Testimony on Reform of the 421-a Property Tax Exemption Program
Support Comprehensive, Citywide Reform (Intros. 490 & 487) to Create Affordable Housing and Save Taxpayer Dollars
Chairman Dilan, members of the Housing & Buildings Committee, thank you for the opportunity to testify. I want to begin by thanking the Committee, Speaker Christine Quinn, and the Bloomberg Administration for your hard work on this important topic. We have come to collectively recognize that 421-a property tax exemption program – which made sense when it was created in the 1970s – has become a deeply misguided, tax giveaway of hundreds of millions of dollars primarily for luxury housing. We all agree that profound reform is necessary – but not easy – and I have deep appreciation and respect for the work of the Committee, the Speaker, and the Administration to make this reform happen.
At the same time, I believe that the changes proposed by Speaker Quinn and Mayor Bloomberg – while a substantial improvement on the status-quo – do not go nearly far enough toward comprehensive reform to create affordable housing and make the best use of taxpayer dollars.
The starting point here is simple: Developers and owners of market-rate housing – like the rest of New Yorkers – should pay their taxes. If they want a tax break, they need to provide the public benefit of creating affordable housing.
Intro 490, sponsored by Councilmember Palma (and Intro 487, sponsored by Councilmember Gerson) is built on this basic point. Anywhere in the city, developers seeking a tax break would have to include 30% affordable housing, on-site, and commit to keep it permanently affordable. Otherwise, they are still welcome to build – they would just have to pay taxes like the rest of us.
Still Too Big a Giveaway (approximately $100 million each year)
In 2006, the City gave up more than $400 million of revenue through the 421-a program, for all of the buildings granted exemptions over the past years. Perhaps more significantly, the City authorized $963 million (in lifetime, net present value terms) of tax breaks for newly built buildings that came onto the market in 2006.
Of this nearly $1 billion, much went to buildings containing affordable housing (through the 20- year exemption for 80/20 buildings in Manhattan, or the 25-year benefit for affordable housing elsewhere in the city). But approximately $422 million went for newly-built buildings that contain not one single unit of affordable housing (calculations and assumptions are attached).
The proposal by Speaker Quinn and Mayor Bloomberg would help to correct this problem. However, we estimate that the City would still be giving out approximately $100 million each year (in lifetime, net present value) of tax breaks for market-rate new developments outside the exclusion zone that do not contain any affordable housing.
Councilmember Palma’s bill would correct this $100 million annual mistake. Instead of a $100 million tax giveaway for market-rate housing in upper Manhattan and the outer boroughs, we would either get on-site affordable housing, or we would collect the tax revenue (which can then be used to build affordable housing elsewhere).
Still Subsidizing Luxury Development in Every Borough
This $100 annual million mistake is not simply a dollar figure. It is high-end buildings, in every borough, that receive large tax breaks, even though they are priced far out-of-reach of the vast majority of residents in their neighborhoods.
The Pratt Center recently released a report identifying high-end condos in neighborhoods in all five boroughs that would continue to receive generous tax subsidies (of up to $107,000 per unit in lifetime benefits) even under the compromise proposal to reform the 421-a program supported by the Speaker and the Mayor.
This report highlights 54 condo buildings (samples below) that would still be eligible for 421-a tax relief, even if they would have been built after the proposed reforms. These buildings contain more than 6,100 high-priced condominiums, far beyond the reach of the average New Yorker.
Not one unit is priced for less than $350,000, most are above $600,000, and some exceed $2 million. They are located in every borough, in neighborhoods including Riverdale, Flushing, Long Island City, Brighton Beach, East Harlem, Washington Heights, and Roosevelt Island. Even with the new limits proposed on the benefits, the estimated lifetime tax breaks on these buildings – post- reform – would be over $500 million.
Citywide Reform Will Not Significantly Dampen Development
Opponents of citywide reform have argued that eliminating the as-of-right, 15-year benefit for market-rate construction in the outer boroughs will harm development. But I believe this is a mistaken argument for a number of reasons:
- The 421-a benefit is a relatively small factor relative to other much more important factors, like the housing market, the cost of construction, and interest rates.
- HPD projects that having 421-a benefits enables a developer to charge about $30,000 - $40,000 more for a condo. In the vast majority of places around the city, developers would still develop even if they had to sell the unit for $30,000 - $40,000 less.
- NYC is facing an affordable housing shortage, not a market-rate housing shortage. The vacancy rate for low & moderate income units is under 3%. For higher income units, the vacancy rate is nearly 10%.
- Market-rate units do not “trickle down” to make things easier for working families. The housing market overall is so tight that even with the highest rates of market-rate production in years, there is no impact on more moderately-priced units.
- Therefore, even if there are a few units somewhere that need the 421-a benefit to take place, it is not worth the many market-rate units that are receiving large tax breaks.
- We need to use tax incentives to create affordable housing, not market-rate housing. We can have both – but since developers will continue to build market-rate housing because it is profitable, we need to use tax breaks for affordable housing only.
If the Council is truly concerned about making room for moderate- and middle-income housing units, there are a range of options. We have in the past explored a “tiered affordability model,” which would allow developers to receive 421-a benefits for providing affordable units on a sliding scale – from 30% of the units at or below 50% of the area median income, up to 100% of the units affordable to families earning 120% of the area median income. This model would enable developers to receive tax benefits for creating permanently affordable housing for moderate and middle income families.
More & deeper is reasonable
Especially with the kind of tiered approach outlined above, it is entirely reasonable to seek more and deeper affordable units from this program – especially in strong-market areas.
Councilmember Gerson has an especially good idea in this regard. In those areas where developers are eligible to receive both 421-a tax benefits and an inclusionary zoning density bonus, they should have to do more than just the minimum to get only one of those. This was the general rule in Manhattan prior to the Hudson Yards Rezoning – developers had to include 27% affordable units to get both benefits.
These are very large benefits, especially in Manhattan. The value of the tax break, per affordable unit, of the 20-year exemption in Manhattan is $119, 598 per market-rate unit, or more than $475,000 per affordable unit. And the value of inclusionary zoning is significant as well, allowing a 33% density bonus where land is worth $200 per square foot. With these substantial benefits, it is perfectly feasible for developers to include more affordable housing.
In addition, these requirements could be easily aligned with HDC’s Mixed Income Program which provides financing for developments that are 50% market, 30% middle-income, 20% low-income.
Commit More Money to the Affordable Housing Trust Fund
I am pleased that the Speaker and the Mayor have agreed on the wisdom of creating an Affordable Housing Trust Fund, capitalized by anticipated savings from the 421-a reforms being proposed. However, the $400 million figure that has been proposed is far too small.
I concur with the analysis by Housing First!, which found that these reforms would lead to about $1.5 billion (lifetime value, in net present value) from the development of new buildings in the next 10 years – and that at least $1 billion must be committed to affordable housing.
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For all these reasons, I enthusiastically support Intro. 490 by Councilmember Palma (to insure that developers seeking tax breaks citywide include 30% affordable housing, on-site, and permanent), and also Intro. 487 by Councilmember Gerson (to require developers receiving both 421-a and inclusionary zoning benefits include 35% affordable housing).
With these reforms, the City Council can shift the 421-a program from a hundreds-of-millions dollar giveaway for luxury housing to a program that truly creates affordable housing and makes wise use of taxpayer dollars.
Thank you very much for this opportunity to testify, and for your work on this important issue.