A Grand Bargain on 421-a Tax Abatements: How Market-Rate Builders Can Pay Taxes Without Destroying the Industry

The 421-a rules should be changed, but it shouldn't come at the expensive of affordable new market-rate construction like 2454 Hoffman Street, in the Bronx. Image by Christopher Bride for PropertyShark.

In June, New York’s 421-a tax abatement program is up for renewal, and many on City Council want it either eliminated entirely or seriously overhauled. The program, as currently structured, relieves owners of newly built rental buildings or condos of their property tax obligations for at least 10 years, either contingent upon a 20 percent below-market housing set-aside in the city’s core and some gentrifying areas, or without conditions on and beyond the gentrifying fringe.

Some radicals on the council with a shaky grasp of the real estate industry want the state to end the program entirely, even for buildings’ 20 percent affordability set-asides. The real estate industry, meanwhile, would like the program to stay as it is, allowing them to continue to dodge taxes on new buildings in neighborhoods like Clinton Hill and Windsor Terrace, where they could probably do without the abatements for many projects.

But a more likely scenario is that the so-called geographic exclusion area – the part of the city where landlords must guarantee affordability to get the tax break – will be expanded, perhaps to encompass the whole five boroughs.

While YIMBY does think that developers of market-rate buildings everywhere in the city should pay their fair share of taxes, there are some reforms that need to happen first, lest the sudden jump in taxes choke off what little growth there is beyond the gentrifying fringe.

It’s certainly true that the tax break is given out in some areas where it’s not necessary to spur housing construction, but in most neighborhoods outside of the geographic exclusion area, development is a much more marginal proposition. Ending the abatement without easing any of the other rules that drive up costs would likely vaporize new market-rate construction in the Bronx, for example, and would do serious harm to other markets. One builder in the Bronx told us that if they lost the 421-a abatement, “almost all of the projects we have planned would not pencil out, and we wouldn’t be constructing anything, just continuing to do rehabs.”

That said, the tax break for buildings without affordability is certainly outdated. But to end it without eviscerating the market-rate construction industry – something that, during Council hearings yesterday, Brad Lander candidly acknowledged that some of his colleagues don’t see much harm in – the state must pass compensatory measures.

Luckily, New York State is so poorly governed that there are a wealth for reforms possible on the state level – which is where 421-a reform would happen – that could cut costs to developers, allowing the city to start taxing all new market-rate development without doing further damage to our already low housing production rate. YIMBY’s picked two of the biggest to focus on: the Scaffold Law, and dramatically higher tax rates for large rental buildings.

The so-called Scaffold Law is perhaps the most exciting possibility, given the sudden downfall of Sheldon Silver. The assembly speaker was a shameless shill for his fellow trial lawyers, and firms like the one he worked for while speaker profit mightily from plaintiffs suing under the state’s unique liability law, which puts 100 percent of the responsibility for “gravity-related” injuries on property owners and contractors, no matter who a jury finds was actually at fault.

The law is tremendously expensive. The New York City School Construction Authority’s bill is the most well known – they do $2 billion worth of work each year, but construction insurance costs alone are in the hundreds of millions of dollars per year.

Reforming the law would cut percentage points off of market-rate builders’ construction costs, easing the blow of having to pay their full property tax bills. And given that Scaffold Law lover Sheldon Silver is on his way out and Scaffold Law reformer Joe Morelle now has a favor or two to call in with the man likely to replace him, the timing could not be better.

And while developers should certainly pay their share of property taxes, it must be noted that the current rates are anything but fair. New York City taxes mid-sized and large multifamily rental buildings at much higher rates than single-family and very small apartment buildings. The disparity in taxation is so galling that two longtime Bronx and Queens renters filed a lawsuit against the city, claiming the higher rates for large rental buildings have a disparate and adverse impact on black and Hispanic New Yorkers, who are more likely to rent than whites and Asians.

The Bronx builder we spoke to called the levels of taxation he’d be subject to “confiscatory,” and looking at some examples of new projects throughout the borough, we’re inclined to agree.

On East 217th Street in Williamsbridge, we found a seven-unit rental building (No. 741) right next to a three-unit home (No. 737), both built in the mid-2000s. Without abatements, the owner of the three-family building would pay $5,046 a year in taxes, or $1.15 per net square foot of floorspace. The owner of the seven-unit building, on the other hand, would have to shell out $30,196 – a whopping $4.77 per square foot.

In Belmont, another Bronx neighborhood where the market can support unsubsidized new residential construction, it’s the same story. A pair of buildings at 2464 and 2454 Hoffman Street, with 14 and eight units respectively, would each pay in excess of $4 per square foot of space annually in taxes absent the 421-a abatement. But a pair of three-family homes just one block to the south, at Nos. 2424 and 2426, pay less than $1.50 a foot.

While market-rate developers certainly should pay something, the current rates for multifamily rental buildings are simply absurd.

Both Scaffold Law and property tax reform would have benefits beyond aiding market-rate builders. All developers benefits from Scaffold Law reform, including the government and affordable housing builders. And cutting tax rates for apartment buildings would put some money back into the pockets of renters of older buildings, ending the racially discriminatory status quo.

Legislators in Albany have the opportunity this year to both put all new market-rate buildings in the city back on the tax rolls, while at the same time easing the tax and liability rules that necessitated the abatements in the first place. Developers would end up about where they are now, but the city would capture the tax revenues rather than special interest groups like trial lawyers, insurance companies, and single-family homeowners.

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Posted in New York | Property taxes | Residential