In the 1970’s, 421-a was created to stimulate housing development at a time when residential construction rates were dropping in New York City. In exchange for constructing new housing, the city agreed to make owners exempt from paying the increase in property taxes that resulted from the new construction for anywhere from 10-25 years.
Once the 1980’s came around, housing had rebounded a bit, so the city created an “exclusion zone” in Manhattan, roughly between 14th Street and 96th Street. In the “exclusion zone”, developers can only qualify for the tax exemption if they include affordable units either on-site (by designating a percentage of the units as low-income units) or off-site (by purchasing “negotiable certificates” from developers building low-income housing elsewhere in the city.) In 2005, the exclusion zone was extended to cover the Greenpoint-Williamsburg waterfront.
The program has been somewhat of a failure at providing substantial affordable housing. In 2003, the Independent Budget Office conducted a study of the program and found that from 1985 – 2002, only 7% (4,905) of the 69,000 units subsidized through the 421-a program were affordable to low or moderate income families. They also calculated that the average lifetime cost to the city of each unit ranged from $19,400 for a 15-year exemption to $91,455 for a 20-year exemption. Last year, 421-a was responsible for more than $1.1 billion in forgone tax revenue.
This June, the tax exemption program was up for renewal, but not without controversy. A hot debate between politicians, developers, and affordable housing advocates has been at the center of discussions on reform. Affordable housing advocates have long argued that revenue should be collected and used to pay for low-income housing, while developers continue to insist fewer buildings will be constructed without the tax break.
State Legislature voted, and they decided to require developers to build more affordable units (between 25 percent and 30 percent of units) and eliminate exemptions based on location. In exchange, the break was extended to 35 years, up from the 25 year maximum currently. Developers will be given three options tailored to different types of housing markets. There is also a new ban on most condos and co-ops from receiving the tax break, with some exceptions that are meant to protect small, reasonably-priced projects in the outer boroughs.
The De Blasio administration was the main driver for reform. Aides to the mayor said the changes to 421-a are expected to result in the creation of 24,000 affordable housing units over the next decade. The existing program, they estimated, would only have resulted in about 12,000 new units. The reformed program will also reach lower incomes than the existing program, with affordability requirements down to $31,000 per year.
The fate of these changes are now in the hands of two special interests groups: The Real Estate Board of New York, representing the city’s biggest developers, and the Building and Construction Trades Council of Greater New York, representing various construction unions. One important stipulation of the reform is that leaders from both organizations must sign a “memorandum of understanding” by the end of the year, or they risk losing the program altogether.
The current 421-a program has been extended until Jan. 15, 2016. Changes will not apply to projects that start construction before January. The measure also grandfathers in any projects that complete 421-a applications before the end of the year.