Testimony: Hearing on exemption from taxation of alterations and improvements to multiple dwellings

Testimony of Judith Goldiner
Attorney-in-Charge, Civil Law Reform Unit of the Legal Aid Society
 
Testimony of Samuel Stein
Housing Policy Analyst, Community Service Society

New York City Council Committee on Housing and Buildings
November 29, 2021

Thank you Chair Cornegy, Councilmember Yeger and the New York City Council Committee on Housing and Buildings for this opportunity to comment on the proposed renewal of the J-51 property tax exemption and abatement program.

The Community Service Society is an independent nonprofit organization that addresses some of the most urgent problems facing low-wage workers and their communities here in New York City, including the effects of the city’s chronic housing shortage.

The Legal Aid Society is the oldest and largest program in the nation providing direct legal services to low-income families and individuals.  The mission of the Society’s Civil Practice is to improve the lives of low-income New Yorkers by providing legal representation to vulnerable families and individuals to assist them in obtaining and maintaining the basic necessities of life — housing, health care, food and subsistence-level income or self-sufficiency.  The Society’s legal assistance focuses on enhancing individual, family and community stability by resolving a full range of legal problems in the areas of housing and public benefits, foreclosure prevention, immigration, domestic violence and family law, employment, elder law, tax law, community economic development, health law and consumer law.

The Community Service Society and The Legal Aid Society present this joint testimony to urge this committee and the Council to either significantly amend the J-51 program or to let it lapse. The following testimony is very close to the that which our organizations offered on this issue in 2019, as the problems with the program have not changed in the intervening years.

The J-51 tax expenditure program is an extraordinarily expensive program. In fiscal year 2021 it cost the city $295.9 million in lost taxes. But the benefits it produces are not proportional to this cost. Although it certainly does help to make needed improvements in some apartments that would not otherwise be improved, it is poorly targeted and also bestows unnecessary tax breaks on owners of apartments that are not affordable and that would have been improved even without the tax incentive.

The most clearly justifiable use of J-51 is to help pay for improvements in subsidized affordable housing in buildings subject to regulatory agreements. Here the program is simply one of several tools used to finance the creation or preservation of affordable housing as part of the city’s or state’s housing production plan. The Department of Finance’s reporting on J-51 in its Annual Report on Tax Expenditures unfortunately does not make it clear how much of the expenditure is devoted to this purpose, but it is probably a significant part, helping to account for the fact that 31 percent of the total expenditure is for buildings in the Bronx.

The least justifiable application of J-51 is for non-affordable coops and condos, where owners already have a strong incentive to improve their apartments simply in order to enjoy the improvement. The tax expenditures report does not distinguish affordable from non-affordable condos and coops, but the share of the expenditure going to all condos and coops rose from 26 percent in 2001 to 30 percent in 2021, and non-affordable apartments surely make up most of that.

Market rate and rent-stabilized rental apartments make up an intermediate case. The existing J-51 law attempts to direct benefit to apartments in these categories that are relatively affordable. To this end, the exemption component of J-51 is normally restricted to apartments outside of Manhattan below Harlem, and the abatement is restricted to buildings where the assessed value is below $40,000 per apartment, meaning that the Department of Finance’s estimate of the market value is below about $89,000.

The significance of these restrictions have changed over time, as larger areas of the city are incorporated into the luxury market once concentrated in Manhattan below Harlem, and as market values rise rapidly throughout the city. The result is that the restriction on exemptions has been getting much weaker, while the restriction on abatements has been getting stronger. The results of this can be clearly seen in Figure 1.

Figure 1: Inflation-adjusted value of J-51 exemptions and abatements, in millions of 2019 dollars, 2001 to 2019

It is clear from this graph that the restrictions are no longer working as intended. Neither the increase in the value of exemptions nor the decrease in the value of abatements reflects any desirable targeting of benefits. Instead, the reflect that the assumptions underlying the program’s targeting strategy are getting more and more out of date.

As discussed in the Community Service Society’s 2012 publication, “Upgrading Private Property at Public Expense: The Rising Cost of J-51,” the program was developed and had its major revisions at times when real estate investment conditions in New York City were vastly different from those we see today. Times have changed, and the owners of rental housing in the city are in a far more advantaged position than they were in the 1950s, 1970s, or even the 1980s. Over the 63 years of the program’s existence, efforts to retarget it appear to have had only modest success in shifting the direction of benefits toward the greatest need. The result is the squandering of public funds at a time of great fiscal stress.

The J-51 program should be either drastically altered or eliminated entirely and replaced with a far more targeted incentive for improvements that benefit low-income tenants and that would not be undertaken without the incentive. If the program is continued, the following changes would significantly improve it:

  • Eliminate all benefits for coops and condos except those being developed with government assistance.
  • Replace the current system of restrictions on exemptions and abatements with one that more directly targets benefits to lower-rent apartments, ideally by setting a limit on the average rent on apartments in buildings eligible for the benefit. The outdated strategy of basing eligibility on geography should definitely be abandoned.
  • Improve the coordination of the J-51 benefit with the rent increases allowed in rent-stabilized buildings for major capital improvements by requiring landlords to seek a J-51 exemption before applying for these rent increases and document the outcome to the state agency that administers rent stabilization; and by reducing the rent increases by 100 percent of the value of the tax benefit instead of only 50 percent.

Additionally, while the acceptance of J-51 benefits means that buildings are rent regulated and landlords cannot deregulate units, in practice, both the City and the State have abandoned their responsibilities to oversee this program.  In response, landlords have taken advantage of lax enforcement and ignored their legal responsibilities.  If the Council were to simply extend the law without amendment, the landlords would interpret such an action as the Council’s support for business as usual.  New York City landlords would continue to accept the benefits of the exemptions and abatements without having to comply with the affordability provisions in the law.

Currently the J-51 law requires that if a rental building receives J-51 benefits, the landlord must register the apartments as rent regulated.  Additionally, if the building receiving the J-51 was rent regulated under the Emergency Tenant Protection Act, landlords could not deregulate units.  Further, the law states that if a landlord who receives a J-51 benefit also applies to New York State Homes and Community Renewal for a Major Capital Improvement increase, the MCI increase should be decreased by 50% because of the receipt of the J-51.  However, there is no mechanism in place to ensure that landlords do not receive the full MCI increase and the J-51 benefit.  It is our experience that lax enforcement has led to high rents and deregulation. 

The Legal Aid Society represents tenants in a building in Queens.  Our clients’ building has 110 units.  Although the building was built before 1974, it was never regulated as rent stabilized.  In 2008, the landlord of the building began receiving the J-51 tax abatement.  The landlord assured the New York City Department of Housing Preservation and Development that he would comply with the law by registering eleven units as rent regulated.  Not one person at HPD thought to check its own housing portal to see that the building had over 100 units.  Indeed, those fortunate tenants who lived in the eleven registered units were able to apply for and receive Senior Citizen Rent Increase Exemptions and Disability Rent Increase Exemptions.  Our clients who were eligible for such benefits could not access them because their apartments were not registered as rent regulated.  When we sued the landlord and the City, the City responded by arguing that the J-51 law had nothing to do with providing affordable housing to tenants and instead as long as the landlords completed the improvement to the building, the benefits could not be revoked.  This is but one example of New York City’s decades long refusal to enforce the rent regulation aspect of the J-51 law. 

Thus until the law is amended to ensure that landlords who receive these benefits actually comply with the affordability restrictions in the law, we urge the Council to eliminate this program.

Thank you for the opportunity to testify before the New York City Council Committee on Housing and Buildings today.

 

 

Issues Covered

Affordable Housing