The Impact of 421-A on NYC Housing

The New 421-a (16) Affordable Housing New York Program, which began its legal course on January 1st, 2016, is set to expire on June 15th, 2022, without a concrete plan for its renewal. Some questions arise: What does it mean to lose a program like 421-a? What will the future hold without it, and/or will there be an alternative program on the horizon?

What is 421-a?

421-a was first enacted on July 1st, 1971 and has since gone through several renewals with alterations according to varying economic and real-estate climates over the years. It was established to provide tax benefits to developers for projects on under-utilized or vacant land. The current version that holds a place in New York housing regulation is 421-a (16), with numerous different requirements that put the allowance for such tax benefits to effective use.

Depending on the varying requirements placed on different projects born under the tax law, 421-a enables project planners and developers up to a 35-year tax benefit. A majority of NYC developers have availed themselves of the tax law in order to make their projects economically viable, providing an incentive in a market environment with strikingly low inventory. As opposed to condo developments, rental housing development takes a long time to achieve a return – making 421-a an encouraging incentive to take that risk.

In addition to driving the market, one of the most notable qualifying attributes for these projects is affordable housing. In exchange for the extended tax benefit (with limitations), between 25-30 percent of the project must be affordable housing (with different standards of affordability available depending on individual project plans). Not only does the program create much needed quality affordable housing for lower-income groups, it does so in a way that promotes diverse communities as the affordable units are interspersed amongst predominantly free-market buildings.

Buildings in NYC under the 421-A program are also obligated to pay its employees a certain wage plus benefits, with a growing rate each year. The newest version of 421-a (421-a(16)) includes wages for construction employees as well. More specifically, eligible projects under the program with at least 30 units must pay prevailing wages to building service workers unless 100% of the residential units are affordable to households earning no more than 125 percent of the AMI. In fact, more than 60 percent of the income-restricted units created by the 2017 program through 2020 were built for families earning 130 percent of the AMI. In other words, with the elimination of 421-a, thousands of building employees and construction workers would no longer have guaranteed salaries and set increases as they do under the program.

Overall, 421-a helps developers, workers, the housing market, and people of varied financial backgrounds gain access to thousands of housing opportunities. Thanks to 421-a, some 200,000 apartments remain affordable to the NYC public.

With its expiration, why is it not being renewed?

Skeptics of 421-a usually cite the loss in tax revenue that resulted because of the program, arguing that 421-a is not necessary given the budget problem that arises. In order to run, 421-a costs a little under 1.8 billion annually in ‘lost’ tax revenue. However, the revenue alongside what is ‘lost’ to 421-a simply would not exist without the projects that the law supports, and the projects would not exist without 421-a. The city is not forgoing revenue by keeping 421-a alive; there simply will be no revenue without it.

The program costs a lot of money because the tax share is a lot of money – hence the incentive to build rising with the exemption. It’s also not as if developers are completely exempt from paying property tax. Developers still pay property tax based on the assessed value of the pre-existing building for the first 25 years of the 35 year abatement; they are just deferring any immediate increase. Therefore, those who crack down on the tax exemption bill as an allowance for developers to bring up luxury housing with little to no financial ramifications fail to acknowledge the intricacies of the tax code.

What’s Next?

With June 15th fast approaching, the question naturally arises: what’s next? Little has been said in terms of what the developing rental market will look like without 421-a, but based on the number of projects that have relied on this tax exemption to run, project planners are not optimistic.

New York City was projected to hold 8.8 million people ten years from now – that projected number has already been surpassed. Therefore, the city is ten years ahead with its population increase, and ten years behind in its housing production. In order to meet housing goals and keep up with these factors, 421-a – or a modified version – is essential. Without overstating, it is the heart that pumps the rental housing market, and is a necessary vehicle to alleviate a problem NYC has endured for well over a decade.

As it stands, with no similar program on the horizon, there will be less rental housing as it becomes increasingly expensive to build which not only limits access to affordable housing but will drive up free-market rents as well. It is also likely that city capital subsidies will be required to maintain this development of affordable housing in neighborhoods across the city. To combine the current housing crisis due to the growing population and low inventory with the expiration of 421-a without a concrete replacement, things are not looking great: for everyone.

In the words of Basha Gerhards, the Senior Vice President of Planning on the Real Estate Board of New York, ‘The idea of taking away a tool that produced 70 percent of our housing over the last decade seems nonsensical…’

What Does CHARNEY Believe?

As developers, we have an inherent bias towards the continuation of 421-a as, among other things, the program serves as an engine that enables us to grow our company. On the other hand, we are genuine believers in providing quality affordable housing to under-represented neighborhoods. While there are programs in place to incentivize fully affordable new developments, they take years to be approved and are primarily only viable in less-desirable locations due to land values.

We feel a strong need to build affordable housing in premium locations and we place immense value on keeping affordable units integrated with free-market housing. Bridging income divides is one step we can take to help foster stronger communities and our current Gowanus projects will aim to have programming designed to do just that. Without 421-a or a modified version, none of this will be possible and, what’s more, the resulting increases in rents will further enhance the already problematic income gap in the city.

Another source of the push to eliminate 421-a seems to come from critics who believe that developers profit from massive sums with little benefit to lower income bands, as many affordable units across New York still command relatively high rents at 130 percent of the AMI. One possible solution that CHARNEY has devised in response to this criticism is a revenue share model if there are outsized returns, constructing a cap of sorts to ensure development goals are honest ones. In addition, a new program should include more strict protocol regarding AMI requirements to allow broader affordable groups access to housing, and therefore reaching more income bands.

CHARNEY and other developers are not alone in the push to maintain the benefits that 421-a has so long provided; New York Governor Kathy Hochul recently proposed a similar phase to 421-a with a more affordable component called ‘Affordable Neighborhoods for New Yorkers’ or ANNY. With lower AMI requirements and greater portions of units made affordable, Governor Hochul is helping developers and committees alike to take big steps to solve the New York housing and inventory crisis.

While the future is uncertain, one fact remains: New York City must keep 421-a or a modified version for the interest of all parties involved. Whether led by Governor Hochul or another development expert, a future that is focused on affordable and accessible housing for all is a future that CHARNEY envisions for New York City.