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New 421-a Tax Break for Developers Could Cost City Billions: Study

By Amy Zimmer | November 19, 2016 2:04pm | Updated on November 21, 2016 7:47am
 There were four subsidized apartments opening up in a new building on Stanhope Street in Bushwick for singles and couples making up to $38,100.
There were four subsidized apartments opening up in a new building on Stanhope Street in Bushwick for singles and couples making up to $38,100.
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DNAinfo/Gwynne Hogan

MANHATTAN — Developers have warned that Mayor Bill de Blasio's plan to build 80,000 units of affordable housing would be in jeopardy without the state's 421-a tax break. But a proposed update to that law could actually cost the city billions of dollars in what advocates describe as a "wasteful giveway."

Under a new 421-a agreement up for approval by state lawmakers, the Real Estate Board of New York trade group that represents developers says it needs the program to put shovels in the ground for affordable and market rate rentals.

But an analysis from the Alliance for Tenant Power — a coalition of housing, community and legal service groups — said the new program would cost the city $2.4 billion a year in lost tax revenue.

That’s double the $1.2 billion the program cost the city in 2016, which only yielded about $100 million a year worth of affordable housing, the group said.

“There are better ways to use billions of city tax dollars each year to house low-income New Yorkers," said Thomas Waters, Housing Policy Analyst for Community Service Society and author of the study.

Alliance members are concerned about the potential loss in tax revenue at a time when important federal subsidies face uncertainty amid the incoming Donald Trump presidency.

The president-elect, for instance, has already warned that he will withhold federal funds from “sanctuary” cities like New York, where local police refuse to cooperate with federal authorities on certain aspects of immigration enforcement. There are also concerns about the new administration cutting back on Section 8 vouchers for low-income residents and on tax credits that help build affordable housing.

Gov. Andrew Cuomo charged REBNY and construction labor unions to negotiate a new deal that included some form of a prevailing wage requirement for construction workers. After missing a January deadline and letting the program expire, the two trade groups announced a deal last week.

This week, however, REBNY released further details, and seemed to backpedal on some previous statements.

Under the new plan:

► Eligible buildings in Manhattan — those with 300 rental units or more south of 96th Street — would pay, on average, an hourly wage of $60, including benefits.

► Eligible buildings in Brooklyn and Queens — those in Community Boards 1 and 2 within a mile of the nearest waterfront bulkhead — would pay construction workers, on average, an hourly wage of $45.

► These buildings would get a 100 percent tax exemption benefit for 35 years in exchange for keeping income limits for renters in place for 40 years.

When the new agreement was initially announced, REBNY issued a statement implying that all buildings participating in the 421-a program would get the 100 percent break over 35 years.

This week, however, the group clarified that buildings outside those “wage” areas in Manhattan, Brooklyn and Queens would get a tax break for 20 to 25 years, the size of which would decrease 10 to 15 years into the program.

"There was a misunderstanding between the parties regarding the 35-year provision of the 421-a agreement announced last week," Jamie McShane, REBNY’s senior vice president, said in a statement.

But “in the interest of getting legislation passed that will reinvigorate the production of new rental housing,” REBNY’s executive committee agreed that “the 35-year tax exemption should only apply to those projects that participate in the wage and benefit agreement," he added.

Providing larger tax break to buildings that did not give the higher wages raised eyebrows even more among housing advocates.

In the wage areas that are slated to get the 100 percent exemption, it represents a 25 percent loss in revenue, Waters’ analysis found. That money is a big piece of the revenue they say would be lost overall under the plan. 

The wage areas are the most desirable for developers and they get the biggest benefit from the program, he said, adding that had the program extended the bigger break citywide, it would have cost about $100 million more to the city.

For a program that has such a tremendous impact on the city, it “raises flags” that local elected officials were not part of crafting the agreement, said James Parrott, of the Fiscal Policy Institute.

“It’s not the way public policy should be formulated,” said Parrot, who said the program merited a careful cost-benefit analysis. “An agreement largely negotiated by two private parties may reflect a balance of their interest but not a balancing of the public interest."

Having a cost-benefit analysis would help fine tune the program, he added.

“It raises the question whether there is a more affordable way to incentivize affordable housing,” Parrott said.

The state originally launched the 421-a program during the fiscal crisis of the 1970s to spur 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.

Before the program expired in January, the number of building permits surged, as developers rushed to get foundations to qualify for the tax exemption.

Though the number of permits then fell precipitously in the first quarter of this year, the numbers of permits began increasing again later in the year, rebounding to 2014 levels — even while 421-a was on hold — according to a recent analysis from NYU’s Furman Center.

But REBNY insists that the program is essential for affordable housing, especially in the city's most coveted neighborhoods.

"The 421-a program has accounted for a majority of the affordable housing projects in the city," REBNY President, John H. Banks, III, said in a statement, "particularly in those areas where high land costs, construction costs and property taxes make it most difficult to build below-market rental housing and where economic diversity is more difficult to achieve."

He added, "The critics can cling to their ideology, but facts are facts. Without 421-a, the ability to create more affordable housing will be significantly curtailed."