercial buildings have always been allowed to be bigger than the residential buildings will now actually be allowed to see the residential buildings match that size.

This is going to be a mixed use district. That doesn't mean that all the buildings have to be residential. Most of them probably won't be fully residential. Many of them will keep some of their commercial components. It's going to allow that mixed use to be, the bulk controls are designed to encourage it, but we're going to see very large residential buildings here utilizing mandatory inclusionary housing 4 85 x. We're going to see there's something like an estimated, I've seen the numbers range between 20 and 50, I think the likely numbers somewhere in the upper forties of these kind of large scale office conversions to residential where you're going to have the four 60. Some of them will be using the 4 67 M to generate rentals. I'm sure you'll see a few of them that just will pay their taxes and GoCon. But we're going to see all of that come together in some of the best real estate in the city and opening up millions of square feet of new development.

Michael Vermut: Thanks. So as these residential developments come about and bring a lot more people into the area, as you said, it's kind of dead in the morning and the evening, how will having all of these people in the neighborhood change the feel of the neighborhood, especially after business hours, and how are the new building rules designed to make sure these new homes and businesses look good alongside the older buildings?

David J. Rosenberg: I think the best frame of reference that we have for something like this is the financial district, which in the nineties and the early two thousands suffered from a lot of the same problems. It was people came, they went to work, they left, then all of a sudden people started leaving the offices in lower Manhattan, started going to midtown, started going elsewhere. The place felt dead. And that became especially true after nine 11 when most of the offices were just empty for years and the city didn't quite use zoning for it. State law, there were various tax incentives that facilitated that first wave of conversions there in the nineties and early two thousands. And that neighborhood has transformed dramatically. You go to the financial district now, day, night, Sundays, Friday, it is busy. There are restaurants, there's activity going on all day. It's not just the offices anymore that hasn't stopped offices from locating.

There's plenty of people still work in lower Manhattan, but the entire field, the neighborhood has changed. It hasn't displaced those offices, it just put residents there as well. And it's made it a very exciting place for people to be. And what we found is that it doesn't conflict with each other. A lot of the thinking behind the zoning in 61 was the idea that uses need to be separated. You go had your four areas of the city where people came to work and then they left and they went home. And with things like the financial district and some more other recent developments shown is that that's not really where people want to be right now. People want to be able to go to work, go to the gym, go out to eat, go do something, and have something to do on the weekends all in the same area.

And so that's what Midtown is being set up for. And of course the city also recognizes the history over there. It been, this was a place for a long time where immigrants came to work. There are industries that are core to the city's history and there are going to be special heightened setback rules over there to kind of match the very tiered building design so that when you're walking down the street, it's not going to be so easy to tell, oh, that's the apartment building and that's the office building, or that's to the extent there, our manufacturing building goes. A lot of 'em are going to look the same, but once you get inside, it's going to be a very different experience and that's going to ripple through the neighborhood.

Michael Vermut: All right. Thank you. So just kind of looking at that and your point about the financial district, what is the big picture of the city? Yes. And what can we take from what they're now doing with Midtown South and see how potentially other neighborhoods in New York City in the future could be redeveloped?

David J. Rosenberg: Yeah. I think the big picture from all of this is that the city is starting to recognize now, I don't know that they're all the way there yet, but they're starting to recognize that we actually have to build housing and that the only way that the city is going to be able to deal with the housing shortage is to actually go and build it. And that has problems. I think especially we just saw this week, the city has serious infrastructure problems that need to be scaled to match the fact that we're going to increase the density in a lot of places that have historically haven't had them, but we have to do it. And when you take this broader approach and you look at neighborhoods instead of looking at one site at a time, there are ways to plan for all of these things in ways that are responsible, in ways that create vibrant communities and that there's room for the city and the industry to work on ways to reinvigorate a lot of areas that people thought just were impossible.

Michael Vermut: Well thank you for that. And just before we switch over to q and a, just is there anything else besides city of Yes that we've been talking about? Are there any other initiatives that are in the pipeline in the city that will address additional areas?

David J. Rosenberg: Yeah, there's a lot going on and City of Yes, takes up right now seven months later, takes up a lot of the oxygen, but it's not all that's going on. There's obviously Midtown, which we talked about. City also has area wide rezonings going on in Jamaica. They have plans in Long Island City. These are all things that are coming down and they're in the pipeline now that much like Midtown are going to generate significant development potential in places where people have looked past and said, okay, there's nothing to do here. Opportunities to generate that kind of new housing.

If you're on the commercial side, there are some things to look at. The city is taking aim at last mile warehouse and how the city just moves goods around. These are all things that zoning is dealing with now that the city, these plans coming down that people ought to be paying attention. And for the lawyers, the accountants who are on here, we build relationships with our clients over time. We know what they have in their portfolios sometimes better than they do. There are going to be things that they're not thinking of that we can advise them and say, Hey, remember that property that we were talking about a year ago, it might be worth another look or that plan that you have to open up a warehouse and put Amazon in there. If you're going to do that, you have to move quickly because you're about to get locked out and you need to vest. Things like that for this audience especially are things to think about.

Michael Vermut: All right. Well thank you for your insight. Before we go to q and a, I'm just going to push out the last whole question. There we go. Will you or your clients be adopting the city of Yes Initiative in the future? And I'll leave this open for a little bit. I mean, but while it's open, I mean David or Pat, if you want to take a look through some of the q and a, we can start discussing Well,

David J. Rosenberg: So I'll jump on the grenade first. I see from David Gonzalez about the mayoral candidates. We'll go jump on the third rail here. So without talking about any of them in particular, I think the one thing about all of them, and when I say major candidates, I'm not talking about Curtis Lee or Jim Walden. So we have, there's Ani won, the Democrat was a Democratic nominee. Eric Adams running as independent, Andrew Cuomo, who is still running as an independent, say what you want about both Adams and Momani. Eric Adams has a very good record when it comes to development in New York City. City of Yes was not an easy thing to push through. He did it and aside from city of Yes, it had a very good record in making sure and really charging the Department of City planning with making sure that we're finding ways to facilitate these things, making the Department of Buildings find ways to make approval processes faster, not always successfully admittedly, but his record I think is solid on it, have the same record, but buried in his proposal about the rent freezes, which that's a separate conversation.

He's talked about building 200,000 new units of housing. He understands that it is very important for the city to make sure that we are building more housing and that we're opening up more of the city to build that level of housing. Cuomo's proposals have been a little bit more vague, but he also is a long record as governor, as HUD secretary has a record supporting supporting development and building housing. So I think on this side of the, I always say that there are two ways to look at the state of the real estate market in New York if you're an owner of a rent stabilized building and then if you're a developer, if you're a developer right now, I think things are looking pretty good. Everything's moving in the right direction. All the politics lining up in favor of development, I think it's a different conversation that we're talking to an audience of rent stabilized owners.

Michael Vermut: Alright, I don't know what order you want to,

Patrick Madigan: That was well said. I'll jump in on this question about unit count thresholds and hard costs from Jonathan. So just for everybody, as a question for developments over 150 units in zone A or a B as a percentage of what kind of hard costs increase or developers assuming under 45 x for projects, a hundred to 149 and there's been a spike in permits filing for nine, nine years projects. So lemme just take a step back and tell you that virtually all new permit filings that are rental and not condo in zones A or B have utilized the 99 unit threshold. So a property and it's a flawed policy, so a lot that very clearly would've benefited from the economies of scale without a prevailing wage requirement and to deepen the affordability requirement should be a single building. All the laws of economics suggest that it should.

Now that lot gets carved up into 4, 3, 4 or five buildings, whatever it takes to deliver several 99 unit projects. So I think there's two ways to answer this question. I'll answer the first part. With projects outside of zone A and B that are under 99 or 150 units, it's the minimum threshold for 45 x. That prevailing wage requirement's $40 an hour for all staff on the construction site. We estimate that that prevailing wage requirement increases hard costs or labor, I should say labor costs by approximately 20%. Historically, labor costs account for 45% of your hard costs materials, the other 55%. So if you apply a 20% increase to your 45% of your costs, you wind up with a 9% increase, which is not so financially burdensome that it prevents these projects. This is why we're seeing so many 99 unit projects in zones A and B, I think you will likely see a couple of things happening.

First is if somebody owns a piece of land generationally and their basis is so low that they can afford to absorb the prevailing wage reforms and deliver not 20% of the project affordable, but 25% of the project affordable and 60% A MI, it pulls from both directions. And so a large part of the pushback here is not even just the economics. The economics alone have prevented anybody from taking an actionable approach in zones A or B with 45 x almost full stop, at least that I'm aware of. I'd love to be surprised and see that change. The other part of this is even developers, developers who self-develop are telling us that their subcontractors don't want to deal with it because there's a logistical issue of remaining compliant in every way, shape and form, and it gets more complicated from there. But the short answer is the baseline underwriting for the lowest prevailing wage requirement of $40 an hour is a 9% increase to your hard costs on paper. It works in practice it seems to, and then in zones A and B, those prevailing wage requirements increase to 60 and $70 an hour. So I think we could probably extrapolate how big of an impact that has on your hard costs.

David J. Rosenberg: Yeah, I'd echo what Pat's saying. We have seen some developers start talking about doing the 100 to 149 unit projects and they start thinking about the cost of that $40 an hour wage might not be enough to justify say, doing another building or leaving 50 units on the table, but really have not seen anyone go for that 150 unit plus in zone A and B. It's looked, I think across the board people are looking at it as just a non-starter.

Patrick Madigan: Yeah. I just want to take a step back and clarify 99 minutes and under no prevailing wage requirement, you break that outside of zone A and B, that's your $40 an hour. That's where it becomes questionable, but I have yet to see anybody take action in zones A or B in the higher prevailing wage requirement. A couple sites have traded, but I think you peel back the layers and you find out that one of those sites actually was vested for 4 21 A or it was in the governor's pilot program and so on and so forth.

Michael Vermut: All right. One of the questions which I think is the city of yes help owners not focused on affordable housing.

David J. Rosenberg: Yeah, we talked about this before. The answer is unequivocally yes. The affordable housing takes a lot of the oxygen because that's a big one, especially if you're building multifamily, that's an important one. But even if you're building condos, city of yes is going to give you relief on your parking requirements. It's going to give you relief on heightened setback. It's going to give you relief on yards. It's going to, if you are in Manhattan or downtown Brooklyn, it's going to eliminate your density requirement. It's going to give you added flexibility when calculating your density in any kind of mixed building.

If you're outside the residential space, it's going to make it a lot easier for you to put commercial tenants in because the uses are going to be that much more predictable and much easier to manage about figuring out who's allowed to go where. It's a streamlined process. It gives you the ability to actually put in the required energy systems and comply across the board. There are any number of ways that even though we spend a lot of time talking about the affordable housing, there is something in city of yes for everyone. It really was a wholesale redo of the zoning text and it's really hard to find parts of the city that weren't affected by it.

Michael Vermut: Great, thank you. We had another question, which I don't think we actually touched upon or I'm not sure what it is, but are there any financial reporting requirements that can be expected from clients related to the city of Yes.

David J. Rosenberg: So there aren't going to be financial reporting requirements for City of Yes, but especially in 4 85 x, you're going to see there are various requirements about wage compliance and hiring that are going to add layers of compliance costs across the board in addition to the usual having to have lawyers and architects file all sorts of applications that are going to require the kinds of reporting around hiring, especially hiring outreach that we're going to see from this. I don't know how much of it is going to be, how much financial reporting it's going to be, but there are going to be a number of layers of compliance costs.

Patrick Madigan: Okay. See, another question here. Have you come across situations where developer feedback was at 40 85 x coupled with U AAP provides little to no financial benefit because of the current assessed value? This is an interesting question and it's timely. So within the benefits of UAP, there are sort of delineation points in terms of what the fair market rent within the future asset will be and how beneficial it is to take up zone. So let's just take an example. You have a property, you're going to build 99 units, you're going to take a 4 85 x, so 20% of your project is designated affordable at 80% of a MI. That's a $49 a foot rent on average to take the UAP benefit, and let's say you get another 20% that becomes a 60% a MI obligation, which is $37 a foot. So in essence, you're trading $12 a foot loss to open up 20% of the project for free market.

And so if you have to do that math, you have to look at it from the free market against the previous affordable obligation as the benefit to measure the value of that up zone. So in markets where rents are 85, 90, 90 $5 a foot, it feels like a no-brainer because even if you have deeper affordability in your project, you've freed up 20% of it for more free market. So you're gaining 40 to $45 a foot in rent in 20% of the project in exchange for losing 12% or $12 a foot in the affordable component. If you take that same project and you airdrop it into a medium market where rents are $65 a foot or $61 a foot or $68 a foot, that's where it sort of becomes hazy because 60% a MI rents just don't necessarily make money for the building. Right. 80% kind of eats out a profit or breaks even, and so there becomes this calculus of does opting into a deeper affordability justify more free market units? And so the long-term vision probably yes, but in the short term, when you're underwriting yield on costs, there is sort of this reverse bell curve where the high value markets benefit the medium-ish and getting into secondary, tertiary markets, it becomes a lot less clear. And then I think as you get even into sort of the lower value markets where everything is about that same threshold anyway, it's just more building for less trade-offs. So it's almost like a reverse upside down bell curve, if that makes sense.

David J. Rosenberg: Yeah. And this policy, the difference between a 45 x and UAP, this was intentional on the part of the city and the city had proposed this idea of UAP before 44 85 x was on the table. And when they set these amis, what they call it is fun little double speak, the city calls it strategic misalignment that they very much want you to bring down, they want to bring down the affordability levels from 80 to 60, and they were trying to find a way where they're giving you just enough that, as Pat said, in most cases, it's going to end up worth it. There are some cases where it won't, but most people are going to find that it's worth for the part, for most of the affordable units end up coming down. Some will still be at 80, but most of them will have to come down to 60. But most people will do it for the benefit of the extra floor area and the tax benefit.

Michael Vermut: Okay. I want to thank David and Pat for their time and insight today and explaining the city of Yes.

David J. Rosenberg: Thank you for having us all.

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