Luxury Housing Claims Rising Share of J-51 Tax Breaks

A significant share of the city’s J-51 tax breaks, intended to help landlords improve affordable housing, are going to luxury buildings, according to a report released this month by the Community Service Society.

Because the subsidies are not specifically limited to apartments below a certain price, that “undoubtedly results in a large share of its benefits going to unaffordable apartments,” said the report, “Upgrading Private Property at Public Expense: The Rising Cost of J-51.” “Its affordability targeting is also out of date, ignoring the trend toward high-end development in Upper Manhattan and many other areas of the city.”

The J-51 program, begun in 1955, is the city’s second-largest housing-subsidy program, after the 421a tax benefits for new construction. In fiscal 2011, the report says, it supported buildings with 709,000 apartments, more than one-fifth of the city’s housing stock. The $256.6 million it cost was more than the city’s share of the Department of Housing Preservation and Development’s capital and expense budgets. The program provides two kinds of tax benefits: tax abatements, which give owners a limited amount of tax credits for the cost of the improvements, and tax exemptions, which postpone the time when owners have to pay taxes on the building’s increased value for 10 to 34 years. 

The program expired last Dec. 31, and is now a political bargaining chip in Albany. Tenant advocates are urging the Legislature not to renew it without strengthening the state’s rent laws and tenant protections. The real-estate lobby, meanwhile, is acting as if losing the tax breaks would not be a big deal. At the same time, however, it is pushing for legislation to let landlords buy out of the program and deregulate apartments in those buildings. 

That, if enacted, would undo the 2009 state court decision that said the owners of Stuyvesant Town/Peter Cooper Village had illegally deregulated apartments there. As the law stands now, owners of rental apartments who receive benefits are required to keep those buildings under rent stabilization as long as they are in the program. Those apartments stay regulated as long as the current tenant lives there, unless the tenant signed a lease that says otherwise when they first moved in.

Originally, J-51 was intended to help landlords improve substandard rent-controlled buildings; at the time, thousands of “cold-water flats” had no hot water. By 1973, it had aided 250,000 apartments. In the 1970s, when almost one-seventh of the city’s rental units were abandoned, the city expanded the program to encourage private investment in housing. In the 1980s, as concerns grew that landlords were using it to convert buildings to luxury housing, some restrictions were added, primarily affecting Manhattan below 110th Street.

 That geographical limit, the report says, is now outdated, as luxury development has spread to Upper Manhattan, Brooklyn, and Queens. The amount of J-51 tax exemptions has doubled in the last 10 years, which “probably reflects the decade’s surge in investment in gentrifying Upper Manhattan. This geographic pattern is also very likely coupled with a shift of exemptions away from government-assisted buildings.” Meanwhile, the Bronx’s share of apartments receiving benefits, almost 60 percent in 2003, has fallen to less than half. Another flaw, the report notes, is that, “in most cases, eligibility does not depend on actual affordability.” 

While the J-51 program doubtlessly helps many apartments that need improvement, the report concludes, it has not responded to changes in the real estate market enough to shift “the direction of benefits toward the greatest need. The result is the squandering of public funds at a time of great fiscal stress.”

If the program is to be continued, the report recommends, it should eliminate all benefits for coops and condos except those being developed with government assistance; require landlords to seek a J-51 exemption when they apply for major-capital improvement increases, and use all the tax savings to limit rent increases; and eliminate the tax exemption except for buildings being developed with government assistance.