421-a Reform: NYC is Not Facing a Shortage of Luxury Housing

News flash! Anyone with a passing knowledge of NYC real estate recognizes that developers do not need tax incentives to build on the Upper East Side. However, one would never know that by looking at the annual distribution of nearly $400 million in tax breaks that the City gives to developers through the Section 421-a tax abatement program.

With 421-a set to expire this year, state legislators have the opportunity to reflect on 30-odd-years of misallocated tax breaks, and choose whether to amend the program or let it sunset.

While the mission of 421-a is a worthy one, the real estate realities of NYC have changed in the since the program began, and 421-a has gotten way off course. Intended to encourage the building of affordable housing, 421-a has become a form of corporate welfare—a subsidy program for luxury developers who profit from tax breaks, often without developing any affordable housing units.

According to the NYC Comptroller, Manhattan receives a grossly disproportionate ratio of 421-a tax breaks compared to the rest of the City: 78%. Meanwhile the Bronx receives 3% and Staten Island gets a measly 1%. Even within Manhattan there are huge disparities in who gets the breaks. Washington Heights? Out of luck. The Upper East Side? Cha-ching!

Money that should be building affordable housing for moderate- and low-income families is instead helping purchase the most valuable real-estate in the world. This is not rocket science: the subsidization of luxury housing is not a wise use of taxpayer dollars.

In 1971 when NYC's population was shrinking and the City was facing a severe fiscal crisis, 421-a was enacted to encourage developers to build new multi-family housing by granting them substantial property tax savings under 10-, 15-, 20-, and 25-year plans. As the economy and real estate market recovered in the 80's, 421-a was adjusted to encourage the construction of affordable housing through the creation of a geographic "exclusion zone" between 14th and 96th Streets in Manhattan. In order to receive tax benefits, developers now had to include 20% affordable units on-site, or purchase "negotiable certificates" to fund off-site affordable housing.

The current reality is that many developers are exploiting out-of-date laws to help subsidize million-dollar condos that no moderate- or low-income family dare dream to buy.

The good news is that current 421-a law must be extended before June 30th or it will expire at the end of the year. Until then the state legislature will be considering a variety of proposed changes. The bad news is that many of these proposals, though better than the status quo, lack the visionary reforms that this program needs to effectively help combat the affordable housing crisis facing the city.

Mayor Michael Bloomberg and the City Council have proposed some positive changes for state legislators to consider. They would like to expand the exclusion zones to most of Manhattan, parts of Downtown Brooklyn, and a section of the Queens waterfront—again areas of real estate already highly sought after by luxury developers where development is happening regardless.

We can—and we should—go further.

The exclusion zone must be expanded to cover every inch of every borough, and every developer benefiting from these tax breaks must preserve 30% of their units as affordable housing for moderate- and low-income families.

These units must be onsite—no more broken promises of building somewhere else, someday down the road. Plus, since these units are being subsidized by the taxpayers, the units should be permanently affordable. Otherwise, we are just fostering a Mitchell-Lama buyout type of crisis few in 10- to 25-years when the next round of tax abatement expiration dates hit us smack in the face.

By changing the law to preserve 50% of the designated affordable housing units for people that already live within the boundaries of the local community board, we will be using tax dollars to foster community growth and stability, and help preserve the socio-economic diversity of New York. Considering some of the ways that we legislators spend your money, this seems like a pretty responsible idea to me.

Speaking of the sometimes questionable use of taxpayer funds, why should we give tax breaks to companies who don't pay adequate wages to ensure that their employees can afford their own housing? We do, and we have to stop.

If enacted, these changes will be a huge economic boon for the City. It has been estimated that the City will realize up to $1 billion in revenue over the next decade that can fund a true Affordable Housing Trust Fund. Just imagine the difference a billion dollars could make in the poorest communities where affordable housing and development is needed most.

What NYC is facing is an affordable housing crisis, not a shortage of luxury developments. When we use tax exemptions as incentives in housing, we better use them where we really need them.

421-a is a public benefits program, not a giveaway, and should be re-enacted as such.

*Printed in the May 31, 2007 edition of Our Town.

Liz Krueger (D-Manhattan) is a State Senator representing New York's 26th District.