The truth about 421a

Here’s what fans and foes of the $1.8B tax break are hiding

New York News Analysis /
Apr.April 15, 2022 08:00 AM

From left: James Whelan, president, REBNY; Cea Weaver, campaign coordinator, New York Housing Justice for All; Kathy Hochul, governor, New York (REBNY, NY Housing Justice for All, Getty Images, iStock/Illustration by Steven Dilakian for The Real Deal)

 

By now, you’re probably sick of reading about 421a. Really, what’s left to say about this property tax break?

A lot, actually.

Until now, we’ve been drubbed by supporters and opponents’ tiresome narratives about the abatement, which forsakes nearly $1.8 billion in taxes annually from apartments in the city.

Backers say without 421a, developing rental buildings in New York City wouldn’t be profitable. All we’d get are luxury condos, and the housing crisis would get even worse.

Progressives say without 421a, developers would still develop and New York state could spend that lost tax revenue on truly affordable housing.

The spin is dizzying. It’s time someone cut through it.

First, the obligatory context. The tax break, renamed Affordable New York in 2017, will expire June 15. Gov. Kathy Hochul has proposed a replacement (“485w” or “Affordable Neighborhoods for New Yorkers”). The industry likes it, but 421a haters call it more of the same.

Legislators declined to include it in the budget, so they would have to pass a standalone bill to keep 421a going. Politically, that’s harder. There’s talk of an extension while lawmakers negotiate a revision.

Both sides are being deceptive, willfully ignorant or both. Here’s what they are not telling you.

First, developers routinely omit that 421a raises the prices they must pay for development sites. That means a chunk of the tax break enriches owners of those sites rather than subsidizing affordable apartments.

Don’t believe it? Think it through. Not having to pay property taxes for 25 years, then getting a discount for another 10, means developers can bid more for the site and still make a profit. If they had to pay property taxes, they would bid less for development sites.

I confronted the Real Estate Board of New York’s leaders with this fact when they were pushing my previous employer’s editorial board in 2015 to support 421a’s renewal. Their response was, “What? No!”

But I persisted. Eventually they amended their rebuttal. “Okay, maybe so,” they said. “But if we lose 421a, owners will not reduce land prices.”

I was dubious. “Landowners will sit on underperforming property rather than make millions of dollars?” I asked. “What kind of capitalists are they?”

And REBNY said, “Yes, landowners in this city are very patient. They would wait for years until the tax break was restored.”

It’s true that some would wait. That’s why if state lawmakers want to trash 421a, they must make clear that it’s not coming back. The last time it lapsed, negotiations for a replacement continued, so developers waited rather than starting projects.

But not everyone would wait. Some landowners would continue to sell sites even if they had to lower prices to account for the lost tax break. Rent-stabilized buildings were devalued by the 2019 rent law, but have continued to sell.

“There might be a freeze period where developers don’t build because they’re waiting for a tax break to come back,” said Housing Justice for All’s Cea Weaver, an opponent of 421a. But ultimately, they would do what builders do. “I find it hard to believe that developers will simply not build,” Weaver said.

Opponents of 421a, however, omit crucial facts from their campaigns against it. One is that all new housing, even if it’s market-rate or restricted to middle-income folks, helps affordability now and in the future. Supply absorbs demand, and the “luxury apartments” of today become the affordable housing of tomorrow.

“But a better thing to do would be to overhaul the tax system, which is incredibly fucked up.”

Cea Weaver, Housing Justice for All

“We know that adding housing supply does help lower housing costs in the long term,” said Matthew Murphy, executive director of New York University’s Furman Center, a real estate think tank.

Another fact understated by opponents of 421a is that without it, property taxes would be too high on newly built rentals, so developers would build condos or commercial buildings instead.

The lack of new rentals would constrain supply, allowing owners of existing rental properties to jack up rents. Opponents’ answer to that is to regulate all rents, but that would cause a bunch of other problems and trigger an endless cycle of regulation. Policymakers need to stop tipping the scales in favor of rentals or condos and just let the market provide the mix of property types that New Yorkers want.

Even Weaver acknowledged that “421a does, in some respects, lower the property tax bill” on rentals. “But a better thing to do,” she said, “would be to overhaul the tax system, which is incredibly fucked up.”

Hochul and the state legislature, unfortunately, have not proposed an overhaul, because it would involve raising some people’s property taxes — something few lawmakers are willing to do, especially in an election year.

Politically, it is much easier for them to tinker with 421a, and that’s what REBNY is asking for. One could say the trade group is recognizing the political reality. But to an extent, it is also creating it.

To be fair, the industry is pushing for property tax reform: It funds a group called TENNY, which sued to force changes. But the lawsuit is now all but dead.

TENNY did attempt to recruit a leading 421a opponent, City Comptroller Brad Lander, to its lawsuit. Lander hasn’t joined it, although he, like Weaver, supports property tax reform.

But until the industry and its critics lobby together for a comprehensive solution, Albany will not do the right thing: reset the property tax system rather than patch it with complicated programs, allow more residential development and use the power of markets to ensure we get enough housing at all price levels.

Dogs and cats are not about to start playing together. The politicians, meanwhile, will keep catering to narrow constituencies. Legislators on the left will kick and scream to end 421a. Moderate Democrats will negotiate a revision similar to Hochul’s, adding wage benefits for labor unions. Lip service about property tax reform will continue, as will the housing crisis.

And when the next version of 421a expires, we will do it all again.





    Related Articles

    arrow_forward_ios
    Silverback's Josh Schuster and Hopson's Chu Mang Yee with rendering of the project at 131-141 East 47th Street (LinkedIn, Getty, Ismael Leyva Architects)
    Schuster out as Hopson borrows $156M for Midtown tower
    Schuster out as Hopson borrows $156M for Midtown tower
    (photos by Joe Lovinger/The Real Deal)
    Day 2 of ICSC: Retailers button up to network, prep for uncertain future
    Day 2 of ICSC: Retailers button up to network, prep for uncertain future
    Boston Properties' Hilary Spann and Eldridge CEO Todd Boehly in front of 767 Fifth Avenue (Boston Properties, Eldridge, Google Maps)
    Firm ditches Park Ave for entire floor of GM Building
    Firm ditches Park Ave for entire floor of GM Building
    Adam Neumann with 515 West Avenue (Wikipedia, Realtor, iStock)
    No buzz, but Adam Neumann will take the $293M
    No buzz, but Adam Neumann will take the $293M
    Clockwise from top: Mayor Eric Adams, Bruce Teitelbaum, Adrienne Adams and Suri Kasirer (Getty/Adams via Paul Dilakian)
    A make-or-break moment for NYC’s housing crisis
    A make-or-break moment for NYC’s housing crisis
    Photo illustration depicting landlords being outearned by their lenders (iStock)
    More multifamily landlords are making less than their lenders
    More multifamily landlords are making less than their lenders
    RFR's Aby Rosen and 285 Madison Avenue (RFR, iStock)
    RFR seeks extension on 285 Madison loan
    RFR seeks extension on 285 Madison loan
    A photo illustration of Veyoel Moshe Gardens in Kiryas Joel (LoopNet, iStock)
    Developers seizing on Hasidic suburb’s explosive growth
    Developers seizing on Hasidic suburb’s explosive growth
    arrow_forward_ios

    The Deal's newsletters give you the latest scoops, fresh headlines, marketing data, and things to know within the industry.

    Loading...