Monday, September 23, 2024

Tag Archives: albany

Dump Trump’s unaffordable N.Y. real estate tax break, aka 421-a

Dump Trump’s unaffordable N.Y. real estate tax break, aka 421-a

By Latrice Walker and Kevin Parker, New York Daily News

Latrice Walker is a Brooklyn assemblywoman and Kevin Parker is a Brooklyn state senator. They authored this article, which originally published March 23, 2017 on the New York Daily News.

If you want to know who really benefits from the real estate tax abatement known as 421-a, look no further than a lawsuit filed by then-developer Donald Trump 36 years ago, which to this day inflicts this unaffordable burden on New York City, costing $1.3 billion this year alone in foregone property taxes.

Now, Albany is considering bringing back the 421-a tax exemption, which expired last year in a political impasse. And this time, proposals would make the program even more expensive.

New York is facing a human services crisis as President Trump slashes the federal budget. The cuts to housing programs alone will add up to hundreds of millions of dollars, which will become a fiscal crisis as local government confronts the impossible task of filling those budget holes.

In the face of Trump’s cuts, we must think twice before giving away our tax revenues in a massive tax exemption created by Developer Trump.

The original 421-a tax exemption was created in the 1970s when the city economy was in crisis, and was designed to encourage new development in locations that were vacant or underutilized.

But in 1980, Trump bought the iconic Bonwit Teller department store on Fifth Ave., with plans to knock it down and build Trump Tower. Then, as now, Trump did not want to pay his taxes.

Told by Mayor Ed Koch that the Bonwit site could not qualify for a 421-a tax break, Trump and his lawyer – the infamous Roy Cohn – sued the city. In the end, they won a tax exemption worth $50 million for the extravagant Trump Tower, packed with luxury condominiums.

More importantly, Trump’s lawsuit established that all new development, even luxury projects, would be automatically eligible for the 421-a exemption. Koch said then: “The Court of Appeals has found that some of the most expensive and luxurious accommodations, not only in the United States but in the world, are entitled to a tax break. Does that make sense? Not to me.”

And not to most New Yorkers, either.

We never fixed this costly mistake, and now all these years later, with New York City one of the hottest real estate markets in the world, restoration of the 421-a program would continue to offer an automatic tax exemption. Most luxury developers in our city have paid little to no property taxes for decades, with their profits effectively subsidized by the public.

Even as the city added requirements to include affordable housing in some buildings receiving 421-a, at its core it remained a subsidy for luxury developers. The Association for Neighborhood and Housing Development found that of the 152,402 residential units built under the program, only 12,700 were affordable.

With 421-a suspended for the past year, evidence has mounted in the meantime that the program may not even accomplish the most basic presumed purpose of encouraging new development. The number of new apartment building construction permits across the city is back up to previous levels, suggesting not only that the tax break was not needed, but that it may have been hindering development by inflating land prices.

Now, the real estate industry wants to bring the expired 421-a program back, and expand the benefit to make it even more costly, adding hundreds of millions of dollars to the expected annual cost to the city.

Meanwhile, Trump is planning unprecedented federal budget cuts that target essential services for New Yorkers. To respond to these budget cuts, the city will need to rely on exactly the money that we are giving away to the luxury real estate industry for Developer Trump’s tax exemption.

New Yorkers have shown up at the polls and in the streets to reject Trump’s policies. And New York’s elected officials have shown leadership by saying that our state will be a sanctuary of good policy to protect our residents.

It’s time for us to say no to Trump. His real estate tax exemption shouldn’t be rammed through the Albany budget process, but instead should be negotiated separately and apart from the budget, which is due April 1. We must take the time to get the details right.

The problems with the 421-a exemption are too expensive to ignore. For every dollar the program spends, only 11 cents go toward affordable housing, with the rest subsidizing luxury development. No one would call that a well-designed program.

It didn’t start out that way, and we have Donald Trump to thank for the exemption’s bad turn.

Let’s look at it in the light of day. Let’s decide who should benefit, and what it should cost. Let’s get it right this time.

What Happened To Housing Development When 421a Was Suspended?

What Happened To Housing Development When 421a Was Suspended?

An ANHD White Paper, February 2017

 

The real estate industry has long claimed that the 421a tax exemption is absolutely necessary to get new rental housing built in our City and that this justifies the enormous cost of the program.

But new data and recent reports from policy experts show this is not true. In fact, the 421a exemption likely has been making new housing development more difficult all along by inflating land prices.

This is pertinent since policy makers in Albany are currently considering whether to revive the program, or not.

The 421a exemption costs City taxpayers over $1 billion a year, making it the most costly tax exemption in NYC. In 2014, the program subsidized over 152,400 residential units, but only 12,700 of those units were affordable while the rest were luxury or market rate. $100 was given away to subsidize luxury development for every $11 in actual benefit to the public.

This is why the real estate lobby, REBNY, fights so hard for the 421a program. Taxpayers have put up with the increasingly expensive and inefficient exemption for decades because REBNY’s influence made it seem inevitable. But, on January 1st, 2016, the program was suspended because of a surprising political impasse in Albany that triggered a sunset clause in the legislation.

Housing experts have long wondered exactly what impact the massive exemption had on the real estate market, but the tax exemption had been around for so long that we had no control-group data. Now, we can look at 2016 and see what actually happened.

To defend the program, REBNY has asserted unequivocally that “it was not feasible to build rental housing in New York City without the 421a subsidies,” and without it, new development would languish in many neighborhoods of the City.

REBNY has pointed to data like this as proof that new housing development plummeted when the 421a exemption was suspended:

But, by focusing on those two years alone, REBNY is ignoring the larger truth. If you pullback a few years, the data shows something very different:

New building permits did drop in 2016, but that’s because 2015 was a unique year as developers rushed to file their permits before 421a came up for renewal and renegotiation in Albany in June of that year. This drove the volume of residential permit applications through the roof in 2015 as reported in the Wall Street Journal. But 2012, 2013, and 2014 – which were strong but more normal years for real estate development – are almost exactly in line with 2016. There was an average of 15,654 new units approved from 2012 to 2014, and there were 15,697 new housing units approved in 2016. So, new housing development in 2016 occurred at normal rates, even in the absence of 421a.

This data clearly contradicts REBNY’s claims and the expectation of many other housing policy experts, even those skeptical of REBNY, that development would drop off without the 421a exemption. And instead shed light on an important fact which has become clear in the past year – the 421a exemption may have been hindering new development in many neighborhoods by driving up land prices.

In the past 12 months, new data has shown that the long-term presence of the inefficient 421a exemption inflated land prices. 421a acted as an artificial stimulant that drove up land prices, which is a major factor in whether a new development is economically feasible or not.

Here we can closely examine the price of land in Brooklyn per buildable square foot (PBSF):

When we also take a closer look at the rate of new development in BrooklynThe price of land per buildable square foot in Brooklyn trends steadily upward from 2012 to 2015, averaging a 23.75% increase per year. Then in 2016, it suddenly levels off to only a 5% increase when 421a is suspended. This flattening of land prices is a significant part of the reason why new development in Brooklyn kept up a normal pace in 2016, even without the subsidy of the tax exemption. There were an average of 5,663 new units approved each year from 2012 to 2014 (excluding the unique rate in 2015), and there were 4,778 new housing units approved in 2016. The citywide numbers make up this very modest decrease with the overall increase in new units in other weak market outer borough areas.

This effect of softening land prices is even more pronounced in the weaker outer borough real-estate markets. For example, in parts of the Bronx, lower land prices can be the margin of difference in whether development is feasible or not, and where government policy should correctly encourage new development since those are the neighborhoods where it will be more naturally affordable.This answer isn’t entirely surprising. A report from the NYC Independent Budget Office last week stated that “because the 421a exemption is partially capitalized [economically inefficient], it contributes to higher land costs.”

What is most notable is how quickly land process adjusted down without the exemption, and how quickly development became more feasible and rose back to natural levels without it.  

Housing markets are complicated and 421a is just one factor that explains why new housing construction is still strong – there are numerous other factors, including the strengthening of rent levels in some weaker neighborhood markets. But the fact is, new private rental construction is happening without 421a across the City, and specifically in the crucial weaker market neighborhoods where REBNY asserted it would not happen. This unsupported assertion has been the centerpiece for REBNY’s argument that 421a must not only be revived, but expanded.

It is important to note that, in 2016, New York City actually exceeded the affordable housing development goals set by Mayor de Blasio’s Housing New York Plan by building or preserving 21,963 affordable units, making 2016 the highest year on record for New York City affordable housing production. The fact that New York City did not need the 421a Exemption for its affordable housing targets is an indication that the 421a exemption is overwhelmingly a subsidy for high-end development. Furthermore, the City and State have better tax exemptions designed for affordable housing such as exemptions 420-c and Article XI.

We have long known that 421a is unjustifiably expensive and inefficient. Now we know it may not even accomplish the most minimum public purpose to justify its $1.4 billion price tag. Despite these facts, REBNY is currently working to convince the State legislature to make the subsidy even richer for themselves. (Even the New York Post condemned the new REBNY proposal in an editorial titled, Cuomo’s latest blow to city taxpayers).

With the City and State facing the prospect of billions in additional local budget obligations because of the Trump federal budget cuts, legislators in Albany should resist the REBNY push to revive the 421a exemption.

Click here to download our White Paper.

Understanding REBNY’s New 421-a Tax Exemption Proposal

Understanding REBNY’s New 421-a Tax Exemption Proposal

What does it do? What does it cost?

In January 2017, a revised 421-a Tax Exemption, rebranded and given the title “The Affordable New York Housing Program,” was introduced and inserted into the proposed FY18 New York State budget. This version of the 421-a Tax Exemption is essentially an expanded and amended version of the expired June 2015 exemption that passed the legislature but with modifications intended to resolve the conflict created from a trade union wage provision that was inserted at the last minute, which subsequently led to legal complications and suspension of the exemption.

 

What is REBNY’s Proposal?   

REBNY’s proposed 421-a program does not improve or change any of the affordable housing requirements passed by the legislature in June 2015.

The June 2015 version was citywide and would have been used by almost all new residential development projects over 6 units, allowing developers affordability Options A, B, C, and D. (See image below for an explanation of the Options) The new REBNY proposal adds Options E, F, and G and requires developers to pay higher construction wage levels. The new Options E, F, and G also extend the length of the tax exemption to an unprecedented 35-year, 100% exemption. This is a major increase in the lifetime value of the exemption to the developer and a major increase in the cost to the New York City taxpayer.

The proposed new REBNY program is citywide, and would be widely used across most neighborhoods. Development of new buildings with 300+ rental units will be required to participate in the program in some areas, and eligible to participate in all other areas of the City. The new program is exceptionally generous to the developer, and most will take advantage of this financially generous opportunity.

What is the Cost of the REBNY Proposal?

The NYC Independent Budget Office recently reported that the current “421-a remains the city’s largest tax expenditure at $1.4 billion this fiscal year.”

New York City’s Department of Housing Preservation and Development (HPD) has stated that the REBNY’s proposed changes will increase the overall cost of the program by yet another 22% on top of the billion-plus dollars we are already spending on the program every year.

And the increase in cost won’t just come after year two of the extended tax exemption; it will come immediately. Developers will find the enhanced benefit irresistible since it allows them to not pay taxes for an additional ten years. We will see a rush of developers applying for REBNY’s 421-a program and see developments from the last 1.5 years retroactively being granted 421-a, costing tax payers an estimated additional $820 million in the first ten years, according to HPD.

 

Is 421-a an Affordable Housing Program?

Although the current 421-a Tax Exemption includes some requirements for affordable housing, it cannot be accurately described as an affordable housing program. It was designed in the 1970s to incentivize the creation of private, market-rate, and luxury housing at a time when the City economy was stagnant. The affordability benefits were a minor, late add-on the program. In fact, a 2014 analysis of the annual cost by ANHD shows that the exemption cost the City over $1.1 billion in lost tax revenue and covered 152,402 residential units, but only 12,700 of those units were affordable. That’s $11 of affordable housing benefit taken for every $100 given away to subsidize luxury development. That’s not an affordable housing program.

 

Who Will Benefit from the REBNY Proposal?

No additional affordable units, or deeper level of affordability will be generated by the REBNY proposal, and the increase in the length of affordability is minor. The primary beneficiaries will be market-rate and luxury real estate developers, who will have their already substantial public subsidy increased by an estimated 22.5% in each new building. A fraction of the increased value that is given to the developer will be passed along in the form of higher wages for the short-term construction labor, but this will be a minor amount.

Additional beneficiaries of the REBNY proposal will be landlords and politicians who oppose rent stabilization laws. The New York State Assembly, which tends to support rent stabilization laws, has often used the threat of not renewing 421-a as leverage to prevent the weakening of rent stabilization laws by the New York State Senate, which tends to support the 421-a Exemption. Since this version of 421-a included a higher construction wage for the first time, the Assembly – which tends to also be pro-organized labor –will find it far more difficult to use the threat of not renewing 421-a as leverage.

 

How Do the New “Options” Work?

  • Option E is allowed within any of the Enhanced Affordability Areas, and requires 10% of the apartments be affordable at 40% of Area Median Income (AMI), 10% at 60% of AMI, and 5% at 120% AMI. The average hourly construction wage must be $60. Additional public subsidy is not allowed.
  • Option F is allowed within any of the Enhanced Affordability Areas, and requires 10% of the apartments be available at 60% of AMI, and 20% at 130% AMI. The average hourly construction wage must be $60 an hour. Additional public subsidy is allowed.
  • Option G is allowed only within the Brooklyn and Queens Enhanced Affordability Areas, and requires that 30% of the new housing is affordable at 130% of AMI. The average hourly construction wage must be $45 an hour. Additional public subsidy is not allowed.
  • Any building with 300+ rental units outside of the Enhanced Affordability Areas can opt-into Option G, which, given the extraordinary value of the 35-year 100% abatement to the developer, is the most likely outcome.

 

 

Albany 421a Deal May Mortgage NYC’s Future for Bigger REBNY Tax Break

Albany 421a Deal May Mortgage NYC’s Future for Bigger REBNY Tax Break

New Evidence Suggests that the Exemption May Not Have Any Public Benefit

The controversial 421a tax exemption for developers – now popularly known as the Trump Tax Break – is back in the news with reports of a possible pre-Election Day deal that would mortgage New York City’s budget for decades to come.

As a recent article in Politico New York reports, decision-makers are not only conferring to bring the 421a Trump Tax Break back, but they are also considering making the tax break even more costly by extending the term of the exemption. This would give private developers up to 45 years of paying no property taxes – 10 years longer than the law that expired in January and 20 years on top of an earlier version – all at the expense of New York City taxpayers.

This would give private developers up to 45 years of paying no property taxes – 10 years longer than the law that expired in January and 20 years on top of an earlier version – all at the expense of New York City taxpayers.

The new 421a proposal is unconscionable on its face. Our NYC classrooms need supplies and 21st technology; our roads, bridges, and mass transit need investment and repair; and our nurses and firefighters need paychecks.

With at least a $3 Billion City budget deficit by 2019 just around the corner, we cannot afford to mortgage our City’s fiscal future in exchange for a tax break for private developers to create primarily market-rate housing. It is unconscionable that the ability of New York City to pay for essential government services for its citizens for the next 45 years might be mortgaged away and handed over to REBNY as a pawn in the negotiations between the real estate lobby and the building trade unions to revive the 421a Trump Tax Break.

With at least a $3 Billion City budget deficit by 2019 just around the corner, we cannot afford to mortgage our City’s fiscal future in exchange for a tax break for private developers to create primarily market-rate housing.

The cost of the 421a Trump Tax Break to our City is dramatic and increasingly indefensible. A 2015 analysis of the exemption by ANHD shows that in fiscal year 2013-14, the 421a program covered a total of 152,402 residential units, and granted $1.1 billion in tax abatements. But, only 12,748 of those units had affordability restrictions. That translates very roughly to about $86,000 a year that taxpayers are transferring to private developers to subsidize each affordable unit, making 421a tax break by far the most inefficient affordable housing program on the books.

This 421a Trump Tax Break deal will hand a hefty portion of the City’s tax base over to REBNY. The fact that these negotiations are happening under the shadow of Election Day coverage and between the real estate industry, the build trades, and without any conversation on rent regulation or with affordable housing stakeholders make it all the egregious.

And evidence is mounting that the 421a Trump Tax Break may not even accomplish the most minimum public purpose.

Last week, a data update released by the NYU Furman Center titled, “NYC New Building Permits Recovered to 2014 Levels in the Third Quarter [of 2016], Despite 421a Suspension,” notes that not only have the number of new construction permits returned to normal levels, but the number of units per building has also returned to normal levels – growing from an average of 26 units per building in the Bronx in the 1st quarter of 2016 to 39 units per building in the 3rd quarter. This suggests that the surge in new rental developments without 421a is not limited to small-scale, one-off development sites.

As ANHD’s previous blog examining 421a noted, “There is one thing the real estate lobby has asserted unequivocally [in order to justify the existence of the tax exemption]: ‘It was not feasible to build rental housing in New York City without the 421a subsidies.’… However, new trends suggest this may not be correct. In the past few months, there has been increasing evidence of new market-rate rental private construction in exactly the types of low-cost housing markets where the real estate lobby insisted would never happen.”

But new data indicates that new construction has adjusted to a housing market without 421a Trump Tax Break and is quickly recovering, and that the existence of 421a itself may have been hindering development in key markets.

But new data indicates that new construction has adjusted to a housing market without 421a Trump Tax Break and is quickly recovering, and that the existence of 421a itself may have been hindering development in key markets.

The general consensus of housing researchers and experts has been that the broad availability of the 421a Trump Tax Break has the effect of artificially inflating land prices, thereby increasing the cost of new housing development. One possible outcome of the suspension of 421a is that land prices in relatively weak real estate markets – where new privately-built housing will be more naturally affordable – would soften without the artificial stimulant of the tax exemption, with the effect of making new housing development in those neighborhoods more affordable.

This position was made in a 2015 NYU Furman Center report hypothesizing that “the loss of the 421a exemption would reduce the amount that residential developers would be willing to pay for the land.” The report continued, “In the medium and long term, as landowners adjust their expectations of the value of development parcels downward, or as market rents rise, the pace of development could resume.”

Further evidence from a New York City Development Update through the 2nd quarter of 2016, released by the investment firm NGKF Capital Markets, shows that the trend of increasing price per square foot for development sites in some key areas has slowed dramatically since 421a was suspended:

  • In Manhattan above 96th Street, the average price per buildable square foot for development sites rose by 71% from 2014-2015, but only rose by 6% from 2015 through the first half of 2016.
  • In the Bronx, the average price per buildable square foot for development sites rose by 24% from 2014-2015, but only rose by 2% from 2015 through the first half of 2016.

Together, this new data suggests that the suspension of 421a has softened land prices, which makes new development more economical even without 421a. The fact that new development is now more robust in these neighborhoods suggests that, as the return of 421a is debated, policy makers should examine what policy goal 421a actually accomplishes and whether the cost to the taxpayer is worth it.

Evidence is growing that we should be moving away from any 421a Trump Tax Break. Our City’s housing market is booming without it. Giving REBNY an unnecessary and unreasonably lucrative tax break at the expense of the tax paying public is unconscionable.

Giving REBNY an unnecessary and unreasonably lucrative tax break at the expense of the tax paying public is unconscionable.

2016 © | ANHD.org
ANHD 50 Broad Street Suite 1402, New York, NY 10004-2699 | Phone: 212.747.1117 | Fax: 212.747.1114