Hochul’s Proposed 421-A Replacement Is In For a Fight, Key Lawmakers Signal

“By April 1, it will be out or modified. It will not be this program,” one legislator predicted.

Colin Kinniburgh   ·   February 7, 2022
Construction in Gowanus, 2015. Most multifamily buildings built in NYC over the last decade have used the 421-a tax break, especially buildings in Brooklyn. | jqpubliq via Flickr

After Governor Kathy Hochul delivered her State of the State address in early January, housing organizers issued a bitter rebuke.

“On housing, Governor Hochul is continuing the worst of Cuomo’s legacy,” said the Housing Justice for All coalition in a statement. The group singled out one policy in particular: the 421-a tax break for real estate developers, which Hochul promised to let expire—only to replace it with a new, substantially similar tax break.

The details of Hochul’s proposed 421-a revamp, unveiled two weeks later in her executive budget, did little to allay criticism. Dubbed the Affordable Neighborhoods for New Yorkers Tax Incentive, or 485-w, it would deepen the program’s affordability requirements and slightly increase wage requirements for construction and building service workers in the largest buildings.

The governor’s proposal has garnered support from Mayor Eric Adams and Assembly Housing Committee Chair Steve Cymbrowitz, who has said that Hochul “should be commended for coming up with something different.”

But other lawmakers, including key figures in the state Senate, told New York Focus that in coming budget negotiations, they want to go back to the drawing board.

“Nothing less than a wholesale redesign is necessary to transform what is now an annual two billion dollar boondoggle into a program that would actually provide a benefit commensurate with its cost,” said Liz Krueger, chair of the Senate finance committee and number three in the chamber. Such an effort would take time, she said, and should be pursued outside the budget process, with its March 31st deadline.

Brian Kavanagh, chair of the Senate housing committee, struck a similar tone.

“The Executive Budget proposal regarding 421-a is not anywhere near where we would need to be if we were going to enact a new tax subsidy program—in terms of affordability, labor concerns, and environmental sustainability,” he told New York Focus.

That opposition means that the new subsidy program won’t go in the final budget without a fight.

“I can guarantee it’s not going to stay in its current form,” said Assemblymember Linda Rosenthal, a member of the chamber’s housing committee. “By April 1, it will be out or modified. It will not be this program.”

How 421-a works

First established in 1971, the 421-a tax abatement was designed to lure real estate development back to New York City in a moment of urban decline. Although the policy only applies to New York City, and falls on the city’s tab, it is set at the state level. It exempts new buildings from taxes for 35 or in some case 40 years if developers meet certain conditions—typically, with a full exemption for the first 25 years, tapering off in the remaining decade. It is an “as-of-right” program, which means buildings automatically qualify if they meet the conditions; regulators have no discretion to approve or deny specific projects.

Since the early 1990s, as the program’s design has evolved, it has gone from subsidizing mostly condos to mostly rentals, according to New York City Department of Finance data.

Over the decades, lawmakers have added affordability requirements, and 421-a has become central to the city’s push to create affordable housing through private development, by adding income-restricted units alongside market-rate ones.

“The city was in a very different place in 1971, when [421-a] was created, and it was really created as a way purely to attract private investment, to build housing,” said Matthew Murphy, executive director of the NYU Furman Center. “There were no affordability requirements, there were no geographic exclusions… Since then, it’s changed a lot, but the principles are the same.”

From 2010 to 2020, about 70 percent of all new buildings 4 units and larger used the tax break, Murphy said. These buildings are increasingly clustered in Brooklyn, with the borough accounting for just over half of all 421-a exemptions as of last year—up from 18 percent in 2001.

As developers have increasingly taken advantage of the program, it has ballooned in cost, reaching $1.7 billion in foregone taxes last year—a tenfold increase since 2001, even accounting for inflation. That makes it by far the city’s largest tax expense, and critics say it has delivered little affordable housing in return.

Under the current 421-a, buildings qualify if at least a quarter of units meet affordability criteria, broken down into seven options based on building size, location, and other factors. Those criteria are based on “area median income” (AMI), a standard set by the U.S. Department of Housing and Urban Development for each metro area. AMI for the New York City region is currently $107,000 for a family of three.

The income limits for “affordable” units under 421-a reach as high as 130 percent of AMI. That can translate to as much as $3,400 for a two-bedroom, regardless of which neighborhood the development is in. This means even income-restricted units in 421-a buildings can rent for more than unsubsidized apartments in the surrounding neighborhoods—yet developers receive a 35-year tax break on the entire building.

Hochul’s proposed 421-a replacement would do away with the 130 percent AMI threshold for rentals, requiring all income-restricted units to be targeted at households making less than median income. For buildings larger than thirty units, at least a quarter of units would go to households earning 40 to 80 percent of AMI ($43,000–$86,000 for a family of three); for smaller buildings, a fifth of units would be capped at 90 percent of AMI ($97,000). The new program would also bring the restricted units under permanent rent stabilization, rather than allowing them to revert to market rates when a building’s tax break expires, as the old 421-a program did.

It also revises 421-a’s homeownership option, which analysts say has rarely been used in the program’s current iteration. Hochul’s version would allow condo and coop buildings to receive a full tax exemption for 40 years, provided all units remain affordable to households earning 130 percent of AMI for those 40 years.

A spokesperson for the state Division of Homes and Community Renewal (HCR), which Hochul’s office directed questions for this article to, described 485-w as one in “a series of bold tools to stimulate private market production of housing in New York City and across the State.”

“The Affordable Neighborhoods for New Yorkers tax incentive breaks from the previous program by requiring permanency of the affordable units for the first time, serving lower income households across the City, and ensuring greater efficiency of taxpayer dollars,” the spokesperson said.

Mayor Eric Adams’ office has been receptive to Hochul’s proposal.

“We need to build more rental housing, and without this kind of tool, the housing crisis will only get worse,” a spokesperson for the office said in a statement. “While the administration may suggest tweaks in the future, this proposal is incredibly important, and the Adams administration supports it.”

The governor’s approach has also won the backing of another key player: the powerful Real Estate Board of New York, whose president James Whelan said in a statement that it “provides the private sector with an important tool for producing rental housing at deeper levels of affordability permanently.” (Filings submitted to the state’s ethics commission in late January show that REBNY regularly lobbied the governor’s office, lawmakers, and a range of other city and state officials about 421-a over the second half of 2021.)

“Giveaway to developers”

The 421-a tax break already faced sharp scrutiny when it was last up for renewal in 2016. That year, the program lapsed after lawmakers failed to reach a deal with building trades unions over construction wages (which the program also regulates, alongside affordability, in eligible buildings). It was revived in 2017 and dubbed the Affordable Housing NY Program. Five years later, it’s due to expire again in June.

In that time, the city’s housing movement has grown stronger, and getting rid of 421-a is high on their agenda.

“It’s just a giveaway to developers,” Ellen Davidson, a staff attorney at New York City’s Legal Aid Society, told New York Focus, describing the program’s promise of affordable housing as a “fig leaf.”

Households making six-figure incomes, Davidson said, rarely need or want the income-restricted units, while the clients she represents, who typically earn less than half of AMI, cannot afford them.

In some cases, the above-AMI apartments are out of reach even for tenants with vouchers provided by the CityFHEPS program or federal Section 8, which caps payments at just over $2,000 a month for a two-bedroom in New York City. As a result, critics say, many of these apartments remain empty, while those who need housing most struggle to find it.

Bronx native Luis Torres is one of those people. Six years ago, he said, he lost his job and then his apartment while grappling with a hereditary medical condition (an overactive thyroid) that nearly killed him. He found medical treatment, but not an apartment, and spent three years between the streets, subways, and friends’ apartments before reluctantly entering the shelter system, where he has spent another three years.

Today, Torres is still biding his time in a hotel near JFK airport. He’s spent much of the pandemic looking for an apartment through the housing lottery after qualifying for a CityFHEPS voucher. His early matches on the city’s Housing Connect portal were totally out of reach, even with the voucher, he said.

“My voucher is $1,260 and they want $1,900, $2,100, $2,300,” he said. “I’m like, why you even contacting me?”

Further complicating things, Torres was determined to find a place in the Bronx, near his doctor. Eventually, he did: a 421-a funded building in East Tremont, where he’s set to move into a one-bedroom renting for about $1,500. It’s a beautiful, brand-new building, he told New York Focus, and his apartment will be more affordable than he first expected thanks to a recent stroke of luck: he qualified for Section 8, which is more generous than CityFHEPS.

But he regrets how long the search has taken, and says the apartment’s total rent remains totally out of proportion with the area, where he says shootings and other crime are rampant. (A city crime map shows two murders on his new block in just the last year.)

Meanwhile, many low-income New Yorkers struggle to find housing at all, with or without assistance. Close to 49,000 people were living in shelters as of October, according to the Coalition for the Homeless. Rents in almost all neighborhoods are rising again, according to StreetEasy data, as the city’s housing market has sharply rebounded from its pandemic lows.

A statewide eviction moratorium expired on January 15, putting tens of thousands of households at risk of losing their homes, while others have been illegally evicteddespite pandemic protections.

Critics say Hochul’s 421-a update would do little to house those who need it most. In large buildings, only 10 percent of new units would be targeted at households making less than half of AMI; the remaining 15 percent would go to households making 60 and 80 percent of AMI.

The looser criteria for smaller buildings, which only require them to offer 20 percent of units to people making up to 90 percent of AMI ($97,000 for a family of three), mean many outer-borough developments could still charge more for income-restricted units than median rents in the surrounding neighborhoods—while charging even steeper prices for the remaining 80 percent of units in the building.

Tax incentives are simply “not producing the kind of housing that we actually need to solve the housing crisis,” Cea Weaver, campaign coordinator at Housing Justice for All, told New York Focus.

“An important tool”

Critics of 421-a say the program not only subsidizes developments that don’t need it, but pushes up rents for tenants in existing buildings. New York City has four classes of property taxes, with multifamily apartment buildings falling into Class Two, and the city counts on a certain amount of revenue from each class to meet its budget, setting annual tax rates accordingly.

“A larger and larger share of class two developments are coming in with 421-a, and so they’re not paying their property taxes,” said Sam Stein, a researcher at the Community Service Society. “Non-421-a rental owners are responsible for making up that whole share… and it all falls on the back of the renters.”

Proponents of 421-a and similar tax incentives counter that it’s not fair to look at the foregone tax revenue as an expense—whether to the city or other landlords—because the untaxed housing wouldn’t have been built without the program. Some housing experts say mechanisms like 421-a are especially necessary to make new affordable housing viable in higher-cost neighborhoods, like recently rezoned Soho and Gowanus.

Murphy, of the Furman Center, says tax incentives and New York City’s Mandatory Inclusionary Housing (MIH) policy go hand in hand, “in the sense that 421-a is the money, and MIH is the space.” Rezoning opens up new land for developers to build on, and tax breaks provide financing.

Proponents say this combination helps prevent new affordable housing from getting clustered in low-income neighborhoods and deepening segregation.

“Incentives are an important tool to create affordable rental housing in high-cost neighborhoods near good jobs and transportation, and provide vital opportunities for affordability to be woven into the fabric of the City as we continue to grow the housing stock,” said the HCR spokesperson.

Critics, in turn, note that the financial viability of new construction depends in part on developers’ expected returns, which shouldn’t be taken at face value.

“I don’t think we have to buy into how much profit they decide they want,” Rosenthal said.

Providing people with housing, she said, is a “civic imperative” that should be steered towards nonprofit developers if their for-profit counterparts can’t do it adequately.

Rosenthal added that if the state is going to create a new subsidy, it should cover only the affordable units—an approach echoed by some of her colleagues.

“Our state should solely incentivize improving and expanding our affordable housing stock,” Senator Gustavo Rivera told New York Focus.

Moreover, advocates said the state should prioritize other ways of making housing more affordable to lower-income New Yorkers, including vouchers, which organizers, researchers, and even major landlord groups agree are the quickest way to prevent evictions and get people off the streets. Legal Aid wants to see the state allocate part of Hochul’s proposed $2 billion pandemic recovery fund towards the Housing Access Voucher Program.

Such a program might, among other things, help more people like Torres get into the higher-priced rent-restricted apartments that have already been built and are struggling to find takers.

Longer-term, organizers would like to see the city and state pilot new forms of social housing.

Davidson, of Legal Aid, said that might look like project-based Section 8, where vouchers are attached to a specific development; this approach has already been tested in neighboring Connecticut. Weaver would like to see the state go further, creating a new public entity that would own and operate buildings to maintain permanent affordability.

If homeownership is part of the equation, Weaver added, it should take the form of limited-equity cooperatives, which cap apartments’ resale value as well as buyers’ income eligibility. This principle was the basis for the longstanding Mitchell-Lama program, now largely defunct.

For now, Weaver said, eliminating 421-a is a top priority for the coalition she leads this year, along with passing good cause eviction. “421-a is a wildly unpopular program and it’s embarrassing for Kathy Hochul that she thought she could pull the wool over the eyes of the New York state legislature by just giving it a rebrand,” she said.

Assemblymember Harvey Epstein, a member of the chamber’s housing committee, told New York Focus that scrapping or overhauling 421-a and passing policies like good cause should be looked at as part of a holistic effort to protect New York City renters, as the legislature prepares its one-house budgets in response to Hochul’s draft.

“We can’t just look at this in a vacuum of saying, ‘Hey, this is a replacement for 421-a, let’s go continue.’ I think that’s a mistake,” Epstein said. “I think we need to have a comprehensive housing plan.”

There may be room for some version of 421-a as “a market-based part” of that plan, Epstein added, “but we’re nowhere near that right now.”

This article has been updated to include a new statement from the mayor's office.

Colin Kinniburgh is a reporter at New York Focus, covering the state’s climate and environmental politics. Over a decade in media, he has worked in print, television, audio, and online news, and participated in fellowship programs at CUNY’s Graduate School of Journalism and… more
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