The affordable housing program that wasn’t

The headline of a recent New York Times article reads “In program to spur affordable housing, $100 million penthouse gets 95% tax cut.” Like many of the protesters featured in the article, I was outraged to hear this news. According to the author, there is a widely used tax-credit program in New York City, the 421-a property-tax exemption, that essentially provides incentives to developers who build expensive market-rate units.

As I read on, however, my anger became mixed with confusion. The article provides only a cursory explanation of the program, with the bulk of the reporting focusing on those who want it redacted (affordable housing advocates), those who insist it is a necessary tool for construction (real estate developers) and how Mayor DiBlasio will navigate between these competing (and voting) interests.

Details such as why 421-a was created, how eligibility is determined, why some buildings are required to build affordable units and others have no price limits were omitted. The headline is catchy but the premise is misleading: the author makes it seem as though the developer of One57 was exploiting a loophole in an otherwise good affordable housing funding source. In the article, however, the link between the penthouse’s price-tag and affordable housing advocacy is hazy.

Still, I felt there was something to the story and so I decided to do some research.

The 421-a program was created in 1971 to stem the outflow of city residents to the suburbs.  Lawmakers figured if developers had fewer costs and could guarantee a larger profit margin, they would build more (and more attractive) homes in Manhattan. Under the current iteration of the program, developers of buildings with three or more units are given a tax exemption for building on lots that are vacant, underutilized or occupied with a non-conforming use. If the lot is between 14th and 96th Streets in Manhattan (considered an exclusion zone because property here is in high demand), the developer must dedicate 20 percent of units as affordable to people making up to 60 percent of the area median income ($50,340 for a family of four). As with other cities where construction of affordable housing is a requirement for tax exemption, the quota can be reached by building units off-site, anywhere in the city. Developments outside the exclusion zone do not need to finance affordable units. A 2003 report by the Independent Budget Office found that between 1988 and 2002 only 4,905, or 7 percent of total units constructed under the program, were affordable to moderate and low-income families. Thus, this is not an affordable housing program but a construction incentive program with language added to encourage some below market-rate units.

Tax exemption is granted for either 10, 15, 20 or 25 years, depending on the number of affordable units and whether the units for low-income residents are built on- or off-site. Unlike the federal Low Income Housing Tax Credit program, the 421-a exemption phases out over the duration of a building’s eligibility. This overview of the program by the Pratt Center for Community Development provides a clear breakdown of the exemption schedule.

The program should, in my opinion, be expanded to mandate affordable units all participating buildings, with a possible exception for developers who construct affordable buildings nearby. The proposed amendments to Chicago’s Affordable Housing Ordinance are a good and balanced starting point. To the developers who claim real estate construction in New York City is too high to allow any new construction without government subsidies, I point to the 64 percent of buildings financed without the aid of 421-a exemptions. This program cost the city $1.1 billion in fiscal year 2014 alone. It is not sustainable, cost-effective or productive. When it comes up for renewal in June, I hope the city’s officials eliminate incentives for developers so that the program becomes a true catalyst for affordable housing.

 

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