NEW YORK, NEW YORK (Photo by Alexi Rosenfeld/Getty Images)
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Like many American cities, New York City’s demand for housing is staggering. In spite of state laws intended to hold down housing costs, rental prices have increased and low- and middle-income families are finding it even harder to find affordable homes.
However, new housing development to address the shortage is being threatened because one of New York’s main tools to encourage building, the property tax abatement called Affordable New York or 421-a, is scheduled to sunset on June 15, 2022. Why is 421-a necessary to develop affordable housing? High construction and operating costs (including property taxes) in New York City make it financially impossible to build multifamily housing, including buildings with affordable units, without this property tax-incentive or other subsidies.
As a result, local developers may stop building and capital may abandon New York City.
Quick Background – 421A
Since the early 1970s, New York City has promoted residential housing construction using 421-a, which enables a property owner to continue to pay taxes on the assessed value of the land before it is developed into residential housing and receive this benefit over a certain number of years. Between 2010 and 2020, developers leveraged private capital to build the majority of the City’s multifamily apartments (117,042 rental units) using the 421-a program, according to the NYU Furman Center.
Rental Development: The Numbers Don’t Work Without Incentives
New York City’s construction costs are higher than any other U.S. city, except for San Francisco, over 30 percent more than European cities like Paris and more than double Toronto’s, according to an annual survey by Turner & Townsend.
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Also, once the rental building is up, operating costs are 50% higher than the country’s average, according to a report published by the Citizens Budget Commission (CBC) Amend It, Don’t End It: Improve 421-a to Spur Rental and Affordable Housing Development. “Fully taxed rental buildings in New York report spending between 60% and 65% of gross rental income on expenses as compared to an average of 38% elsewhere in the country,” the report shows. “As a percentage of rental income, New York’s property taxes are high: 30% in New York City compared to 13% elsewhere in the country.”
Therefore, a property tax exemption available for multifamily development, aligns New York City with the rest of the country by reducing “operating expenses, from about 60% to 65% of gross rental income to 30% of income, depending on a building’s size.”
Developers are the Solution, Not the Problem
With 421-a set to end, New York Gov. Kathy Hochel proposed a successor program, 485-w, in the FY 2023 Executive Budget, but it was not approved by the New York State Legislature.
Some New York officials have criticized the 421-a program, claiming it doesn’t adequately serve low-income residents and that the City has lost nearly $1.8 billion in tax revenue because of it. However, this theory assumes that developers would have built the affordable housing without the 421-a tax abatement, which isn’t the case, according to another CBC analysis, No Windfall: Ending 421-a Today Won’t Free up $1.8 Billion for Decades. “The 421-a program exempts only the increase in assessed value attributable to new construction,” the analysis noted. “Property owners continue to pay taxes on the assessed value of the site prior to development…”
In lieu of 421-a, officials like City Comptroller Brad Lander are proposing to overhaul the New York City’s property tax system to encourage affordable housing development. However, a major change like this will be challenging, politically charged and difficult to achieve in a timely manner.
Mayor Adams Gets It, Will the State Legislature?
In Mayor Eric Adams words in a Daily News editorial, “If the 421-a program is allowed to expire without a new program in its place, affordable housing production in New York City would fall off a cliff.”
Mayor Adams gets it. He has pledged $5 billion to build and preserve more than 20,000 units of affordable housing per year.
Unfortunately, that still won’t be enough to meet the demand. New York City has an immediate need for 227,000 new residential units to accommodate the significant growth in its population and jobs between 2010 and 2020, and a projected need for 560,000 new units by 2030, according to a recent Real Estate Board of New York commissioned study.
Without incentives, there will be no new private development of affordable rental housing on the horizon. As a result, the housing crisis in New York City will worsen, reducing the supply of units over the next decade and pricing out not only low-income families but mostly middle-income families.
Developers and their capital have many options to consider when it comes to developing new housing and there is no doubt that New York City is an attractive place for it. However, if developers do not receive the economic value and return necessary for building rental housing, they will abandon the City for a more hospitable environment.