New name, same basic idea: Hochul pitches 421a reform

Governor’s plan tweaks tax break but looks much like current version

New York /
Jan.January 20, 2022 08:45 AM

Gov. Kathy Hochul Lays Out Replacement 421a (Getty Images, iStock, , Illustration by Kevin Cifuentes for The Real Deal)

It may have a new name, but Gov. Kathy Hochul’s proposed development tax break looks a lot like 421a.

In her executive budget, the governor outlined a replacement for the incentive program, often cited by developers as essential to the construction of rental housing in New York City.

Hochul re-branded it Affordable Neighborhoods for New Yorkers, but would create a new tax code for the five-borough program, 485w. If approved by the legislature — which is virtually certain to demand changes — it would replace 421a, which was christened Affordable New York in its most recent iteration and will expire June 15.

The Real Estate Board of New York, which represents developers, supports the governor’s proposal, calling it an “​​important tool for producing rental housing at deeper levels of affordability permanently.”

The proposal ignores tenant advocates’ demand that 421a end. The Legal Aid Society criticized it as similar to the current program, which it called “a colossal waste of tax dollars.” Tenant advocates are pushing the legislature to pass good cause eviction, which could complicate negotiations over Hochul’s tax break proposal.

Aaron Carr, founder of the Housing Rights Initiative, which has played a part in several lawsuits alleging abuses of 421a, said until there is political will to reform the city’s property tax system, incentives based on it will continue to be “wasteful and inefficient.”

“I am against 421a and any replacement program that is like 421a,” he said. “It is like putting a Band-Aid on a wound that needs many stitches.”

Like 421a, the new program would provide a property tax exemption for 35 years in exchange for developers setting aside a percentage of rental units as affordable. But 485w would give developers fewer options to meet this requirement, while increasing affordability levels.

It would also require certain apartments to remain affordable permanently, not just while taxes are reduced, and seems to ease wage requirements for building service workers in projects receiving the benefit.

To get the tax break, residential rental projects with 30 or more units would have to reserve at least 10 percent of units for households making 40 percent of the area median income or less, another 10 percent for those at 60 percent of AMI and 5 percent for those at 80 percent.

These affordability requirements must remain in place, even after the tax break ends — a departure from the current program. That does not change anything for projects subject to the city’s Mandatory Inclusionary Housing law, which already requires permanent affordability.

The city program applies to upzoned parcels and was designed to work in tandem with 421a. The governor would essentially eliminate the 421a affordability option that was the analogue to MIH’s option 2, where 30 percent of units are affordable to those earning an average of 80 percent of AMI.

City officials have shown an appetite for eliminating option 2 entirely to focus on lower earners instead. In rezoning Soho and Noho, the City Council removed the option for developers.

Hochul offers one other avenue for rentals: Projects with fewer than 30 units must designate at least 20 percent of units for households earning up to 90 percent of AMI. Those requirements, which only apply to incoming tenants, would last for the duration of the exemption.

Notably, the governor’s budget bill would let more condo and co-op projects benefit from the program. The current one is off limits to condos and co-ops that are in Manhattan or are larger than 35 units and have an average assessed valuation of more than $65,000 per unit.

Hochul would give a 40-year benefit to co-op and condo buildings if all units are restricted to buyers earning up to 130 percent of AMI for that four-decade period and new owners use the home as their primary residence for at least five years. The city’s housing agency would be tasked with policing resales by individual owners.

Alvin Schein, a partner at Seiden & Schein who has worked extensively with the 421a program, called the changes to the condo and co-op eligibility requirements an improvement.

“This replaces it with a more rational standard, based on income,” he said. “It is not based on assessed valuation.”

In the current program, developers of condo and co-op projects do not know if their units are eligible until the project is complete. The 2016 reform limited the program almost entirely to rentals.

The soon-to-expire 421a included several more affordability levels, which hinged on whether the projects had more than 300 apartments. Some options allowed for apartments dedicated to those making up to 130 percent of AMI.

The governor’s proposal requires all income-restricted units to remain rent-stabilized even after the tax break expires. She makes clear, however, that the market-rate units in projects receiving the benefit will not be subject to the terms of the rent stabilization law.

This became a thorny issue when the 2019 rent reform killed “luxury decontrol” — the option to deregulate apartments on the basis of the rent exceeding a certain threshold. Lawmakers subsequently amended the law to exempt market-rate units in projects receiving 421a.

Hochul’s measure includes language that bars landlords from warehousing units, saying affordable apartments cannot be “held off the market for a period longer than is reasonably necessary to perform repairs,” though it does not define “reasonably.”

Her bill also states that developers who lose the tax benefit for breaking the program’s rules will still need to meet affordability and rent stabilization requirements for their original tax-break term. The penalty would also apply to market rate units, which would need to remain stabilized.

The proposal changes wage rules for construction and building service workers. The version approved in 2017 introduced construction wage requirements for projects larger than 300 units in “enhanced affordability areas” in Manhattan, Brooklyn and Queens. The budget bill increases these average minimum wages to $63 per hour in Manhattan, up from $60; and $47.25 per hour in Brooklyn and Queens, up from $45. Those figures rise by 5 percent after one year and every three years after that.

The bill leaves the door open for wage tweaks, granting that authority to the Department of Labor. Before 421a was renewed in 2017, construction unions demanded that construction workers on 421a projects receive prevailing wages. Then-Gov. Andrew Cuomo left it up to the Real Estate Board of New York and the Building and Construction Trades Council to hash out an agreement.

The result fell short of the trades’ original demands and created a new puzzle for developers and general contractors tasked with figuring out which trades to hire to meet the average wage requirements.

REBNY and the Building Trades have since agreed to team up on policy issues that affect their members. Some unions in the labor group have also reached wage agreements with individual developers to compete with their nonunion counterparts.

A representative for Gary LaBarbera, president of the Building Trades’ state and city chapters, did not respond to a request seeking comment on 485w.

The budget bill appears to loosen the rules for paying building service workers prevailing wages. It exempts projects with fewer than 300 units, rather than those with fewer than 30, in addition to those where 50 percent or more of the apartments are affordable. However, projects receiving city aid of $1 million or more and have at least 120 units must pay prevailing wages to workers under a measure passed by the City Council in 2019.





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