Movement Builds to End 421a Luxury Tax Break

Protesters outside One57 last month.“Subsidize our house, not the penthouse,” protesters chanted outside the One57 luxury-condo building at 157 West 57th St. last month. The protest, organized by New York Communities for Change, was part of a campaign by tenant and housing activists to end the 421a program, a $1.1 billion-a-year tax break for apartment construction that largely goes to luxury buildings, including One57. However, the program may end up a bargaining chip in the battle over renewing the state’s rent-stabilization laws. Both expire on June 15.

“We’re basically subsidizing luxury buildings and giving away money to developers who can afford to build,” says Maritza Silva-Farrell, coordinator of the Real Affordability for All campaign. “It has been proven not to build the affordable housing that we need in our communities, so we want it to end.”

The 421a program, a property-tax abatement that lasts from 10 to 25 years, is intended to encourage housing construction. Last year, it subsidized more than 70,000 new apartments, more than three times as many as it did during the pre-recession real-estate boom, according to a January report by the Association for Neighborhood Housing Development. 

The program dates from 1971, the beginning of the era when one-seventh of the city’s apartments were abandoned. As luxury construction boomed in the ’80s and afterwards, it was modified to require that developers in some areas include some below-market “affordable” housing while they are getting their taxes reduced. Changes that went into effect in 2008 expanded the “geographic exclusion area” where those taking the tax break have to include 20 percent apartments that people who make the city’s median income of about $50,000 a year can afford, defined as about $1,260 a month rent. That area now includes all of Manhattan and the Brooklyn-Queens waterfront from Sunset Park to Astoria, with a thick spur stretching inland from Williamsburg to East New York. 

Outside that zone, developers who take the tax break for 15 years don’t have to include any affordable apartments. They can get a 25-year subsidy if they include 20 percent below-market units, but virtually none choose that option. 

In 2013, however, a no-one-takes-responsibility-for-this amendment to a state omnibus housing bill gave 421a exemptions to five luxury buildings under construction in Manhattan, all of which would normally have been ineligible. The five included One57, the 75-story tower across the street from Carnegie Hall whose $100 million penthouse, recently sold to an unknown buyer, is the most expensive home in the city’s history. The developers got $35 million in tax breaks and contributed $3.5 million of that to affordable housing in the South Bronx, says Thomas Waters, a housing policy analyst at the Community Service Society.

The 2008 reforms “have not changed the program much,” he says. “You need to tie the value of the tax benefit to the value of the housing you’re getting. Right now, it’s not even ten cents for every dollar.” 

The real-estate industry, obviously, wants 421a renewed, arguing that construction costs a lot and they already pay enough taxes. In a February editorial, the New York Observer called opposition to the program “mindless populism,” arguing that only “risk-taking private developers” can build affordable housing. 

Mayor Bill de Blasio, whose plan to build 80,000 new “affordable” apartments over the next 10 years relies on tacking them on to new luxury development, is more likely to support reforming the program than abolishing it. “Mend it, don’t end it,” Public Advocate Letitia James said March 5.

If 421a is reformed rather than repealed, those changes must be “not just a tweak,” says Emily Goldstein, senior organizer at the Association for Neighborhood Housing Development—they must provide real public benefits.

“The primary challenge we face today is not whether the market will, on its own, incentivize development; it will,” ANHD’s January report stated. “Instead, we are faced with the dilemma of how to prevent the market from only building housing that fails to meet the needs of low-, moderate-, and middle-income people and the neighborhoods in which they live.” 

A 2014 study by the Real Affordability for All campaign of 61 Brooklyn buildings that received 421a subsidies found that only 6 percent of the 4,395 apartments in them rented for below market rate. Only five of those 61 buildings, constructed in downtown Brooklyn, Prospect Heights, and Park Slope from 2008 to 2012, contained any below-market-rate units. Of the 257 “affordable” apartments, only 31 were cheap enough for a family making less than $41,000 a year—roughly the median income for city renters last year, according to a Census Bureau survey. 

Virtually all those below-market units received substantial other public subsidies. One building with 303 market-rate apartments and 75 “affordable” ones got $11.7 million in 421a benefits and $86 million from other programs. The one building that received no other public subsidies got $23 million from 421a, for 306 luxury apartments and eight affordable ones. The study estimated that each below-market apartment produced cost $642,000 in public funds.

“With that amount of money, the city could buy each of the people in those units a condo,” says Silva-Farrell. That’s not much of an exaggeration. Condos in the buildings studied cost $777,000 on average. 

Practically, however, some kind of bargaining in Albany involving rent stabilization and 421a is highly probable. Tenants are demanding stronger rent controls, particularly ending the deregulation of vacant apartments that rent for more than $2,500 a month. Landlords want the 421a program continued. Both must be renewed by the state legislature, which is divided between the Democratic-majority Assembly, which is likely to once again pass a bill repealing vacancy destabilization, and the Republican-majority state Senate, where such a bill has never reached the floor.

“If 421a could be traded for repealing vacancy decontrol, that would be worthwhile,” says Goldstein. “Strengthening rent laws is the number-one priority.”

With that in mind, ANHD has proposed four reforms to the program. First, any building receiving the tax break should contain affordable housing. Simply encouraging construction “may have made sense in the ’70s, but not now,” says Goldstein.

Second, the affordable housing should be designated “for a much lower income level.” If done properly, Goldstein says, using luxury apartments to cross-subsidize low-income housing would be a very efficient way to build homes for the one-third of New Yorkers who make less than $33,000 a year. 

Third, all units built using tax breaks should be permanently affordable, instead of reverting to market rate once the subsidies expire. 

Fourth, “double dipping” should be prohibited. Developers can receive public subsidies from several different sources for including affordable units, such as 421a, bonds, and low-income-housing tax credits. They can also volunteer for the city’s inclusionary-zoning program, which allows them to build more apartments on the same land. But in no case are they required to include more than 20 percent below-market units; the same apartment can be counted for credit in each program. In fact, developers getting subsidies from another program besides 421a can double the maximum income level for the below-market apartments, so a $2,500 apartment can still qualify as “affordable.”

“We’re not getting any additional public benefit,” says Goldstein. If a developer is receiving subsidies from two programs, she adds, then they should have to set aside twice as many affordable units.

The de Blasio administration’s dilemma is that the main avenues for building and preserving low-cost housing that don’t involve subsidizing private development have been closed. A 1998 federal law prohibits building any more public housing, even though the number of people on the waiting list for the city’s projects is more than the total number of apartments. Rent controls are in the jurisdiction of the state legislature, which dramatically weakened them by enacting vacancy destabilization in 1997. Changes in tax and pension laws, Waters explains, preclude new versions of the large low-cost developments erected after World War II, such as the labor union-financed Penn South and Electchester and the insurance-company built Riverton and Stuyvesant Town/Peter Cooper Village.  

421a, says Waters, is “really just a subsidy,” just one that goes to housing for people much better off than those in public housing or the Section 8 program. 

“They should replace it with a program that puts money where it belongs,” he adds. Developers and landowners, he believes, should have to apply to the city Department of Housing Preservation and Development to get any kind of tax break, “just like they do for the federal low-income housing program.” 

 

A version of this article appeared in Gothamist.