Constructing a Newer 421-a
New York’s expired 421-a tax rebate program has a long history, but its impacts are still to be felt for decades to come. Both celebrated and criticized, the program had fallen under intense scrutiny over whether it serves its purpose as the engine for robust growth in the New York City real estate market, or as a profiting tool for developers seeking to maximize their gains. Such debate ultimately resulted in gridlock and failure to renew or replace the program, which officially ended at the start of this year. However, there are more substantial talks to reform and revive the program.
When the 421-a tax-rebate program expired at the start of this year, there were some concerns that the program would suffocate the construction of housing units in the city. New housing unit permit approvals had fallen dramatically compared to the same time last year. However, there may be a variety of factors beyond 421-a’s expiration that has lead to this decline such as less favorable market conditions for developers to start new construction projects and an expiration of the EB-5 Visa. More pressing are the concerns growing over how the program’s expiration would impact the construction of affordable housing projects, half of which apparently benefited from the 421-a program.
That’s why talks about reviving the program have been so critical, especially with increasing concerns on how much the city should give up for the program’s benefits, along with a debate on whether the program has been too favorable for developers. The 421-a program indubitably helps incentivize construction overall, but some claim it has also become more of a profiting tool for developers. State and city officials have called for a higher prevailing wage for workers on these sites, and failure to include such a provision led to the program’s death.
New York Governor Andrew Cuomo, developers, and workers’ unions have been in talks ever since the program expired. The potential agreement includes provisions such as a wage minimum that the Governor had strongly supported — $60 an hour for labor in Manhattan for apartments with 300 or more units south of 96th Street and $45 per hour in parts of Brooklyn and Queens. Probably to please developers, the tax exemption would be extended in certain conditions beyond the original 25 years. However, there’s currently no rush to finalizing the bill thus far.
Considering the current timetable already costs New York City around a billion dollars per year, extending this exemption could cost the City much more in the future, especially if real estate values climb. The maximum 25 year exemptions have already cost the city so much (projects that were approved in 2015 could potentially be tax exempt until 2040) — additional extensions will siphon off more valuable resources in the long term.
It should be clear that the 421-a program is a clear factor in spurring housing development since the 1970s. Its connection with building affordable housing units is a bit murkier. There are claims that over half of the affordable housing projects in New York City alone were built under the program. However, while there have been affordable housing “projects,” critics say the actual number of affordable housing units were only eight percent of the total units built under this program. The overwhelming majority — 92 percent — of housing units built under this program were luxury units, far more profitable than the affordable ones.
Residential construction is currently falling off, which may very well be because of the program’s expiration combined with a much slower housing market — whichever has a larger impact is up for debate. But looking at the generous benefits that the tax rebate program offers, it does certainly provide developers with an incentive to build more housing projects, and the new proposal may further support that trend. With New York City’s population expecting to add over half a million more people in the next few decades, having a program that incentivizes residential housing construction is much needed.
But again, attention must be paid to affordable housing units as well — luxury units are more profitable, but not everyone can afford them. The 421-a isn’t quite designed for it, so city officials may want to look into an additional program that is much more narrow in its focus. A better way to build a program that provides incentives to build affordable housing is through Assemblyman Keith Wright’s proposal of a flat $100,000 subsidy for each affordable housing unit — it is much more focused in its efforts. 421-a is a program that provides benefits as well as some criticisms. Though many of its costs should be evaluated closely, developers would be able to make the right decisions once the housing market begins to pick up again.