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What the 421-a Tax Break Stalemate in Albany Means for NYC Housing

By  Jeanmarie Evelly and Amy Zimmer | June 16, 2016 5:33pm | Updated on June 17, 2016 4:54pm

 A rendering of The Durst Organization's Hallets Point development, which they say they can't complete unless 421-a or a similar tax program is revived.
A rendering of The Durst Organization's Hallets Point development, which they say they can't complete unless 421-a or a similar tax program is revived.
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Durst Organization

NEW YORK CITY — Albany wrapped up its last official session of 2016 on Thursday, without renewing or replacing the state's controversial 421-a program — a tax break for certain newly-built residential developments that expired in January.

Lawmakers were slated to reconvene in both the Senate and Assembly early Friday, but it was still unclear Friday morning whether they'd resolve the issue before adjourning for the year.

Without a tax break program, developers warned that rental housing development is likely to shrink and put a major dent in Mayor Bill de Blasio’s plans to build 80,000 new units of affordable housing over the next decade.

State lawmakers this week proposed a replacement bill that sets new wage floors for construction workers on projects receiving the tax breaks. And while the real estate community seems placated, construction workers and housing advocates say the new plan doesn't do enough.

Both sides agree though that 421-a had been a large drive of rental development in the city, and without it, some sort of subsidy would be needed to replace it.

On Wednesday, the mayor criticized the existing program for wasting taxpayer dollars to subsidize luxury housing.

"There is a lot of evidence out there that the housing market is slowing," Bill de Blasio said. "We're not going to be able to create the kind of affordable housing we need in this city if we don’t have a tax credit program that’s appropriate, that really focuses on affordability."

Before 421-a expired, a flurry of developers rushed to file their construction permits. The Department of Buildings authorized permits for more than 56,500 new residential units in nearly 2,000 buildings in 2015 — an almost 180 percent increase from the year before, according to a recent analysis from the New York Building Congress.

Right after the tax break’s expiration, permits took a nosedive. The DOB approved only 453 units for construction in January, which was below the average monthly number of permits issued during the height of the financial crisis, the Real Deal found.

Here's a primer on 421-a.

What is 421-a?

The program launched during the fiscal crisis of the 1970s to encourage new residential construction by offering developers tax breaks.

It went through several subsequent iterations, the most recent of which included certain "geographic exclusion areas," where developers could only get the benefits if they included a certain portion of affordable units in their projects.

That meant in all of Manhattan, parts of Claremont and Crotona in The Bronx, areas on the north shore of Staten Island, parts of Astoria, Long Island City, Woodside and Jackson Heights in Queens, and a number of neighborhoods in northwest Brooklyn, developers were required to include a certain percentage of affordable units. (You can find a map of those areas in this download link.)

Projects in the remaining parts of the city could get the tax breaks even without building affordable units.

Why did 421-a expire?

When the program was set to expire at the end of last year’s legislation session, Gov. Andrew Cuomo extended it to January and challenged real estate developers and construction labor unions to negotiate a new deal. The groups needed to include some form of a prevailing wage requirement for construction workers for buildings with 15 or more units that are participating in the program.

They failed to come to an agreement.

The Building and Construction Trades Council, which represents the unions, argued that developers have a responsibility to provide good wages since they're getting public benefits, but the Real Estate Board of New York said at the time that the costs of doing so would be prohibitive to development — or would force the government to increase subsidies to help cover costs.

Where does 421-a stand now?

On Monday, lawmakers introduced a bill in the State Senate to create a replacement version of the tax-abatement — called 421-aa — which would set a new wage floor for construction workers at $15 an hour, rising annually to hit $21 an hour by 2020.

Developments with more than 300 units built south of 96th Street in Manhattan would be required to pay construction workers at least $55 an hour under the proposal.

Gary LaBarbera, head of the building unions, called the $15 wage requirement “offensive” since construction workers do such "specialized and very dangerous" jobs.

"That is outrageous, that is ridiculous," he said on Thursday.

Meanwhile, REBNY President John Banks III gave his approval of the bill, saying in a statement that it would "produce even more affordable housing."

"Any meaningful effort to address the city's affordable housing needs will require reviving the 421-a program," he said, pointing to a REBNY report in April, which found that half of the city's affordable projects in the last two years used 421a.

But the Association for Neighborhood and Housing Development (ANHD) advocacy group slammed the proposed 421-aa legislation as being far too generous to developers.

"The bones of the program really aren’t great, and the proposal the senate put out is actually even worse," ANHD Executive Director Benjamin Dulchin told DNAinfo.

The proposed legislation would also repeal the authority of the city to shape the affordability requirements of 421-a. And decrease the percentage of affordable units required, while lengthening the exemption period to 35 years — dramatically increasing the cost to the city in lost tax revenues, ANHD said.

The bill was referred to the Senate Rules committee, where it still remains.

What happens if 421-a isn't renewed or replaced?

Real estate developers say that without the tax abatement program or something similar, it will be hard for them to finance the construction of new rental housing — including affordable units. Instead, building condos would be the more viable option because of land and construction costs.

"Without it, you will eventually wreck havoc on the housing market, causing limited supply causing rents to rise and making New York City an inhospitable place," said Jordan Barowitz, a spokesman for the Durst Organization, one of the city's most prolific developers.

The future of Durst's own massive Hallets Point development is up in the air without 421-a. The company broke ground on the first building of the project a day before the tax program expired, and so is moving forward with the first 400 units in the plan, about 80 of them affordable.

But unless some version of the tax break is revived, the rest of the 2000-unit complex — six additional buildings with about 400 more affordable units — can't move forward.

"The project needs the tax abatement to be economically viable," Barowitz said.

Experts say the loss of 421-a could also greatly hinder the mayor's recently-approved Mandatory Inclusionary Housing plan, which largely relied on the tax breaks to make it easier for developers to build housing that includes affordable units. 

Existing alternative tax abatement programs have more stringent requirements than 421-a, many developers have said.

Some experts, including NYU’s Furman Center, believe 421-a tax breaks helped prop up land prices and without it, land prices could fall.

But Dulchin of ANHD says he doesn't think the program's halt will bring construction to a standstill.

"This is a worse deal, no need to rush it — let's sort of see how the market plays out," he said.