At a City Council hearing today, the Department of Housing Preservation and Development endorsed a pair of bills that would require annual audits to crack down on builders who are skirting affordable housing requirements in the 421-a property tax exemption program.
A revamped version of 421-a has been on hold, but the New York State Legislature is expected to act now that the Real Estate Board of New York (REBNY) and construction unions have reached a deal on wage requirements. Rather than examining the future of the tax exemption program, today’s joint hearing of the City Council’s finance and housing committees was focused on projects that have already taken advantage of the tax break and are required to register and maintain rent-stabilized apartments at specified income levels.
While a ProPublica story last year spurred the Council’s interest, HPD says it had already begun ramping up enforcement, starting in 2014. Most recently, the city sent notice to 54 buildings in January of this year before retroactively revoking benefits in September for 35 of those properties. The city is now facing its first lawsuit as a result of the crackdown, from a Flushing developer who had tax benefits revoked for not registering condominiums-turned-rentals with the state Department of Homes and Community Renewal.
HPD says 77 percent of 421-a rent-stabilized units — excluding three-family homes, which the city is not prioritizing for enforcement — are registered with the state every year. Three percent, or 1,400 apartments, have never been registered as rent-regulated units.
Compliance is lowest among smaller buildings, HPD said, which could be due to both bad actors and smaller developers who lack the knowledge or resources to register. However, there are high-profile cases of major developers skirting 421-a rent regulations, including 125 Court Street, owned by Two Trees Management, where tenants were charged excess rents for years.
Sponsored by Council Members Stephen Levin and Jumaane Williams, the pair of bills would require HPD to annually audit 20 percent of 421-a buildings to ensure landlords are complying with the program’s affordability and rent registration requirements, respectively. The administration supported both bills today with minor modifications. HPD said a third bill from Public Advocate Letitia James, Int. 1009-2015, requiring an online database of registered units, duplicates information already available on the city’s open data portal.
While HPD can track whether a 421-a building has registered its units with the state, it has trouble tracking whether new tenants are being overcharged in what should be a rent-stabilized apartment. The agency expects to have this third party audit system, which already covers inclusionary housing units, in the first quarter of 2018.
HPD has also submitted a request to the Office of Management and Budget to increase the size of its compliance unit, which currently has nine staffers and a director position that is funded but not yet filled.
The Department of Finance and HPD are also finalizing a memorandum of understanding to cover the gap between “preliminary” 421-a benefits, intended for a construction period of up to three years, and “final” post-construction tax benefits. Next week, the city will begin sending letters to the approximately 3,000 buildings that are receiving post-construction benefits without having submitted the proper paperwork and registration. If they do not comply, 421-a benefits will be suspended beginning January 5, 2018.
Many council members don’t like the tax break, which costs the city $1.4 billion a year in property tax revenue, but are straightjacketed because it is written into state law. “421-a is an extremely expensive subsidy in terms of bang for buck,” Levin said.
Affordable housing advocates testifying today agreed, including Benjamin Dulchin, executive director of the Association for Neighborhood and Housing Development. “If you took the same money and invested it into a city Section 8 program, you would have five times the affordability benefit,” he said.