Why I support Mayor de Blasio’s 421-a reform proposal

Why I support Mayor de Blasio’s 421-a reform proposal

(along with stronger rent laws, a mansion tax, and a real strategy for lifting up workers)

For more than a decade, I’ve been fighting to reform New York’s “421-a” property tax-exemption – which has long been a far-too-generous giveaway to developers, too expensive to NYC, unnecessary to encourage development, and generating far too little affordable housing. 

(Starting in 2003, I helped to lead the effort that won the first significant reforms to the 421-a program in 20 years – implemented in 2006/2007, though unfortunately with a far-too-long grandfathering process that meant it took 7 years for those changes to really go into effect.  In 2011, when the Bloomberg Administration granted an administrative extension to allow developers to utilize the “old” 421-a rules, I was virtually on my own in challenging the extension. And in 2013 I helped lead efforts to support progressive City Council candidates, with the main opposition coming from a SuperPAC created by REBNY, and then worked to reform Independent Expenditure disclosure rules to limit real estate and other corporate influence in NYC elections … if only we had these rules in Albany as well).

Building on that decade-plus of experience, I strongly support Mayor de Blasio’s proposals to:

*** Reform the 421-a program by: (a) requiring affordable housing citywide (right now, you get the tax break for all-market-rate housing in over 80% of NYC, outside the “geographic exclusion area”); (b) eliminating condos (which are more than 50% of the total 421-a exemption, and almost never including affordable housing), (c) increasing the affordability requirements from the current 80/20, while (d) offering developers a longer benefit (to be clear: I don’t love this part, but it is a far better compromise than no reform at all).

*** Strengthen the rent laws in NYC, by eliminating vacancy decontrol & vacancy bonuses, and making “MCI” and “IAI” increases into one-time surcharges, not permanent increases. (I would also like to see efforts to eliminate the “preferential rent” loophole, which lets landlords arbitrarily evict tenants as market-rate rents in a community rise). FWIW, I believe that strengthening the rent laws is even more important than reforming 421-a, since it affects far more actual New Yorkers, at risk of being priced out of their neighborhoods.

*** Increase the “mansion tax,” with a 1% tax on home sales over $1.75 million, and a 1.5% tax over $5 million, which would generate as much as $200 million per year for affordable housing.

I also believe we can take important next steps to insure better jobs in construction & buiding service work (including more union jobs, a higher wage floor, more local hiring, and better enforcement of labor laws), without a citywide imposition of “prevailing wage” rules (that make sense for high-rise Manhattan projects) on small or mostly-affordable housing development in the outer boroughs – a step that would substantially diminish the amount of affordable housing we can produce in the coming years. 

Some of my long-time allies (and very close friends) in the affordable housing advocacy community & the labor movement are opposing the Mayor’s 421-a reforms, arguing that the reforms don’t go far enough.

But the alternative to Mayor de Blasio’s reforms is a straight extension of the current 421-a program (backed by Governor Cuomo) – inarguably a far worse giveaway to developers, since it continues to provide benefits for market-rate-housing-with-zero-affordability in the vast majority of the outer boroughs. A straight extension is far more expensive to NYC, does far less for affordable housing, and does nothing for construction workers.

(And apparently this would be paired, in the Governor’s proposal, with a straight extension of the rent laws, without any new policies to strengthen them – which will lead to a significant loss of many additional units of affordable housing.)

Is the mayor’s reform proposal perfect? Of course not. It is a compromise, rooted in the fact that Republicans control the State Senate, and that Governor Cuomo has not proven to be an ally of either real reform of 421-a, or of strengthening the rent laws.

But between a “straight extender” of the current system, and the Mayor’s proposal? There’s no comparison, and it is an easy call. The Mayor’s proposal is a good one, and it should be adopted.

The politics, the policy, and the economics are all complicated here, so I thought I would lay out my thinking in a little (ok, a lot) more detail. And be honest about a few areas where I’m anxious, and some things we’ll need to watch and keep pushing.

If we were starting from scratch

To be clear: there is a strong argument for scrapping the 421-a program altogether:

*** 421-a is an inefficient and overly expensive way of encouraging either market-rate or affordable housing development, largely because much of the value of the tax incentive likely goes into pushing up land values. So developers pay more to sellers of land, who likely get a big portion of the benefit, leaving less to subsidize construction costs (unfortunately, it is nearly impossible to analyze this effect rigorously).

*** We could certainly spend $1.1 billion (the amount the City is giving up this year through the 421-a exemption, but far the largest) in smarter ways.

*** 421-a functions as a very poor corrective for much-needed, but very-difficult-to-obtain-in-Albany broader reform of the inequities & inefficiencies in NYC's property tax system. NYC’s current tax burden notoriously falls unfairly on multi-family rental housing. Developers of new multi-family rental housing have a difficult time even predicting the tax burden, and also paying it. It would be better to fix this problem (and other inequities in the NYC property tax system), with comprehensive property tax reform. Alas, it is hard to believe that thoughtful reform could come from Albany (where such change would legally have to take place) any time soon.  

So, if we were designing an affordable housing & property tax system from scratch, it would make little sense to include 421-a. But, of course, we aren't starting from scratch.

Even so, there is a good argument for ending the 421-a program, allowing the marketplace to adjust over a period of several years, and then collecting tax revenue on new development, hopefully along with more targeted programs for specific types of housing affordability.

But here are the political and policy reasons why that’s not a realistic option at the moment.

Politically

*** The Republicans in control of the State Senate (and the Governor, too) are strongly set on the renewal of 421-a. Is this largely because they receive enormous campaign contributions from REBNY and the real estate industry, through LLCs and a range of other gaping loopholes? Of course it is. But that is the political reality.

On real estate industry contributions to State Senate Republicans, click here.

On real estate industry contributions to Governor Cuomo, here.

*** Holding the rent laws hostage: a 30-year tradition. Democrats in the Assembly could refuse to renew the 421-a program, but the result would be that the State Senate would refuse to renew the rent-regulation laws – which are far more important to protecting 1 million tenant households. This “holding the rent laws hostage” is a 30-year tradition, renewed every time both laws sunset simultaneously.

I love the idea that we can somehow get both an even-better 421-a reform, and stronger rent laws. But in the short-term, I just don’t see it – short of replacing the Republic State Senate majority created largely through NYC real estate cash, and electing a governor who is genuinely supportive of strengthening rent regulation (for both of which, sign me up).

As policy

But still, I don’t only want to rely on political argument. I’m a wonk, so I also want to explain the problems with eliminating 421-a as policy:

*** If 421-a were eliminated entirely, there would first be a giant rush to get projects into the ground under the current rules (in which, again, developers can get the tax break for all-market-rate housing in 80% of NYC). Last time we reformed the program (in 2006/2007), there was a “one-year window” which wound up covering most of the housing build in the past decade. Total elimination would likely lead to an even greater rush to develop under the “old rules.”   

*** Then, there would almost certainly be a period of time when canceling the program would substantially diminish the production of new market-rate (and some affordable) housing. Over time, land prices would likely adjust. But for the next 3 - 5 years, there would likely be a significant relative decline in construction starts. While the imbalance of supply & demand is not the only reason for rising rents throughout NYC, it is one reason, and there would be some real consequences of making it worse. (Again, it is very difficult to conduct a precise analysis of this contra-factual/potential change. But it would almost certainly be true at some level).

*** Some advocates have talked about the idea of replacing the $1.1 billion in foregone tax revenue with a new affordable housing program. And there is no doubt that if we had $1.1 billion in new money, dedicated to affordable housing, we could design a much better program. However, it almost certainly wouldn’t really work that way.

First, ending the program now would not give us access to this money for many years. We’ve already granted the 421-a tax break to new buildings in construction. And there would almost certainly be some grace period (at least a year), for projects in pre-development. So it is likely that for the next 4 years (approximately 1 year for the program to change, plus a 3-year development & construction period before any new buildings would come online and start paying taxes), we would not begin to collect any new revenue at all. Then, it would phase in based on new construction. I believe it would be roughly 7-10 years before we saved $500 million annually in (incremental) net revenue.

Moreover, as we saw in the 2006/2007 reforms (when we dedicated a one-time pool of $200 million to affordable housing, out of the savings from the reform package), it turns out to be very difficult to capture even a portion of those funds for affordable housing (especially when they materialize so long after the policy change).

*** So, while it is likely in the City's long-term fiscal interest to let the 421-a program expire, and to begin collecting tax revenue from new market-rate development, it would do almost nothing to create or preserve affordable housing in the near term.

I care a lot about the City's long-term fiscal health, and if I thought there was a chance to win this in Albany without sacrificing the rent laws, I would explore it. However, in the short term, eliminating 421-a would have little fiscal benefit, and would actually be harmful to the creation of affordable housing. And even in the long term, there's not much reason to believe we could make ending the program beneficial from an affordable housing point-of-view.

Why the de Blasio Administration Proposal is Far Better than the Current Program

Meanwhile, back in the real world, the de Blasio Administration proposal for 421-a is far, far better than the current program – especially when taken in tandem with their proposal for strengthening the rent laws. Here’s why:

*** Citywide affordable housing requirements (currently, the “GEA” covers less than 20% of the city’s geography): When 421-a was adopted in the 1970s, it was a tax break for “market-rate-only” development everywhere. In the 1980s, an affordable housing requirement was added by creating the “Geographic Exclusion Area” in core Manhattan (a tiny fraction of the city, not even including Lower Manhattan, where – as a result – the all-market-rate housing built after 9/11/2001 is like the most publicly-subsidized-housing in history).

In 2006/2007, the GEA was expanded (after a great organizing campaign), but it still covers less than 20% of NYC. We were able to win all of Manhattan, and a decent chunk of downtown/brownstone Brooklyn. But the current GEA covers almost none of Queens, the Bronx, or Staten Island, and none of southern/eastern Brooklyn (check out the map here).   

I've been calling for citywide affordable housing requirements from 421-a for a decade. It does not make sense to provide subsidies for developments that do not include any affordable housing. This proposal achieves that, and that is a big deal. 

*** Eliminating condos from the 421-a program will make it far less expensive. As this chart from the NYC Independent Budget Office shows, more than half of the 421-a tax expenditure is from condos – which are almost entirely market-rate development. Providing the benefit to condos makes little sense. There is strong reason to believe it simply increases the sales price of each unit (since sellers charge as much as they can in the marketplace). In fact, this can wind up hurting home-buyers, who then have to pay a huge tax increase starting when the benefit expires.

And right now, for a combination of market, financing, and tax reasons, there is a very strong market preference for developers to build condos.

Meanwhile, rental units in the 421-a program (both market-rate & affordable) must be put into rent stabilization. So hopefully eliminating condos from the 421-a program will help a little bit to balance the scales. It has the chance to increase meaningfully the number of rent-regulated units in NYC's housing market for the long-term.

*** More & deeper affordability: While it doesn’t go as far – on its own – as many advocates would like to see, the de Blasio Administration proposal increases the requirements for affordability in 421-a projects, from “80/20” (i.e. 20% of the units at or below 60% of AMI) in the large “hot-market” projects to “75/25” (with 10% of the units lowered to 40% of AMI). As I note below, I understand the concern about the “130% of AMI” option (aka “Option 3) – and am eager for some steps to address those concerns through rent-regulations, mandatory inclusionary zoning, and other elements of the de Blasio Administration housing plan. But based on a recent analysis of land and development values by the Furman Center, I think this is a reasonable approach to how much value we can get for the benefit.  

Some Anxieties & Things to Watch

I’ve been listening carefully to the concerns raised about the de Blasio Administration proposal. To my mind, none of them come close to justifying a “straight extension” of the current, deeply flawed program. But I’ll make a few observations about them here: 

*** Depth of affordability: I certainly understand the anxiety about the “30% of the units at 130% of AMI” option, which is well above the income of the average of New Yorker. I don’t believe developers will choose this option in “hot-market” neighborhoods, where the “75/25” model will almost certainly be more beneficial. So it needs to be observed that in the vast majority of neighborhoods where developers will likely take this option, a straight extension means getting 421-a for all-market-rate projects.

But I will have my eye on a few key issues that will determine whether this option works out to generate affordable housing:

-- Combination with mandatory inclusionary zoning (MIZ) to deepen affordability: It is critical that the depth and breadth of affordability for new development be further extended when the Administration comes out with its new mandatory inclusionary zoning (MIZ) rules. Where MIZ + 421-a are combined, we must achieve deeper affordability, with meaningful requirements of genuinely low-income units. I wish we already had those rules, and am eager to see how they will work.

-- Rent-regulation rules for new 421-a rental units: All new 421-a rental units – both market-rate and affordable – are already required to go into rent regulation (and cannot be deregulated for the period of the benefit), and this would be true for “Option 3” as well. The de Blasio Administration proposal to strengthen rent regulations would mean that these buildings could not take vacancy bonuses, and that IAIs & MCIs would be one-time surcharges rather than rent increases. This would make even the "market-rate" units a real value from an affordable housing point-of-view. 

Of course, if the rent laws aren’t strengthened in Albany, then these things are not guaranteed. But I would push, in that case, to require these "rent regulation plus" elements of new 421-a units, even if they are not won for all rent regulated units, as I hope they will be. And, especially in this case, I would push to eliminate "preferential rents" for these units as well, which would mean that the market-rate units would at least be firmly set at today's rents, and don’t allow tenants to be displaced when gentrification pushes rents up rapidly in their neighborhoods.

*** Extended tax break, fiscal impact, and better information:  I don’t love the extension of the tax break for 10 years. It will have a real and long-term fiscal impact to NYC, and we need the additional tax revenue to fund and sustain our infrastructure. It is a compromise of necessity to improve the program at a moment when Republicans control the State Senate, and should be carefully reviewed annually.

One thing we need for sure, in this regard: better information. Right now, it is difficult to get good financial information on 421-a buildings. The Furman Center, Municipal Arts Society, ANHD, and the NYC Independent Budget Office have all tried to run analyses in recent days, but the existing data makes it very difficult. One thing we should do for sure: insist on better data-collection and analysis, so we can review the lifetime costs of the benefits we are providing, and review them again in a couple of years.

*** Addressing displacement:  As the mayor has noted, we have to do more to address ongoing issues of displacement caused by rent increases and gentrification. The best thing we can do here, by far: (1) strengthen the rent laws!  There really is no substitute. Next, (2) expand legal representation for tenants in Housing Court, as the Mayor & City Council are committed to do. And finally, I am eager to see (3) expanded “anti-harassment provisions” for rent-regulated tenants, that would require that any developer seeking to demolish, gut-renovate, or add to a rent-regulated building must get a “certificate of no harassment.”

*** More not-for-profit affordable housing development:  The 421-a benefits go overwhelmingly to for-profit developers, who retain a profit incentive that so often leads to pressure on tenants over time, in either rent-regulated or affordable units. One important answer to this: more support (i.e. dedicated land and subsidy) for not-for-profit affordable housing groups, including community development corporations, mutual housing associations, and land trusts, who create permanently-affordable housing. These “mission-driven” organizations can go a long way to creating housing that is not only truly affordable, and permanently-affordable, but that truly strengthens our communities.

Addressing the Issue of Construction & Building Service Worker Wages

Finally, a few observations on the issue of prevailing wages and affordable housing. I’m a champion of unions, of treating workers fairly, and of lifting wages through public policy. I was proud to help building service workers secure the agreement in the 2006/2007 reform that requires the prevailing wage for those workers (which costs very little to developers, but makes a huge difference in whether those workers live in poverty). And I’ve helped fight for “project labor agreements” and a major “CM build” agreement in NYCHA to secure union jobs on large-scale projects.

There is a lot of room to move forward, with a thoughtful plan, to insure that construction workers are treated fairly and paid well, and that the de Blasio Administration housing plan helps to provide more and better job opportunities. A few elements of this plan might include:

  • Requiring the “A rate” prevailing-wage, union construction for the Manhattan (and large-scale, hot-market Brooklyn & Quens) “75/25s.” If we can do this via 421-a, great. If not, we can explore other routes, including MIZ and project labor agreements.
  • Creating an affordable-housing, unionized “B rate” program, in which majority-affordable housing projects are built union, but at a more affordable rate. There’s been talk about this for a decade, but we haven’t made real progress. This would be a great time to do so.
  • Increasing enforcement on all affordable housing projects, to root out the worst contractors, make sure all construction workers are paid a reasonable minimum (at least $15/hour, and hopefully well more than that), have good job safety, and access to training and career ladders.
  • Local hiring provisions, to make sure low-income New Yorkers who need jobs have a real shot at careers in construction.

But: we cannot simply apply the prevailing wage “A rate” across the board to all 421-a projects. This would mean requiring the payment of high-rise Manhattan construction costs to small and even all-affordable projects in the outer boroughs. That would dramatically increase the cost of construction (by 20-30%), and thus significantly reduce the amount of all-affordable housing and smaller, mixed-income housing that would be built.

And we certainly should not use this as an argument for maintaining the status-quo, via a “straight extender” of the existing rules – which are an enormous giveaway, and don’t do anything for construction workers at all.

(I know it is being billed as a “one-year” extension, and we’ll do better next year. But last time, it took us 7 years just to get the reforms we passed in place, and I see no reason to believe it would be different this time).

To Conclude

Is the de Blasio Administration 421-a reform proposal perfect? Of course not. It is not a panacea, and it won't solve our affordable housing or displacement woes.

Could we imagine an even-better reform of 421-a (especially if we didn’t have a Republican State Senate, and a Governor who has been closely aligned with real estate interests who rely on 421-a)? Of course we could.

But given all the factors (and not only the political ones), it is a good proposal, and one I support. 

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