We Need Stronger Rent Laws, Not Developer Giveaways

David R. Jones, The Urban Agenda

In his State of the City address earlier this month, the mayor called for stronger rent control and rent stabilization laws to protect the one million rent-regulated apartments that a third of the city’s residents call home.  He was soon joined by new Assembly Speaker Carl Heastie (D-Bronx), who said extending rent regulations was a top priority this legislative session.

The good news is there is an expectation that Albany will indeed extend rent regulations when they expire on June 15. The question is whether they will strengthen the tenant protections or allow loopholes and deregulation provisions to continue to undermine the system. And while legislators fight that issue out, they must also deal with an enormously wasteful public subsidy for real estate developers known as 421-a, which expires the same day.

You’re not alone if you never heard of 421-a, a tax abatement program that offers complex tax credits to developers but very little in terms of affordable housing. But you may have heard of one of its most infamous beneficiaries, Extell.  A developer of housing for the mega-rich, Extell reportedly snagged $35 million in tax breaks under 421-a for One57, one of the company’s luxury high-rises where a penthouse recently sold for $100 million. Each year, 421-a costs the city more than a billion dollars in lost revenue.  This is a staggering amount of money – far more than the entire budget of the Department of Housing Preservation and Development, which is responsible for enforcing the housing code, supporting the development of new housing, and distributing 33,000 federal Section 8 vouchers, and more than the total rent paid by all residents of the New York City Housing Authority.

The 421-a program was created in the 1970s at a time when private residential construction in the city had collapsed, and its drafters were probably justified in devising a broad tax subsidy to spur residential development. By the 1980s, any justification for the program was starting to seem weak. But the city’s powerful real estate industry was not about to part ways with the subsidy. So legislators found a way to keep the program alive by adding “affordability” requirements and thereby giving it a new justification. 

This was like putting lipstick on a pig.  The program is still a giveaway that New York City can’t and shouldn’t afford. The billion dollars that goes to developers through 421-a would be enough to fund 100,000 new rent subsidy vouchers, thus providing housing to many of the city’s poorest people. But even with the “affordability” amendments, my office estimates that less than 10 percent of the 163,000 new apartments subsidized with taxpayer dollars are anything approaching “affordable,” with rents usually limited to fit the budgets of households with incomes around $45,000 for a family of three. So instead of helping 100,000 of the poorest households it goes to fewer than 16,000, who are living a little below the city’s median income.

With both 421-a and the city’s rent regulations due to expire on June 15, Albany lawmakers will negotiate both as a package deal. The city’s powerful real estate industry will try to keep the program alive with the minimum of affordability-oriented reforms. It has been reported that the de Blasio administration wants to require affordable apartments throughout the city and increase the requirement in Manhattan and adjacent parts of Brooklyn and Queens from 20 to 30 percent (ratio of market to affordable units), while also extending the length of the 421-a tax-exempt period. Others call for slightly different reforms.

But even if these ideas make it through the legislative sausage-making process, they will increase the program’s efficiency only modestly. They won’t change the fundamental mismatch between a program that in essence rewards developers for creating a minimum amount of affordable housing, and the goal of matching the size of the tax benefit to the value of the affordable housing created.

Ideally, the state will both strengthen the rent laws and replace 421-a with a completely new program to create affordable housing without wasting tax subsidies on unaffordable development. One solution would be a tax credit that developers must apply for, just as they now apply for the federal Low Income Housing Tax Credit. The city could decide how much credit to offer each year, establish standards for determining the best use of the credits, and then award them to the development projects judged best according to those standards. This way, the city could simultaneously reduce its tax expenditures and increase the amount of tax subsidy that actually promotes affordability.

If the goal is to create affordable housing for middle and low-income New Yorkers in the most cost-efficient and practical way, then our state and city leaders should join together in calling for the replacement of 421-a with a program that is accountable and measurable when it comes to investments in affordable housing. But if the goal is business as usual in Albany, then let the horse-trading begin.  

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