Is the end of the 421-a tax abatement quashing new development?

By Michelle Sinclair Colman | From Trending In New York Wednesday, November 2, 2016

Image by Wade Zimmerman

On this past January 1, the 421-a tax abatement program expired after 44 years in existence. Any new construction permitted before January will still benefit from the program, but many want to know what the expiration of this program mean for new construction? And how will the projects still under the 421-a umbrella use their reduced tax status to promote their buildings?

What are its roots?

The 421-a tax abatement program began as a way to stop the waning residential construction as families moved to the suburbs. The program made new housing construction in New York City eligible for a partial tax exemption for up to 10-25 years and hugely enabled the building of low-income housing. But, over the years, the 421-a became a very controversial program.

The case for and against it

The argument against the 421-a program is that it costs the city too much money and does not contribute nearly as many affordable housing units as originally intended, despite the multimillion dollar tax breaks given to developers who take part in the program. The City of New York’s Annual Report on Tax Expenditures estimates that over $1.1 billion of taxable income was not collected due to this program. And yet, according to a 2015 study by the Association for Neighborhood Housing and Development, “in fiscal year 2013-14 the program covered a total of 152,402 residential units, and granted $1.1 billion in tax abatements. But, only 12,748 of those units had affordability restrictions.” That means only 8 percent of units built under the abatement were affordable. And as an example of luxury buildings exploiting this program, in 2015, Politico reported the luxury highrise One57 saved almost $10 million in taxes due to the 421-a.

In a press release by the Community Service Society CEO, David R. Jones said, “As wasteful public subsidies go, 421-a has no equal, the billion dollars lost annually on this tax abatement debacle is enough to fund 100,000 new rent vouchers similar to Section 8, and thus provide housing to many of the city’s poorest people... It’s time to scrap 421-a come up a housing program that is accountable and actually promotes affordability.”

The argument for the program is that the huge growth in the NYC real estate market would never have happened without the program. Jay G. Seiden, Partner at Seiden & Schein who specializes in real estate said, “I’ve been doing this for 35 years and have seen major parts of the city developed under the 421-a tax abatement program. Since January 2016 until today, we have taken in three residential developments. Normally, we’d be at around 70 buildings. I think that puts perspective on what’s happening. There is really very little residential building going to be done now.”

According to Juliet Pierre-Antoine, Press Secretary of the NYC Department of Housing Preservation & Development, the applications received by the HPD for tax exemption has decreased by almost 200 applications, or 45 percent, from January to September 2016 versus the same period last year (449 versus 252).

421-a as a financial tool

Developers clarify that it is easier to defray costs in condominium buildings but virtually impossible to build any future affordable rental units without 421-a. Susi Yu, Executive Vice President of Development at Forest City Ratner, says, “the expiration of 421-a put the kibosh on new buildings going into development. Without 421-a, it’s impossible to make rental projects economically feasible.”

In an attempt to avert the expiration of the program, Governor Cuomo created a six-month extension in June 2015 stipulating that developers, lead by the Real Estate Board (REBNY), and the construction unions had to come to agreement. The terms Cuomo set out included that developers had to agree to use union construction and compromise on a prevailing wage for those workers. Clearly, this did not happen.

Seiden calls the end of the 421-a program “a self-created recession.” He believes the responsibility must be shared by governor, mayor and the unions. “It’s really hard,” Seiden says, “I get the sense that a lot of people frustrated with politics of it. The status is not going to change until everyone comes to their wits. NYC borrows against its taxable assessed value. Since the mid-1980s, the taxable value of real estate in New York has quadrupled and borrowing capacity has enormously increased. This all happened under 421-a.”

Thomas Kearns, a Partner at Olshan specializing in real estate and corporate law, explains, “421-a made it easier for developers to build and start renting their units and get up to momentum. The program phased in taxes over time, eventually the buildings come up to full tax roll and become a productive entity in city.”

Omri Sachs, Managing Director at Adam America Real Estate, understands the arguments against luxury condominium buildings, like One57, using the tax abatement program, but strongly believes the majority development of housing, particularly affordable housing in the city over the past 30 years, is a result of the 421-a tax abatement program. “Our clients are regular people who are making a nice salary but this is an expensive city.”

Sachs believes the city must find a way to reinstate this program or make land more affordable or else developers will have to “seek other opportunities where land is priced lower, where they can design smarter transactions with landowners and look into other markets. Being a developer is a risky business. We don’t make money in all of our deals. We need the city to help or we have to adjust our returns.”

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Contributing Writer Michelle Sinclair Colman Michelle writes children's books and also writes articles about architecture, design and real estate. Those two passions came together in Michelle's first children's book, "Urban Babies Wear Black." Michelle has a Master's degree in Sociology from the University of Minnesota and a Master's degree in the Cities Program from the London School of Economics.

Read Full Bio | Contact Michelle Sinclair Colman

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What are its roots?

The case for and against it

421-a as a financial tool

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