Real Estate Optimistic About New York’s 421a Tax Changes – Business Observer
What’s in a number? Well for 421a – the controversial tax incentive for residential development in New York – that could be the fate of the city’s housing stock.
Governor Kathy Hochul on Wednesday, she presented her changes to the program. They would still allow developers to pay as little to no property tax for up to 35 years on residential developments that incorporate affordable housing. The new program, dubbed “Affordable Neighborhoods for New Yorkers,” would create a new tax code, 485w, slightly increasing affordability levels while decreasing the percentage of affordable units required in a development.
It would also rate co-op units and condominiums based on income affordability rather than property assessment, require permanently affordable units in large rental projects (those with 30 units or more) – rather than for the expanded tax breaks – and easing the requirement to pay prevailing wages of construction service workers.
Affordable housing and tenant advocates have long criticized 421a, saying it produces negligible benefits to the public while allowing developers to avoid taxes. Hochul’s edits don’t seem to have changed his mind.
The Legal Aid Society called the changes “reform in name only” and “a colossal waste of taxpayers’ money.” City Comptroller Brad Lander opposes 421a and Hochul’s changes, saying the adjustments are a poor and financially wasteful fix for the city’s broken property tax codes, which would be better served by property tax reform and affordable housing subsidies, not through tax relief.
“We should end the 421a program,” Lander told Commercial Observer. “We should reform our property tax system to achieve parity between rentals and condos, and then we should have a program where we provide affordable tax rates for affordable units rather than subsidizing large-scale developments. at market rates in the name of affordability. ”
Almost everyone agrees that the city’s property tax codes are highly dysfunctional, from real estate professionals like JLL’s President of Investment Sales, Robert Knakal, to former government officials like Alicia Glen, founder of the real estate development platform MSquared and former deputy of the city. mayor for housing and economic development. But the program debate tends to divide people around a simple question: Is 421a an affordable housing program or a development incentive?
The first 421a tax exemption began in the 1970s as a way to encourage housing development, and has been revised over the years to include affordable housing and wage requirements for construction workers – a battle that has stalled the program for a year in 2016, when then-Gov. Andrew Cuomo has decided to let the Real Estate Board of New York (REBNY) and the building and trades unions go head-to-head.
Hochul’s version would give developers fewer options to achieve higher levels of accessibility than the current program, ranging from units for those earning 40% to 90% of the median area income (AMI), rather than 40 to 130% in the current program. For context, a single person earning between $33,440 per year (40% AMI) and $75,240 per year (90% AMI) or less would qualify under the Hochul program. A family of four with an income of up to $107,370 would also be eligible, according to the New York City Department of Housing Preservation and Development (HPD).
REBNY backs Hochul’s version of 421a, and the real estate industry as a whole has backed his campaign in the 2022 gubernatorial race. Hochul has raised about $21.6 million for his campaign so far, professionals l real estate making up many of his largest contributions, such as $69,700 from Steven Roth of Vornado Realty Trust, at least $50,000 from Stephen Ross of Related Companies, $18,000 from the CEO of Rudin Management. Company, William Rudin, and $10,000 from Samuel Savarino, a Western New York promoter, according to campaign finance information.
“The Governor’s proposal provides the private sector with an important tool to continuously produce rental housing at more affordable levels,REBNY Chairman James Whelan said in a statement.
The 421a program is extremely popular among developers because it lowers the cost of building residential buildings in the city, according to Patrick Sullivan, an attorney at Kramer Levin who represents developers in zoning and municipal law. He said he’s seen 421a used in every rental property he’s worked on since the latest version of the program went into effect in 2017.
Without the program, the city wouldn’t see much development because the city’s tax burden is so high, said Brett Gottlieb, attorney at Herrick Feinstein. As a result, the city isn’t really losing property tax revenue through 421a, because it wouldn’t have collected those taxes in the first place.
“There’s really no other good option in terms of creating affordable housing,” Gottlieb said. “Developers, whether they love them or hate them, will not be altruistic and reserve 25% of their units for affordable housing just for fun. There will have to be an economic incentive. And if there are none, they will grow elsewhere.
Lander argues the city would be better served by affordable housing subsidies — when the city pays developers directly for the cost of including affordable units, rather than subsidizing a full development, which includes market-priced apartments. The grants cost the city less, he added, since the 421a program caused the city to lose an estimated $1.6 billion in property tax revenue in fiscal year 2020, according to the city finance department.
MSquared’s Glen, however, said 421a abatements are more efficient because property tax revenue is allocated to a variety of municipal services, which means lost property tax revenue would not necessarily be directed to affordable housing. , even if they were perceived. The 421a program also provides affordable housing in neighborhoods that would otherwise avoid it, she added.
The location of affordable housing has become a burning issue in previous versions of the tax incentive. Most affordable housing in the city is concentrated in low-income areas, which can concentrate poverty and make life worse for residents of affordable housing, according to the New York City Independent Budget Office.
This disparity appeared when Extell Developmentit is Un57 development – a super-slim luxury skyscraper on Billionaires’ Row – benefited from an early version of the 421a tax abatement despite having no affordable units on property, according to the IBO. Instead, Extell built 66 affordable units in the Bronx in exchange for tax incentives supposed to save the developer and ultra-wealthy residents $65.6 million over 10 years. (Extell’s Gary Barnett also donated $300,000 to Cuomo as it considered renewing the tax benefit, according to a 2013 survey.)
“It was outrageous – that’s why we got rid of the condos. It was absolutely outrageous,” Glen said of One57’s use of 421a. [in 2017] except for a few very small exclusions for [properties with] 30 units or less. I don’t think an agreement has been reached since, because it was really impossible. It was a massive victory for the people to get rid of all that.
The 2017 version of 421a deleted this loophole that has benefited luxury condos, Glen added, and while Hochul’s proposed changes would apply to condos and co-ops to increase homeownership in the city, it would require those condo developments and cooperatives are sold or leased at 130 percent of the region’s median income. One person doing at most $108,680 per year would qualify for the affordable condo or co-op, and a family of four earning no more than $155,090 a year would also qualify, according to the HPD.
Hochul’s proposal would also relax requirements to pay repairers a going wage – but this change was a drafting error, according to Lander. The previous program required the prevailing wage for workers in any building over 30 units, while the new program was drafted to only require this mandatory wage for workers in buildings over 300 units.
Hochul plans to fix the proposal with an amendment so that workers in buildings with more than 30 units retain the same wage protections in effect as in the current program. His proposal too raises the going wage by a few dollars, from $60 an hour in Manhattan to $63 and from $45 an hour in Brooklyn and Queens to $47.25.
The proposed changes are unlikely to pass without adjustments, Glenn said. The 421a revisions are part of Hochul’s executive budget proposal, which will be open for public scrutiny through legislative hearings before a budget can be passed by the April 1 deadline.