Aims to ensure supply of affordable housing

View Letter to Mayor Bloomberg (pdf)
View Letter to Council Speaker Quinn (pdf)
View Policy Brief 421-a (released May 23, 2006)

City Comptroller William C. Thompson, Jr. today presented a compromise proposal to dramatically reform the City’s Section 421-a property tax incentive program to better ensure that it promotes the construction of affordable housing.

“One of my highest priorities has been to address our City’s dwindling supply of affordable housing,” Thompson said in a letter to Mayor Michael Bloomberg and City Council Speaker Christine Quinn.

“I commend you for your ongoing commitment to help resolve the City’s affordable housing crisis. However, I am concerned that your recent proposal to overhaul the City’s 421-a program for housing construction and your efforts to expand requirements for developers to provide affordable housing in exchange for tax breaks falls short of achieving important policy goals.”

“Any proposal,” he added, “should satisfy the central principle that tax subsidies be provided to developers who help address the City’s affordable housing needs; while not stifling the market rate development.”

Thompson’s proposal aims to:

• Create a citywide exclusion zone based on the principle that no tax benefits are provided to developers who don’t create affordable housing
• Require affordable rental units to be created on-site with market-rate rental units to further the goal of economic integration
• Allow off-site affordable construction as a means to extend the program to condominiums and small rental buildings
• Adopt a flexible schedule of 421-a requirements, recognizing that a “one-size-fits-all” requirement is inappropriate for a large and economically diverse city
• Terminate the negotiable certificates program, an inefficient and unaccountable program
• Establish a dedicated affordable housing fund
• Impose a cap on 421-a benefits to prevent subsidies disproportionate to the benefits provided

In May, Comptroller Thompson revealed that the 421-a program had outlived its usefulness as Manhattan luxury developers and apartment purchasers reaped the bulk of the program’s benefits.
The Comptroller’s analysis of the distribution of property tax savings granted under the 421-a program showed that most of the benefits have subsidized some of the most expensive housing in the City.
The 421-a program offers developers tax exemptions to encourage them to build new multi-family housing, and requires that, in return, recipients in the Manhattan “exclusion zone” – generally between 96th Street and West Houston/14th Streets – must help finance affordable housing.
The Comptroller’s analysis documented that relatively little affordable housing has been financed compared with the value of the exemptions that have been taken. In Fiscal Year 2005, more than $320 million in Section 421-a subsidies was provided. Since 1998, the annual value of 421-a subsidies has increased by more than $240 million.
Specifically, Thompson’s plan would do the following:

1. Expand the Exclusion Zone Citywide.  The 421-a “exclusion zone” should be expanded to cover the entire City; in effect, as-of-right tax exemptions should no longer be given to purely market-rate developments. Doing so will allow the City to realize tax revenue from new market-rate housing development, will encourage more developments to incorporate affordable housing, and will eliminate the inherently arbitrary nature of a legislatively determined tax-exemption zone.

2. Require affordable rental units be built on-site. The 421-a program should be a means to further economic integration in New York City

3. Allow Limited Off-Site Provision of Affordable Units.  Expansion of the exclusion zone and elimination of the certificate program (see #5 below) will leave condominium developers and developers of small rental projects with no realistic way to access 421-a exemptions.  For both legal and economic reasons it is difficult for developers to provide affordable units on-site within a condominium building, and no workable model for doing so has yet been established.

To encourage these developers to provide affordable housing, off-site provision of the affordable units should be permitted. This could be accomplished through different options. For example, a suitable model is that used for Inclusionary Housing within the City’s Zoning Resolution. Under that program, required affordable units must be produced either on-site, within the same community board district, or in an adjacent community board district within one-half mile of the site receiving the zoning bonus.  A similar requirement for 421-a units would underscore the importance of community economic integration and also provide better interface with inclusionary zoning rules.

A second option would be payment of fees into an affordable housing fund. This would be simpler for many small developers outside of Manhattan to comply with, and would set up a more accountable system than negotiable certificates.

A third option would be to exclude developers of small rental and condominium projects from affordability requirements entirely. While this deviates from the principle that no one should receive benefits without contributing to the affordable housing stock, it recognizes that development in low-density neighborhoods could be sufficiently negatively impacted by the change in policy that such an exclusion is justified.

4. Adopt a Flexible Schedule of 421-a Requirements.  The existing 80-20 formula is unlikely to be equally feasible in every neighborhood of the City.  In some areas, the rents achievable from the market rate units may not be high enough to cross-subsidize 20 percent of the units as currently required.  In others, market conditions may justify 30 percent affordable units at some appropriate rent and income level.  A program that differs from current law by providing fewer apartments to lower-income households, or more apartments to households whose incomes are higher, is consistent with public policy goals.

Developers should be able to choose an appropriate mix of market and affordable units based on the market conditions of the area and the financial constraints of the project.  A proposed “sliding scale” schedule of options is as follows:

A schedule such as the one above may not only be attractive to developers in core Manhattan, where some would continue to use the 80-20 configuration while others experiment with different mixes, but to developers in the other boroughs as well.  In some neighborhoods the tax exemptions may more than compensate for the rent restrictions at 30, 40 or even higher set-aside levels.  In lower-income neighborhoods where market rents are not high enough to make fully tax-paying apartments financially feasible, the schedule would not impose significant new constraints upon development. Of course, a developer who chooses a more restrictive mix (such as 20 percent affordable at 50 percent of AMI, the current Federal requirement for tax-exempt bonds) would also be eligible for 421-a benefits. This proposal does not alter the current method for determining income eligibility of tenants, and assumes that affordability of units would be required for the life of the 421-a exemption.

5. Terminate the Negotiable Certificates Program.  In practice, this program has provided little capital to low-income housing relative to the amount of City tax revenue foregone, primarily because there is no mechanism for tying one value to the other.  Terminating the program will result in more affordable housing produced under other 421-a provisions, or in tax collections greater than the value of resources the current program generates for low-income housing.

6. Establish a Dedicated Affordable Housing Fund. This portion of the proposal is similar to the Mayor’s proposed housing fund, which would provide financing for new construction, rehabilitation, and preservation. The Comptroller is fully prepared to dedicate Battery Park City joint-purpose 7(a)(ii) funds to help establish this fund. This fund would be established in conjunction with eliminating the negotiable certificates program, and could be the recipient of payments in lieu of affordable construction as mentioned in # 3.

7. Impose a Cap on 421-a Benefits.  Under current law, there is no limit on the value of 421-a benefits an apartment can receive.  A new luxury apartment, assessed at $125,000, could, for example, receive tax exemptions totaling some $250,000 over 20 years if it is part of an 80-20 development.  Moreover, four such apartments would receive the tax benefit for each affordable unit provided.

In order to limit the amount of tax benefits received by market-rate apartments receiving 421-a exemptions through the on-site or off-site provision of affordable housing, a cap of $100,000 on exempt value should be imposed. Further, the length of the exemption period should be limited to 15 years citywide, following the same phase-in schedule as is currently applied to as-of-right developments outside of the exclusion zone. This cap differs from the Mayor’s proposal, which applies only to development exempt from affordable housing requirements.

Thompson wrote: “I strongly urge you to consider these proposals and I look forward to working with you, the members of the task force and other stakeholders to address what is one of our City’s most important concerns.”