A very important hearing was held yesterday morning at City Hall. And bear with us, because there’s a lot of complicated stuff going on here, but you will feel way, way more informed about the current state of affordable housing in this city if you take a deep breath and listen up for this twisted tale. The City Council’s Committee on Housing and Buildings met for a hearing regarding a lil’ old tax exemption called 421a. Sound familiar? Probably not unless you’re a real estate dork, local politician, billionaire developer, or affordable housing activist.
But 421a is something every New Yorker should understand, because it’s a program that in 2014 alone ate up $1 billion in foregone tax revenue. Yep: $1 billion. That’s the city’s largest tax cash cow when it comes to housing. What’s more, critics of the tax incentive program say that luxury condo developers are seeing undue benefits from a program that’s functioned under the guise of an incentive for developers to build affordable housing.
The program has generally been approved and re-approved in the past, but on June 14th of this year 421a is set to expire and there’s a chance that representatives in Albany won’t vote for its renewal. The change could have enormous consequences for the real estate market, and some say it could even threaten affordable housing development, but as Council Member Jumaane Williams said on Thursday: “The way that it exists now is a debacle.”
421a isn’t an easy program to understand, mainly because it’s gone through so many changes since it was first introduced in 1971 as a means of stimulating housing construction. Back then, New York City housing stock was in a state of decay and economic crisis wasn’t inspiring anyone to build much of anything. So the State developed a program to address the lack of construction by introducing 421a. In exchange for creating housing, developers would be exempt from paying additional taxes on the property (or taxes that would apply to the value added when a giant apartment building goes up, for example).
As the city’s economy bounced back, 421a acquired more restrictions. “At its inception, it was not an affordability program,” Vicki Been, Commissioner for Housing Preservation and Development (HPD) said during her testimony today at the housing committee hearing. Since the program wasn’t tailored specifically to create housing for low and middle-income earners, some say it’s not the most efficient way to create affordable housing.
The first affordability requirements for the 421a exemption came in 1984, when developers building on sites located in the strongest real estate markets in Manhattan were required to include affordable housing in their buildings. This “Geographic Exclusion Area” (GEA) expanded to include areas in all the four boroughs. New developments in these areas are required to designate 20 percent (hence 80/20 housing) of their units as affordable in order to receive the 421a benefits, which can last for up to 25 years. The deeper the affordability benefits and the more desirable the location, the longer developers can reap the benefits. While developers are exempt from paying certain taxes on the property, the affordable units are “subject to rent stabilization,” Been explained.
The tax exemption is now so common, as Josiah Madar, a research fellow at NYU’s Furman Center for Real Estate and Urban Policy explained in an interview last summer, that “by and large, every new rental project in Manhattan that’s a large building, will claim 421a.” He added: “It’s kind of required to make the numbers work.”
What’s changed since 1984, that along with increasing restrictive rules guarding 421a benefits, there have been just as many moves to ease things up. For example the 421a certificate program allows for developers building affordable housing to generate certificates, which are then approved by HPD. These certificates can be sold on the free market to other developers who are hoping to build within the GEA and benefit from 421a. Whoever buys the certificates is not required to build affordable housing, because technically the housing has already been built. And whoever sells these certificates makes bank.
And wouldn’t you know it but there are some much darker forces behind this whole GEA thing. Jumaane Williams questioned Been during the hearing yesterday: “How did [the representatives in Albany] choose different areas?”
Been hesitated before hinting that real estate interests were involved. “How do I say this politely? [Albany] recommended boundaries based on what they thought made sense, based on the strength of the market,” she said. “These boundaries were then amended in Albany, which some people would argue left a bit of a mess.”
Furthermore, the definition of “affordability” in city official parlance includes a target population of people earning up to 100 percent of the Area Media Income (AMI). Therefore some developers benefitting from 421a tax benefits could price an apartment as just affordable enough for a single person earning up to $58,800 a year, an income which many people in New York City can only dream of earning.
Vicki Been explained that one concern amongst critics of 421a is that it’s “no longer necessary in a city that is economically thriving,” while others see the tax exemption as “critical to spur residential development.” But as Steven Levin, Williamsburg’s City Council Rep put it today at the hearing, “I don’t buy the premise that private developers will not build without the 421a tax credit.” Simply put,most politicians are worried that there is too much money at stake if developers stop building altogether. But that’s a big “if.”
“I think the general consensus is, that as an affordable housing program, 421a is extremely inefficient and the benefits it gives out are way more generous than the value of the affordable housing,” the Furman Center’s Josiah Madar explained during a phone call.
But while critics like the Association for Neighborhood Housing and Development point to the $1 billion cost of the program and the fact that in 2013, 421a “netted just over 13,000 affordable rental apartments,” Commissioner Been reminded everyone at the hearing that price tag is a cumulative one and actually includes “projects started 24 years ago.” So that figure is actually much larger.
Commissioner Been spent hours yesterday testifying about the benefits and drawbacks of the 421a program, or rather spoke to what her agency is doing to figure out how the program actually functions and whether it’s the most efficient way to create affordable housing. You see, the previous administration kind of left the agency high and dry despite the fact that HPD is in charge of overseeing much of the 421a process.
When Council Member Williams asked Been if HPD could deliver numbers on how many certificates are “out there” or being held on to by developers waiting for the opportune moment to sell them for TONS of money, she responded: “In a wonderful world, yes, I would have them, but in a world where the prior administration did not invest in basic technology… our records are not sufficient to testify under oath.”
One very telling thing about Been’s testimony is that, at times, she appeared unsure about her explanation of the finer details of the 421a program, or at least had a difficult time explaining it. And consider that Been is legit an expert on the issue of 421a; she previously served as Director of the Furman Center, a highly respected research center devoted to real estate, housing, and land use in New York City. How the hell can anyone really unravel this program if even Been was having a hard time getting City Council members to understand exactly what’s going on with the 421a program?
The only people who seem to really understand all the ins-and-outs of 421a are the developers who can profit from it. Like with any tax loophole, it behooves them to understand nuances that can make the difference between six figures and… a lot more than six figures. And that’s a scary thought. If a program created by the government has gotten so out of control that not even the government nor the agencies it appoints to unravel it can understand it, we’re definitely in trouble.
And there’s no reason City Council shouldn’t be able to grasp it, because it’s clearly not for lack of trying. Antonio Reynoso, the Council Rep for East Williamsburg and parts of Bushwick, has built his early political career on championing affordable housing. At the hearing today he expressed his concern about his district. “14,000 Latino residents have been displaced, and the development of market rate [condos and apartments] is consistent with how fast people have been displaced from Williamsburg,” he said, adding that development is proceeding at an “astonishing rate.”
And while the issues with 421a are pretty clear, Vicki Been spent much of the hearing hedging. For example she refused definitively to say whether or not she (and the de Blasio administration) support the renewal of 421a or would rather keep it as is and proceed on a complete overhaul. Yet Been continued to emphasize how HPD was going to play around with the 421a numbers extensively to figure out what the best possible solution might be. “We are considering everything,” she said, later hinting that “permanent affordability” of apartments might definitely be a recommendation as well as restricting 421a to apply only to rental buildings as opposed to condos.
But while city council members were pushing for yes or no answers as to whether the program should be renewed or not, they were kind of missing the point. Many council members’ position, though doggedly in defense of families struggling to afford housing in New York City, seems to be in favor of simplifying the issue as a means of rallying support rather than grappling with reform. It’s easier to tell your constituents a program is either “good” or “bad,” than “it’s complicated.”
The point that Commissioner Been was struggling to make was that, if radically reformed, 421a might actually function properly as an incentive for affordable housing if radical reform. Something something about babies and bathwater. There are no solid numbers just yet, but it seems that in certain controlled situations 421a could be cheaper than if the city were to directly subsidize affordable housing construction, trading foregone taxes for actual cash.
As a developer once told me : “Affordable housing has got to be built someway.” What he meant was that either the government pays for it with cold hard cash, or they incentivize private developers to do so. If housing is already being built, why not ensure a portion of that is affordable? Why not, say, increase the percentage of affordability required from 80/20 to 50/50? Would developers run away or would they just deal?
But I think the real questions New Yorkers should be asking are, can the program be reformed as it is, and do we trust private developers that much?
If the program can be reformed, then there’s the task of convincing people that 421a will actually benefit them… even after it has wronged them for so many years.
“There is absolutely no need for 421a in Williamsburg and I would appreciate it if someone said 421a is not working as it is now,” Antonio Reynoso said to Commissioner Been. “421a has failed my community.”