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Progressives and Hochul Battle Over Fate of $1.7B Developer Tax Break

SHARE Progressives and Hochul Battle Over Fate of $1.7B Developer Tax Break

Residential developments sprouted up in Downtown Brooklyn, Nov. 16, 2021.

Ben Fractenberg/THE CITY

Every year, the city comptroller issues a report listing all the tax breaks the city hands out. And every year, the 421-a abatement that provides decades of property tax exemptions to rental housing tops the list. 

In the year ending last June, 421-a accounted for $1.73 billion in foregone revenue, up from $1.6 billion the year before. Now, with the program expiring at the end of June, lines are being drawn over whether to renew the abatement.

On one side are Gov. Kathy Hochul, who included a renamed version in her budget that makes only modest changes to the current plan, and the real estate industry, which claims that very little new housing will be built without it.

On the other side are progressive politicians — especially City Comptroller Brad Lander — and housing activists who denounce it as an unneeded subsidy to wealthy real estate developers that costs the city much-needed tax dollars.

The issue has become intertwined with the state’s leftward shift in Albany, the diminished clout of the real estate industry and the June primaries for governor and the legislature. But the stakes couldn’t be higher since New York City’s future depends on building much more housing.

“We need more housing supply, the program that’s providing that supply needs to be updated, and that update needs to equitably serve New Yorkers,” said Matt Murphy, executive director of the NYU Furman Center, which on Wednesday issued a report documenting how important the tax break is to the city.

But renewing it will be an uphill struggle for the governor.

“My concern with the Hochul proposal is that it is just minor changes,” said Sen. Michael Gianaris (D-Queens), the influential Democratic deputy majority leader in the state Senate, on the Brian Lehrer show Tuesday. 

He added: “421-a is a boondoggle. We need more than modest changes. We need to end it and start over.”

Half-Century Legacy

The 421-a tax exemption was first enacted in 1971, with the city’s economy in its most severe post-war economic downturn, to spur developers to build housing. It has continued in various iterations since with occasional periods when the program lapsed amid disputes over its requirements.

It now accounts for the vast majority of new housing. In the 10 years ending in 2020, 421-a accounted for 68% of all new units in buildings with at least four units, Furman reported. Another related program accounted for an additional 21% — meaning nine out of every 10 new units benefited from some kind of tax break.

And half of all affordable units since 2014 have been built under 421-a and a locally administered Article XI tax break, according to data from the city.

Historically, the affordable units — required in Manhattan and a few other areas — were targeted to people with modest incomes. But when the state legislature tweaked the program in 2016 — renamed Affordable New York — developers were alternatively allowed to set aside affordable units for people earning 130% of the median income in the region — more than $155,300 for a family of four. 

While intended to create housing for middle-class workers, the decision remains controversial as the housing needs of the lowest-income city residents, including homeless people, become ever more pressing.

Furman highlights another inequity in the program as currently crafted: It estimates half of all affordable studios were targeted to the lowest income groups, but only a quarter of two-bedroom units were available to those renters.

The 2016 revisions also effectively eliminated the ability of condos and coops to qualify for the tax break.

The Hochul plan targets both these issues.

Gov. Kathy Hochul gives an update on the Omicron surge, Jan. 11, 2022.

Don Pollard/Governor Kathy Hochul’s Office

Her proposal, tagged Affordable Neighborhoods for New Yorkers, would continue the 35-year property tax exemption for developers who set aside a percentage of units as affordable — but target those to lower incomes. 

The middle-income program is gone, while any project with 30 or more units would be required to provide 10% of units to households earning 40% or less of area median income, 10% for those at 60% or less AMI and 5% at 80% or less AMI.

The units must remain affordable even after the tax break expires, a significant change.

Hochul also proposed that condos and coops would again qualify for the tax break if all the units were restricted to New Yorkers earning up to 130% AMI for the full 40 years the tax break is provided. 

The condo provision originated not with real estate groups but with legislators outside Manhattan, especially in The Bronx, who want to provide a path to homeownership for their constituents, insiders say.

Condo Controversy

Lander is vehemently opposed to the change, which he claims will encourage developers to build condominiums instead of rental units in much of the city.

He projects condos costing $600,000 with $4,000 a month payments could qualify under the program.

“The proposal trades a small amount of more deeply affordable rental units in Manhattan and brownstone Brooklyn for more market rate condos in the rest of the city,” he said.

Real estate industry players say that scenario likely won’t happen — because making a condo development work is likely be too onerous.

Anyone pursuing a condo project would have to get approval from the city’s Department of Housing Preservation and Development, is likely to want to line up financing from a city or state program, and will need go through the arduous process of filing reams of documents with the state attorney general’s office, said Erica Buckley, a partner at the law firm Nixon Peabody specializing in such deals.

“Affordable home ownership deals are really complicated and difficult. We will be lucky if three or four of every 10 potential developers use it,” she added.

New residential buildings hover over Long Island City, Jan. 8, 2020.

Hiram Alejandro Durán/THE CITY

Lander is pushing a plan to link the expiration of the tax break to property tax reform. The city keeps property taxes extremely low compared to the suburbs for single-family homes, coops and condos but levies high taxes on rental buildings that now take on average 30% of a landlord’s operating income.

He says Mayor Eric Adams and the governor should establish a deadline of the end of the year to push through reform to lower rental taxes. If such a plan fails, he said, would reconsider his opposition to some sort of tax break.

Other experts note that property tax reform has been talked about for decades without any action. Taxes also aren’t the only problem in building rental units, notes Martha Stark, the former city finance commissioner who has been a leader in the fight for property tax reform. She ticks off the high cost of land and construction, which lead to apartments costing more than many New Yorkers can afford.

In any event, the Furman report notes, the current 421-a tax breaks will remain in effect until they expire, the cost is unlikely to change through at least 2030 even if the program ends, and the city will see only small increases in tax revenue for years.

‘Good Cause’ Factor

No one disputes that the city needs more housing. “We want more product and I am in favor of more market rate development,” Lander said.

The city needs 560,000 new units of housing by 2030 to make up the deficit in new construction over the past decade and accommodate expected population and job growth in the post-pandemic city, according to a study by the consulting firm AKRF commissioned by the Real Estate Board of New York.

Insiders say the real estate industry won the first battle by convincing the governor to include her proposal in the budget, a move that came after they emerged as a key contributor to her election campaign. (People would discuss the politics of the tax abatement only on a not-for attribution basis.)

Doing so means the legislators opposed to the tax break will have to decide between eliminating it and other programs they want the governor to support. If voted on alone, the tax break would not pass the legislature, the sources say.

The condo tax break is likely to be shelved, the insiders say, calling it a placeholder for a more extensive homeownership program the governor envisions to meet the needs of the boroughs outside Manhattan.

Other real estate groups with less of a stake in the tax abatement fear a tradeoff where the legislature renews the tax break but passes a “good cause’ eviction bill

The current good cause proposal would extend a type of rent control to currently market-rate housing, although it is likely to be watered down before passage.

Some insiders put the odds of 421-a’s renewal at 50-50 and say the building trade unions will need to support the plan. The unions seek to expand a provision that currently requires specific wages for construction and building service workers on projects in Manhattan and some waterfront sections of Brooklyn. 

An endorsement from Adams will also be crucial, and insiders note the mayor and governor are trying very hard to be on the same side of important issues.

A statement from City Hall said the mayor has not taken a position:

“New York City needs more housing that is more affordable in more neighborhoods, and the administration is absolutely committed to using every tool in our toolbox to achieve that. We are currently reviewing the governor’s proposal and look forward to participating actively in any discussion about affordable housing in the city.”

 

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