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How Your Tax Dollars Are Wasted to Build Luxury Apartments

Saturday, April 04, 2015 By Steven Wishnia, Gothamist | Report
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“Subsidize our house, not the penthouse!” protesters chanted last month outside One57, the luxury skyscraper that's the second-tallest residential building in the Western Hemisphere and the most expensive in New York. “We’re basically subsidizing luxury buildings and giving away money to developers who can afford to build,” said Maritza Silva-Farrell, coordinator of the Real Affordability for All campaign, who was one of the demonstrators standing next to the glass-bound monolith.

The protest was part of a campaign by tenant and housing activists to end the 421-a program, a $1.1 billion-a-year tax break for apartment construction that largely goes to luxury buildings, including One57.

With both the 421-a program and the state's rent stabilization laws set to expire on June 15, the controversial initiative may become a bargaining chip in the fight for more affordable housing.

“It has been proven not to build the affordable housing that we need in our communities, so we want it to end," Silva-Farrell says.

The subsidy's use has grown prodigiously over the last decade. Last year, 421-a subsidized more than 70,000 new apartments, more than three times as many as it did during the pre-recession real-estate boom, according to a recent Association for Neighborhood Housing Development report.

While the majority of the housing constructed using 421-a is located in Manhattan, in 2014, Real Affordability for All conducted a study of 61 Brooklyn buildings that received 421-a subsidies. The study found that only 6 percent of the 4,395 apartments in them rented for below market rate; only five of those 61 buildings, constructed in downtown Brooklyn, Prospect Heights, and Park Slope from 2008 to 2012, contained any below-market-rate units.

Of the 257 “affordable” apartments, only 31 were cheap enough for a family making less than $41,000 a year—roughly the median income for city renters last year, according to a Census Bureau survey.

Virtually all those below-market units received substantial public subsidies in addition to 421-a, such as federal low-income housing tax credits and the city’s Inclusionary Housing Program, which lets developers build more apartments than zoning would normally allow if they include some below-market ones. One building with 303 market-rate apartments and 75 “affordable” ones got $11.7 million in 421-a benefits and $86 million from other programs.

The single building that received no other public subsidies got $23 million from 421-a, for 306 luxury apartments and eight affordable ones. The study estimated that each below-market apartment produced cost $642,000 in public funds.

“With that amount of money, the city could buy each of the people in those units a condo,” says Silva-Farrell. That’s not much of an exaggeration: Condos in the buildings studied cost $777,000 on average.

Created in 1971, the beginning of the era in which one-seventh of the city’s apartments were abandoned, the 421-a program aims to encourage housing construction by reducing property taxes for new multiple dwellings. Developers get a full exemption for up to three years during construction. Once completed, they get a tax break for 10 to 25 years, depending on the location and whether they include lower-cost housing. They also get a 95 percent reduction for eight to 21 years, after which taxes are gradually raised back to normal rate over the final two to four years.

As luxury construction boomed in the ’80s, 421-a was modified to require that developers in some areas include some below-market “affordable” housing while they are getting their taxes reduced. Changes that went into effect in 2008 expanded the “geographic exclusion area” to all of Manhattan, the Brooklyn-Queens waterfront from Sunset Park to Astoria, and a thick spur stretching inland from Williamsburg to East New York.

To build using 421-a in the exclusion area, developers must ensure that 20 percent of their apartments go to people who make the city’s median income of about $50,000 a year, defined roughly as $1,260 a month in rent. These rents rise to market rate once the tax breaks expire and the tenant’s lease period ends.

For example, a 118-apartment condominium building at 150 East 86th Street that opened in 2011 is getting a $5.9 million annual tax break in exchange for the developer paying for about 24 affordable apartments elsewhere in the city. That means the city is paying more than $2 million each for apartments that will stay affordable for 10 years.

Outside the exclusion area, developers can get the tax break automatically for 15 years and don’t have to include any affordable apartments. They can get a 25-year subsidy if they include 20 percent below-market units, but virtually none choose that option.

In 2013, however, a mysterious amendment to a state omnibus housing bill gave 421-a exemptions to five luxury buildings under construction in Manhattan, all of which would normally have been ineligible. (Assembly Housing Committee Chair Keith Wright, the omnibus bill’s sponsor, couldn’t explain why that provision was included; more recently, fingers have pointed at former Assembly Speaker Sheldon Silver.)

The five included One57, the 75-story tower across the street from Carnegie Hall whose $100 million penthouse, recently sold to an unknown buyer, is the most expensive home in the city’s history. The developers got $35 million in tax breaks and contributed $3.5 million of that to affordable housing in the South Bronx, says Thomas Waters, a housing policy analyst at the Community Service Society.

The 2008 reforms “have not changed the program much,” he says.

“You need to tie the value of the tax benefit to the value of the housing you’re getting. Right now, it’s not even ten cents for every dollar.”

Obviously, the real-estate industry, the most powerful lobby in Albany, wants 421-a renewed, arguing that construction costs a lot and they already pay enough taxes.

“Given that many multi-family rental housing developments now pay more than 30 percent of their gross revenue to taxes, the partial and temporary tax relief provided by the 421-a program continues to be critical to alleviate the high tax burden and allow new housing to be built,” the Real Estate Board of New York stated this week.

If the tax break were not renewed, REBNY contends that “over 5,484 affordable rental units would likely never be built, along with the 13,801 market rate rental units associated with the same projects.” REBNY also argues that developers need a “robust, as-of-right tax-exemption program”—one with automatic approval and no strings—to offset “the crushing burden of property taxes.”

The nine current projects their analysis is based on are all in the geographic exclusion area, so they are required to include 20 percent below-market units. In three—Astoria Cove in Queens, Domino on the Williamsburg waterfront, and Essex Crossing on the Lower East Side—the city negotiated that they include 26 to 40 percent lower-cost apartments.

“There’s no denying that 421-a over the last 10, 15 years was responsible for building all that affordable housing,” state Sen. Jeffrey Klein, the Bronx Democrat whose breakaway faction gave Republicans control of the state Senate in 2013-14, told the New York Observer in February. “Let’s face it, I’m not someone who wants to take the profit motive out of building housing.”

Neither the city nor the state maintains a complete database of how many buildings receive 421-a abatements or how many apartments in them rent for less than market rate, the Association for Neighborhood Housing Development said in a January report. Using available city figures, the group estimates that about 153,000 apartments received the tax break in the 2013-14 fiscal year—and less than 13,000 of them, slightly more than one out of 12, were “affordable.”

In contrast, the city has lost more than 100,000 apartments that rented for between $500 and $900 a month since 2011, according to the Census Bureau’s 2014 Housing and Vacancy Survey, released last month.

Mayor Bill de Blasio, whose plan to build 80,000 new “affordable” apartments over the next 10 years relies on tacking them on to new luxury development, hasn’t taken a public position on repeal, but he has called for reforms such as increasing the percentage of low-income apartments required. “Mend it, don’t end it,” Public Advocate Letitia James told Gothamist on March 5, after a neighborhood housing meeting in the South Bronx.

REBNY head Steven Spinola has said renewing the program is essential for developers to participate in de Blasio’s plan. “While necessary, this level of housing production is ambitious,” the group’s analysis says. “Its likelihood of success is greatly imperiled if the 421-a program is not renewed.”

Given REBNY's support for tax incentives, repealing the law would be a formidable task. But if 421-a is reformed rather than repealed, those changes must be “not just a tweak,” says Emily Goldstein, senior organizer at the Association for Neighborhood Housing Development—they must provide real public benefits.

“The primary challenge we face today is not whether the market will, on its own, incentivize development; it will,” ANHD’s January report stated. “Instead, we are faced with the dilemma of how to prevent the market from only building housing that fails to meet the needs of low-, moderate-, and middle-income people and the neighborhoods in which they live.”

Practically, some kind of bargaining in Albany involving rent stabilization and 421-a is highly probable. Landlords want the 421-a program continued, while tenants are demanding stronger rent controls, particularly ending the deregulation of vacant apartments that rent for more than $2,500 a month. Both must be renewed by the state legislature, which is divided between the Democratic-majority Assembly, which passes a bill repealing vacancy destabilization every year, and the Republican-majority state Senate, where such a bill has never reached the floor.

“If 421-a could be traded for repealing vacancy decontrol, that would be worthwhile,” says Goldstein. “Strengthening rent laws is the number-one priority.”

Housing groups estimate that the 1990s deregulation laws, hyped as measures that would only affect a handful of Manhattan tenants too rich to need rent controls, have cost the city 300,000 to 400,000 rent-regulated apartments. They create “a significant financial incentive for landlords to push families out of their homes,” Ilana Maier of the Metropolitan Council on Housing told a City Council hearing March 2. And if not repealed, they would eventually erode protections for the city’s 1 million rent-stabilized apartments.

“If we only extend what currently exists, that’s a loss,” Council Housing Committee Chair Jumaane Williams said before the hearing.

With that in mind, the Association for Neighborhood Housing Development has proposed four reforms to the 421-a program. First, any building receiving the tax break should contain affordable housing. In 2014, Real Affordability for All proposed that any publicly subsidized new buildings in the lower half of Manhattan should contain 50 percent apartments affordable to households making roughly $25,000 to $50,000, and those in the rest of the city should be split between low-income people and moderate-income families making up to $80,000 a year. Simply encouraging construction “may have made sense in the ’70s, but not now,” says Goldstein.

Second, the affordable housing should be designated “for a much lower income level.” If done properly, Goldstein says, using luxury apartments to cross-subsidize low-income housing would be a very efficient way to build homes for the one-third of New Yorkers who make less than $33,000 a year.

Third, all units built using tax breaks should be permanently affordable, instead of reverting to market rate once the subsidies expire.

Fourth, “double dipping” should be prohibited. Currently, developers can receive public subsidies from several different sources for including affordable units, such as 421-a, bonds, and low-income-housing tax credits. They can also volunteer for the city’s inclusionary-zoning program, which allows them to build more apartments on the same land. But in no case are they required to include more than 20 percent below-market units; the same apartment can be counted for credit in each program.

In fact, developers getting subsidies from another program besides 421-a can double the maximum income level for the below-market apartments, so a $2,500 apartment can still qualify as “affordable.” (Mayor de Blasio’s affordable-housing plan, announced last year, would require about one-third of publicly aided apartments to be below market rate, but most would be designated for families making about $65,000 to $130,000.)

“We’re not getting any additional public benefit,” says Goldstein. If a developer is receiving subsidies from two programs, she adds, then they should have to set aside twice as many affordable units.

The de Blasio administration’s dilemma is that the main avenues for building and preserving low-cost housing that don’t involve subsidizing private development have been closed.

A 1998 federal law prohibits building any more public housing, even though the more than 250,000 people on the waiting list for the city’s projects exceed the total number of apartments by more than 70,000. Rent controls are in the jurisdiction of the state legislature, which dramatically weakened them by enacting vacancy destabilization in 1997. Changes in tax and pension laws, Thomas Waters explains, preclude new versions of the large, low-cost developments erected after World War II, such as the labor union-financed Penn South and Electchester and the insurance-company built Riverton and Stuyvesant Town/Peter Cooper Village.  

The 421-a program, says Waters, is “really just a subsidy,” just one that goes to housing for people much better off than those in public housing or the Section 8 program. 

“They should replace it with a program that puts money where it belongs,” he adds. Developers and landowners, he believes, should have to apply to the city Department of Housing Preservation and Development to get any kind of tax break, “just like they do for the federal low-income housing program.”

"The issue," according to Real Affordability for All's Maritza Silva-Farrell, "is people's ability to stay in the city."

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Steven Wishnia

Steven Wishnia is a reporter for LaborPress.org and editor of Tenant/Inquilino and has won two New York City Independent Press Association awards for his coverage of housing issues. He is also the author of the novel When the Drumming Stops (Manic D Press), The Cannabis Companion, and Exit 25 Utopia, and co-edited the forthcoming anthology Imagine: Living in a Socialist U.S.A. (HarperCollins).


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How Your Tax Dollars Are Wasted to Build Luxury Apartments

Saturday, April 04, 2015 By Steven Wishnia, Gothamist | Report
  • font size decrease font size decrease font size increase font size increase font size
  • Print

“Subsidize our house, not the penthouse!” protesters chanted last month outside One57, the luxury skyscraper that's the second-tallest residential building in the Western Hemisphere and the most expensive in New York. “We’re basically subsidizing luxury buildings and giving away money to developers who can afford to build,” said Maritza Silva-Farrell, coordinator of the Real Affordability for All campaign, who was one of the demonstrators standing next to the glass-bound monolith.

The protest was part of a campaign by tenant and housing activists to end the 421-a program, a $1.1 billion-a-year tax break for apartment construction that largely goes to luxury buildings, including One57.

With both the 421-a program and the state's rent stabilization laws set to expire on June 15, the controversial initiative may become a bargaining chip in the fight for more affordable housing.

“It has been proven not to build the affordable housing that we need in our communities, so we want it to end," Silva-Farrell says.

The subsidy's use has grown prodigiously over the last decade. Last year, 421-a subsidized more than 70,000 new apartments, more than three times as many as it did during the pre-recession real-estate boom, according to a recent Association for Neighborhood Housing Development report.

While the majority of the housing constructed using 421-a is located in Manhattan, in 2014, Real Affordability for All conducted a study of 61 Brooklyn buildings that received 421-a subsidies. The study found that only 6 percent of the 4,395 apartments in them rented for below market rate; only five of those 61 buildings, constructed in downtown Brooklyn, Prospect Heights, and Park Slope from 2008 to 2012, contained any below-market-rate units.

Of the 257 “affordable” apartments, only 31 were cheap enough for a family making less than $41,000 a year—roughly the median income for city renters last year, according to a Census Bureau survey.

Virtually all those below-market units received substantial public subsidies in addition to 421-a, such as federal low-income housing tax credits and the city’s Inclusionary Housing Program, which lets developers build more apartments than zoning would normally allow if they include some below-market ones. One building with 303 market-rate apartments and 75 “affordable” ones got $11.7 million in 421-a benefits and $86 million from other programs.

The single building that received no other public subsidies got $23 million from 421-a, for 306 luxury apartments and eight affordable ones. The study estimated that each below-market apartment produced cost $642,000 in public funds.

“With that amount of money, the city could buy each of the people in those units a condo,” says Silva-Farrell. That’s not much of an exaggeration: Condos in the buildings studied cost $777,000 on average.

Created in 1971, the beginning of the era in which one-seventh of the city’s apartments were abandoned, the 421-a program aims to encourage housing construction by reducing property taxes for new multiple dwellings. Developers get a full exemption for up to three years during construction. Once completed, they get a tax break for 10 to 25 years, depending on the location and whether they include lower-cost housing. They also get a 95 percent reduction for eight to 21 years, after which taxes are gradually raised back to normal rate over the final two to four years.

As luxury construction boomed in the ’80s, 421-a was modified to require that developers in some areas include some below-market “affordable” housing while they are getting their taxes reduced. Changes that went into effect in 2008 expanded the “geographic exclusion area” to all of Manhattan, the Brooklyn-Queens waterfront from Sunset Park to Astoria, and a thick spur stretching inland from Williamsburg to East New York.

To build using 421-a in the exclusion area, developers must ensure that 20 percent of their apartments go to people who make the city’s median income of about $50,000 a year, defined roughly as $1,260 a month in rent. These rents rise to market rate once the tax breaks expire and the tenant’s lease period ends.

For example, a 118-apartment condominium building at 150 East 86th Street that opened in 2011 is getting a $5.9 million annual tax break in exchange for the developer paying for about 24 affordable apartments elsewhere in the city. That means the city is paying more than $2 million each for apartments that will stay affordable for 10 years.

Outside the exclusion area, developers can get the tax break automatically for 15 years and don’t have to include any affordable apartments. They can get a 25-year subsidy if they include 20 percent below-market units, but virtually none choose that option.

In 2013, however, a mysterious amendment to a state omnibus housing bill gave 421-a exemptions to five luxury buildings under construction in Manhattan, all of which would normally have been ineligible. (Assembly Housing Committee Chair Keith Wright, the omnibus bill’s sponsor, couldn’t explain why that provision was included; more recently, fingers have pointed at former Assembly Speaker Sheldon Silver.)

The five included One57, the 75-story tower across the street from Carnegie Hall whose $100 million penthouse, recently sold to an unknown buyer, is the most expensive home in the city’s history. The developers got $35 million in tax breaks and contributed $3.5 million of that to affordable housing in the South Bronx, says Thomas Waters, a housing policy analyst at the Community Service Society.

The 2008 reforms “have not changed the program much,” he says.

“You need to tie the value of the tax benefit to the value of the housing you’re getting. Right now, it’s not even ten cents for every dollar.”

Obviously, the real-estate industry, the most powerful lobby in Albany, wants 421-a renewed, arguing that construction costs a lot and they already pay enough taxes.

“Given that many multi-family rental housing developments now pay more than 30 percent of their gross revenue to taxes, the partial and temporary tax relief provided by the 421-a program continues to be critical to alleviate the high tax burden and allow new housing to be built,” the Real Estate Board of New York stated this week.

If the tax break were not renewed, REBNY contends that “over 5,484 affordable rental units would likely never be built, along with the 13,801 market rate rental units associated with the same projects.” REBNY also argues that developers need a “robust, as-of-right tax-exemption program”—one with automatic approval and no strings—to offset “the crushing burden of property taxes.”

The nine current projects their analysis is based on are all in the geographic exclusion area, so they are required to include 20 percent below-market units. In three—Astoria Cove in Queens, Domino on the Williamsburg waterfront, and Essex Crossing on the Lower East Side—the city negotiated that they include 26 to 40 percent lower-cost apartments.

“There’s no denying that 421-a over the last 10, 15 years was responsible for building all that affordable housing,” state Sen. Jeffrey Klein, the Bronx Democrat whose breakaway faction gave Republicans control of the state Senate in 2013-14, told the New York Observer in February. “Let’s face it, I’m not someone who wants to take the profit motive out of building housing.”

Neither the city nor the state maintains a complete database of how many buildings receive 421-a abatements or how many apartments in them rent for less than market rate, the Association for Neighborhood Housing Development said in a January report. Using available city figures, the group estimates that about 153,000 apartments received the tax break in the 2013-14 fiscal year—and less than 13,000 of them, slightly more than one out of 12, were “affordable.”

In contrast, the city has lost more than 100,000 apartments that rented for between $500 and $900 a month since 2011, according to the Census Bureau’s 2014 Housing and Vacancy Survey, released last month.

Mayor Bill de Blasio, whose plan to build 80,000 new “affordable” apartments over the next 10 years relies on tacking them on to new luxury development, hasn’t taken a public position on repeal, but he has called for reforms such as increasing the percentage of low-income apartments required. “Mend it, don’t end it,” Public Advocate Letitia James told Gothamist on March 5, after a neighborhood housing meeting in the South Bronx.

REBNY head Steven Spinola has said renewing the program is essential for developers to participate in de Blasio’s plan. “While necessary, this level of housing production is ambitious,” the group’s analysis says. “Its likelihood of success is greatly imperiled if the 421-a program is not renewed.”

Given REBNY's support for tax incentives, repealing the law would be a formidable task. But if 421-a is reformed rather than repealed, those changes must be “not just a tweak,” says Emily Goldstein, senior organizer at the Association for Neighborhood Housing Development—they must provide real public benefits.

“The primary challenge we face today is not whether the market will, on its own, incentivize development; it will,” ANHD’s January report stated. “Instead, we are faced with the dilemma of how to prevent the market from only building housing that fails to meet the needs of low-, moderate-, and middle-income people and the neighborhoods in which they live.”

Practically, some kind of bargaining in Albany involving rent stabilization and 421-a is highly probable. Landlords want the 421-a program continued, while tenants are demanding stronger rent controls, particularly ending the deregulation of vacant apartments that rent for more than $2,500 a month. Both must be renewed by the state legislature, which is divided between the Democratic-majority Assembly, which passes a bill repealing vacancy destabilization every year, and the Republican-majority state Senate, where such a bill has never reached the floor.

“If 421-a could be traded for repealing vacancy decontrol, that would be worthwhile,” says Goldstein. “Strengthening rent laws is the number-one priority.”

Housing groups estimate that the 1990s deregulation laws, hyped as measures that would only affect a handful of Manhattan tenants too rich to need rent controls, have cost the city 300,000 to 400,000 rent-regulated apartments. They create “a significant financial incentive for landlords to push families out of their homes,” Ilana Maier of the Metropolitan Council on Housing told a City Council hearing March 2. And if not repealed, they would eventually erode protections for the city’s 1 million rent-stabilized apartments.

“If we only extend what currently exists, that’s a loss,” Council Housing Committee Chair Jumaane Williams said before the hearing.

With that in mind, the Association for Neighborhood Housing Development has proposed four reforms to the 421-a program. First, any building receiving the tax break should contain affordable housing. In 2014, Real Affordability for All proposed that any publicly subsidized new buildings in the lower half of Manhattan should contain 50 percent apartments affordable to households making roughly $25,000 to $50,000, and those in the rest of the city should be split between low-income people and moderate-income families making up to $80,000 a year. Simply encouraging construction “may have made sense in the ’70s, but not now,” says Goldstein.

Second, the affordable housing should be designated “for a much lower income level.” If done properly, Goldstein says, using luxury apartments to cross-subsidize low-income housing would be a very efficient way to build homes for the one-third of New Yorkers who make less than $33,000 a year.

Third, all units built using tax breaks should be permanently affordable, instead of reverting to market rate once the subsidies expire.

Fourth, “double dipping” should be prohibited. Currently, developers can receive public subsidies from several different sources for including affordable units, such as 421-a, bonds, and low-income-housing tax credits. They can also volunteer for the city’s inclusionary-zoning program, which allows them to build more apartments on the same land. But in no case are they required to include more than 20 percent below-market units; the same apartment can be counted for credit in each program.

In fact, developers getting subsidies from another program besides 421-a can double the maximum income level for the below-market apartments, so a $2,500 apartment can still qualify as “affordable.” (Mayor de Blasio’s affordable-housing plan, announced last year, would require about one-third of publicly aided apartments to be below market rate, but most would be designated for families making about $65,000 to $130,000.)

“We’re not getting any additional public benefit,” says Goldstein. If a developer is receiving subsidies from two programs, she adds, then they should have to set aside twice as many affordable units.

The de Blasio administration’s dilemma is that the main avenues for building and preserving low-cost housing that don’t involve subsidizing private development have been closed.

A 1998 federal law prohibits building any more public housing, even though the more than 250,000 people on the waiting list for the city’s projects exceed the total number of apartments by more than 70,000. Rent controls are in the jurisdiction of the state legislature, which dramatically weakened them by enacting vacancy destabilization in 1997. Changes in tax and pension laws, Thomas Waters explains, preclude new versions of the large, low-cost developments erected after World War II, such as the labor union-financed Penn South and Electchester and the insurance-company built Riverton and Stuyvesant Town/Peter Cooper Village.  

The 421-a program, says Waters, is “really just a subsidy,” just one that goes to housing for people much better off than those in public housing or the Section 8 program. 

“They should replace it with a program that puts money where it belongs,” he adds. Developers and landowners, he believes, should have to apply to the city Department of Housing Preservation and Development to get any kind of tax break, “just like they do for the federal low-income housing program.”

"The issue," according to Real Affordability for All's Maritza Silva-Farrell, "is people's ability to stay in the city."

This piece was reprinted by Truthout with permission or license. It may not be reproduced in any form without permission or license from the source.

Steven Wishnia

Steven Wishnia is a reporter for LaborPress.org and editor of Tenant/Inquilino and has won two New York City Independent Press Association awards for his coverage of housing issues. He is also the author of the novel When the Drumming Stops (Manic D Press), The Cannabis Companion, and Exit 25 Utopia, and co-edited the forthcoming anthology Imagine: Living in a Socialist U.S.A. (HarperCollins).


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