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Fate of lucrative housing tax break up to empowered state Legislature

In World
January 09, 2024

NEW YORK — New York City has gone 18 months without a lucrative tax break considered essential to residential development, just as it struggles with a severe housing crunch.

But one week into the state’s annual legislative session, it’s clear reviving the program remains an uphill battle.

Gov. Kathy Hochul is not expected to unveil a major new housing agenda when she delivers her State of the State address in Albany Tuesday, after pushing an ambitious housing plan that went nowhere last year. Instead, she’s taking a piecemeal approach to spurring development through executive action, while dialing back her legislative push for overarching policy changes this year.

That doesn’t mean she doesn’t want to reinstate the tax break known as 421-a, as does her downstate counterpart and fellow moderate Democrat, Mayor Eric Adams. But they would have to win over a skeptical state Legislature, whose members are all up for reelection this year and are keenly aware that enabling housing development remains a third rail in politics. Some prominent lawmakers want any new version to be paired with “good cause,” a contentious measure to restrict market-rate rent hikes that the real estate lobby staunchly opposes.

Adams, who is banking on 421-a and other Albany-controlled policies to spur construction, has a tenuous handle on the state capital and other priorities vying for his attention.

“Despite the fact that the governor and mayor have made it very clear how much they care about addressing the housing crisis, I think we’re in an unusual situation where the Legislature is going to have to play a leading role moving this forward,” noted Alicia Glen, former deputy mayor for housing and founder of the real estate firm MSquared.

In other words, a Legislature that generally skews more progressive on housing issues than Hochul and Adams, and is likely to push for more concessions from the real estate industry, holds enormous sway. Dimming prospects further, the real estate industry that once wielded significant influence in Albany has diminished leverage these days.

Without a reinstated tax break, Glen warned the city’s housing crisis would deepen: Rentals would be replaced with luxury condos and the Adams administration would be forced to fork over even more money to subsidize housing for its lowest-income residents.

“And to me, that would be a tragedy,” Glen said. “That would be literally rewinding the clock on the things that we spent all this time trying to fix.”

Movement on 421-a and similarly contentious housing policies will now depend on reaching elusive compromises.

“We have to holistically tackle the housing issues,” said Assemblymember Linda Rosenthal, chair of the body’s housing committee. “I have a lot of market-rate tenants in my district who are leaving because they can’t afford the rent hikes.”

Senate Deputy Leader Michael Gianaris said of 421-a and other policies to boost construction, “It’s a very important piece of the puzzle but it’s not the only piece.” He wants to see “real tenant protections against evictions — and that means some version of ‘good cause’ — as well as incentives to construct affordable housing.”

“That has always been a deal sitting there waiting to get made, but for the unreasonableness of some of the industry players,” added Gianaris, who serves as a leading progressive voice in the Senate.

New York City is in desperate need of more rental housing, a shortage that has driven prices to record highs. The median monthly rent in Manhattan is hovering around $4,000, while affordable options are exceedingly slim: The vacancy rate for the lowest-cost apartments — those listed under $1,500 per month — is less than 1 percent, according to the most recent citywide survey.

The Real Estate Board of New York routinely releases reports showing a drop in residential development since 421-a expired in June 2022.

Despite the enormous demand, the city’s property tax system discourages multi-family development, creating the need for 421-a in the first place.

The tax break dates back to the 1970s, when officials sought to entice developers to invest in New York as residents fled for the suburbs and the city descended into fiscal disrepair. The housing market looks vastly different today, with tight competition for limited apartments allowing landlords to charge premium prices.

In recent years, 421-a has been a continual source of friction between real estate defenders who deem it essential and politicians who think it’s a gratuitous giveaway to a lucrative industry. In the 1980s, lawmakers began requiring developers to build low-income housing in exchange for the benefit. But critics argued those lower-rent apartments were insufficiently affordable given the significant cost of the incentive — $1.77 billion in lost revenue in fiscal year 2022 alone.

In 2022, Hochul pitched a 421-a replacement that would have required somewhat lower rents on the affordable apartments. She had the backing of the real estate industry, but drew little interest from the Legislature. Given today’s high interest rates and inflation, developers no longer support that proposal.

As Hochul and lawmakers begin their six-month legislative session, it remains unclear who would champion the tax break.

The city historically took the lead on the issue, and while Adams and his top aides have advocated for the program, they have not introduced any specific changes since its expiration.

“You have to walk into the room with a piece of paper to start,” Glen said. “Like we walked in with a piece of paper, everybody had the same piece of paper, and we yelled at each other for however long it took to come up with the revised program.”

A broad housing deal almost came together last June, but Hochul would not support it because legislative leaders intended to include a version of the “good cause” measure — a top priority of tenant activists that would effectively restrict rent increases on market-rate apartments by offering tenants a defense against eviction when landlords raise rents above a certain threshold.

Adams called the tenant-friendly legislation a “smart concept” this past August, adding, “We need to sit down with our building owners and come up with a real partnership that everyone can live with, and I think we can do that.” During an interview with Crain’s last month, he said he would support a deal out of Albany that included both “good cause” and 421-a.

Politically influential unions have taken a similar tack.

“We have to get back to the business of creating housing and we understand that also needs to come with some tenant protections,” said Candis Tall, vice president and political director at 32BJ SEIU, which represents building service workers. “We feel like there’s been two sides and there hasn’t been anybody willing to talk about where the majority of New Yorkers fall, which is talking about both.”

While the real estate industry spans a broad range of private interests — developers, for example, care much more about a new construction tax break than landlords do — the industry’s public position on “good cause” has been unqualified aversion.

James Whelan, president of REBNY, noted the industry has backed other measures to support tenants, like a state-funded voucher program.

“When it comes to other tenant protections, I mean, I work for a bunch of reasonable people, and they’ll consider what’s put on the table,” Whelan said. But, he continued, “No one has put forward a case for ‘good cause’ eviction where it won’t be incredibly problematic — and I’m being polite in using those words — for the rental housing market in New York City, and particularly the production of more rental housing.”

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