The tax break that New York relied on to build housing is gone. What's next?

Nearly every debate about New York's housing crisis involves a state program called “421a.”

But what is it?

On one level, it's a simple idea: Give developers a property tax break to build housing in New York City that could otherwise hamper their bottom line. The program was first introduced 50 years ago, and its proponents – including developers and politicians from across the political spectrum – say it is one of the main reasons rental properties are being built in a city with some of the most expensive housing in the world . world.

It is also extremely controversial.

The law expired in 2022, and since then the governor, city officials and many state lawmakers have been trying to bring it back — including introducing a new version this legislative session. But left-wing lawmakers have fought the program's resurrection, saying it is a giveaway to developers.

Mayor Eric Adams and many housing experts believe a new tax incentive is necessary to address the housing shortage that is driving the city's affordability problems. Without more supply, they argue, demand for housing will continue to drive up costs.

Even some critics of the program now acknowledge that a tax incentive is needed that would also require keeping rents affordable for some new apartments. But any new law faces major hurdles, including criticism that the old one did far too little to address the city's worsening housing crisis.

What did 421a have to do with affordability?

To receive the 421a tax credit under the program, also known as Affordable New York, developers had to make a certain percentage of units “affordable” to people and families at different income levels. Affordable in this case meant that the rent could not exceed 30 percent of a household's income.

Developers could do this in a variety of complicated ways, depending on the size of the property they were building and where it was being built. Each option required the building to contain a different combination of primarily market-rate apartments and apartments affordable to tenants at different income levels. For example, last year one option allowed developers to offer one-bedroom apartments for around $1,000, with slightly higher prices for a different subset of units.

But the most common option, according to New York University's Furman Center, was to keep about a third of a building's apartments affordable for people earning 130 percent of something called the “area median income” — a complex measure calculated by the federal government. and used by housing officials.

In 2023, those apartments would have cost $4,130 for a two-bedroom. According to data from the US Census Bureau, affordable rent for the average New York City household would be closer to $1,900.

Did 421a help the housing crisis?

Not as much as it should be.

When 421a was first introduced, typical New Yorkers spent about 20 percent of their income on rent. When it expired, that number was closer to 35 percent.

High housing costs continue to drive people out of New York City. A third of all tenants spend more than half of their income on rent. And the city has lost about 500,000 low-cost apartments over the past thirty years.

Groups that work on behalf of tenants saying that 421a was inefficientcosting the city more and more tax revenue, while not enough is being done to help lower-income New Yorkers who face the greatest housing challenges.

But many developers and officials say that without some form of tax exemption or subsidy to entice developers to set aside affordable housing in their buildings, few will care, especially as construction costs soar due to inflation. They also note that the program was extremely popular among developers: According to research from the Furman Center, more than two-thirds of the 117,042 rental properties built between 2000 and 2010 benefited from 421a.

Without that, construction seems to have Interest rates fell, although that can be at least partly explained by the high interest rates that currently make borrowing expensive. In 2023, developers planned to build 9,090 units, up from 45,593 in 2022, according to a December analysis of New York City Buildings Department data by the Real Estate Board of New York, the industry's lobbying arm. (The 2022 figure was partly supported by developers anticipating the end of the tax break.)

Yet REBNY also recognized that the old 421a program needed to be redesigned to revive apartment construction.

What would a replacement look like?

Gov. Kathy Hochul is trying to get a new program off the ground, which she calls “485x.”

She previously sought to modify and revive the original tax incentive program through a 2022 proposal that tied tax breaks to deeper affordability and reduced the amount of tax revenue lost under 421a. It's possible that 485x would follow a similar pattern.

But she is leaving the details of the new program up to the real estate industry, the city and the unions, and it seems increasingly unlikely that they will reach an agreement. Many lawmakers want to pair a new tax break with new tenant protections called “just cause eviction,” which would give tenants a defense in court against evictions related to rent spikes and prevent landlords from kicking out tenants after their leases expire.

But the real estate industry has fought fiercely against these protections.

A new tax break also requires buy-in from labor groups, and it does trying to tie possible tax incentives for certain wage standards for construction projects.

And some left-wing lawmakers say landlords and developers didn't always follow 421a rules. They say there should be a new tax break with stricter enforcement better audits of developers receiving the benefits.

A new law may not solve the root cause of the problem

Any new law is unlikely to address a deeper problem: that the city's unique and outdated property tax system places a higher burden on rental buildings than on homeowners.

In the city, 30 percent of the revenue a building generates from rent goes to property taxes, compared to 13 percent elsewhere in the country, according to the Citizens Budget Commission, a nonprofit fiscal watchdog.

The result is that the group said in a 2022 report that “almost all new multifamily rental developments require some form of subsidy to be financially viable.”

Some officials say that rather than reviving a version of 421a, the entire system needs an overhaul. They argue that homeowners, including condo and co-op owners, would have to pay much larger amounts. New York City Comptroller Brad Lander said in a 2022 report that rentals are typically taxed at twice the rate of condos and co-ops.

But experts generally agree that a major change in the law would be an even bigger political challenge than creating a new tax exemption.