A Better Way to Tax Multifamily Housing Development

One Part of a Broader Deal to Address the Housing Crisis

An ambitious deal is urgently needed in Albany in 2024 to address New York’s affordable housing crisis. Such a deal should (at least):

• Facilitate the creation of new housing across income levels, with a strong emphasis on affordability.
  This will require a new approach to taxing multifamily housing development, to replace the 421a program. That is the subject of this proposal.
• Protect tenants from displacement with good cause eviction protections.
• Establish & fund the Housing Access Voucher Program to support homeless & low-income families to access permanent housing.

Goals for Multifamily Development Tax Reform

• Increase the supply of housing across income levels, with a strong focus on genuinely affordable housing.
• Protect the public fisc: provide the level of tax incentives needed to facilitate development, but not more than that.
• Better match tax benefits to committed affordability and projected costs (including labor standards).
• Ensure that affordable units created are affordable to people in those neighborhoods.
• Facilitate the development of shared-equity, cooperative homeownership housing that is not currently being produced.

Key Elements of Multifamily Development Tax Reform​

For mixed-income, majority market rate projects:

• Establish tax parity between new rentals & condos to even the playing field & incentivize development (will reduce taxation on new rentals ~30%).
• Offer a tax exemption for projects, underwritten based on projected costs and affordability.
• Facilitate a targeted teardown program to allow Class B and C office buildings to be torn down & rebuilt as large residential buildings, with an affordable housing component.

For all-affordable housing projects:

• Streamline as-of-right tax exemption for 100% affordable housing developments.
• Create a new, as-of-right tax exemption + density bonus for all-affordable, shared-equity cooperative homeownership projects (21st century Mitchell-Lama).

Tax Parity Between New Condos and Rentals Will Even the Playing Field, Incentivize Development, and Reduce the Need for Subsidy

• ​NYC’s current property tax system taxes condos at a much lower rate than rentals, creating an incentive to develop luxury condos, and a substantial barrier to new multifamily rental development.
• This tax inequity is a substantial part of what necessitated 421a. Establishing tax parity for newly-created condos & rentals would reduce the need for subsidy for new development.
• Reducing tax rates for new large rentals (11+ units) by ~30% to achieve parity with condos would enable some additional unsubsidized market rate development to take place in strong markets. ​

Achieving equitable taxation of new multifamily buildings 

• Tax parity for new development would require the creation of a new tax class and class shares formula in Article 18, Sections 1801-1803-B of RPTL.
• Within the new class, assessment ratios, caps & abatements can be chosen flexibly to achieve parity in Effective Tax Rates (ETR) across new large rentals (11+ units), condos & coops – lowering the tax rate on new rentals and avoiding under-taxation of new coops & condos.
• A new class allows for the valuation of new coop & condo buildings based on comparable sales, while lowering their assessment ratio to avoid large jumps in annual tax payments.
• Assessment procedures for rental buildings would remain unchanged. (Valuation based on sales is not feasible due to sample size and greater risk of litigation.)
• The creation of a new tax class requires updating the class share formula to allocate the tax burden appropriately. Changes to assessment rules and abatements could affect, among others, Article 4, Section 467-A and Article 5, Section 581.
• Tax parity should be reviewed every five years within the new class.
• Additional legal and economic modeling will be required to ensure fair implementation.
• This measure should be a component of comprehensive tax reform, but in the absence of political will to accomplish comprehensive reform, it could be done as a standalone effort.

Targeted tax relief for mixed-income projects, underwritten based on cost and affordability

• Tax parity will reduce the need for subsidy & allow some additional unsubsidized market-rate development, but it will not be sufficient for the development of mixed-income housing.
• State legislation should therefore authorize HPD to issue appropriate tax exemption (full of partial) for majority market-rate projects (e.g. MIH) based on underwriting, given projected costs and committed affordability.​
• Underwriting would be based on MIH options, with opportunities for larger tax break based on enhanced affordability. This avoids the potential problem of “double-dipping,” and balances the need for project subsidies with the public fisc.​
• Allows for labor standards to be factored into underwriting.

Authorize a targeted tear-down program to facilitate the conversion of office space

• New “City of Yes” proposals will assist with adaptive reuse of troubled office buildings to residential. However, in some instances a more attractive tear-down option is necessary.
• ​State legislation should authorize a targeted program for Class B and C buildings in specific Midtown Manhattan areas including:
• As-of-right density bonusesfor residential development
• Require an affordable component in new buildings (à la MIH)
• Include access to project-specific tax relief

Ensure that affordable units created are affordable to people in those neighborhoods

• Outer-borough 421-a (options c + g) created 15,028 housing units between 2017 – 2020.

~70% or 10,365 of the units were market rate

~30% or 4,663 of the units were “affordable” for households at 130% of AMI ($173,420 for a family of four), which means they were un-affordable for 75% of New Yorkers, and generally un-affordable for an even higher percentage of the residents of the neighborhoods where they were created.

• These units comprise almost all the income-restricted units outside of Manhattan, where in many cases they are set at prices that are indistinguishable from market-rate development in the neighborhood.
• In some cases, those developments are now seeking additional subsidies or to convert to other options.
• Any new option that provides tax incentives in outer-borough/non-core neighborhoods must create affordable units that are genuinely affordable to people who live there.

Streamline as-of-right tax exemption for 100% affordable housing developments

• 100% affordable housing projects can currently ​receive tax exemptions under several programs (Article XI, 420c), but the process can be burdensome and prevent the development and preservation of affordable housing.
• State legislation could authorize a full tax exemption aligned with HPD 100% affordable programs such as ELLA (Extremely Low and Low-Income Affordability), SARA (Senior Affordability Rental Apartments), Supportive Housing Loan Program, Neighborhood Pillars, etc.​
• Should not apply for conversions of existing, currently-regulated affordable housing where affordability protections might be reduced (i.e. Article II to XI conversions of Mitchell Lama developments should not be as-of-right).
• Where housing is permanently affordable, the tax exemption would be permanent. Where affordability restrictions expire, the benefit would expire with them.

Increase affordable homeownership production through ​21st Century Mitchell-Lama Program​

• The State should establish an as-of-right tax benefit + density bonus that would pave the way for a new citywide, permanently affordable, multifamily cooperative homeownership program​.
• City capital could then be used to incentivize development of deeply and permanently affordable homeownership, with tiers at multiple income levels to provide access to homeownership for a range of households who cannot afford it today.
• New program focusing on working-class families would include labor standards for construction and building maintenance​.
• With new tax break, density bonus, and $1 billion capital investment (over several years), New York City and State could create 5,000 units of truly & permanently affordable homeownership.