Testimony of the Real Estate Board of New York To City Council Housing and Building Committee Oversight Hearing 421A

INTRODUCTION

The 421a partial tax exemption program created in 1971 has been an important and integral component of new housing production in the City of New York.  Since the mid-1980’s it has been an important component in the city’s efforts to build affordable housing as well.  As real property taxes began their dramatic rise in the late 1990s, the burden on residential rental property has been staggering and unsustainable. Rental housing now pays more than 30 percent of their gross revenue to taxes. The partial and temporary tax relief provided by the 421a program is necessary to temporarily alleviate the high tax burden for new housing to be built.

The 421a program will continue to play a crucial role in the city’s bold and ambitious ten-year, five-borough housing plan as it mitigates the serious real property tax problems facing housing production, especially affordable and rental housing.

BACKGROUND

In the early 1970’s the sole intent of the program was to encourage the construction of new housing. Since then, the program has evolved to be a catalyst for affordable housing; sometimes in ways beneficial to affordable housing production, at other times as an impediment.

In the early 1980’s as the city economy and housing market recovered from the fiscal crisis of the 1970s, the city modified the program to capitalize on the growth of the housing market in Manhattan, roughly from 96th Street to Houston Street. It established a Geographic Exclusion Area (GEA) which restricted 421a benefits to projects that included affordable housing on site or that purchased negotiable certificates.  The negotiable certificate program established in 1984 and administered by HPD issued certificates to a builder for the completion of new affordable housing anywhere in the city that was built in accordance with the program’s requirements.  The low-income builder would sell the certificates to a market rate builder to be used for a tax exemption on a market rate project in the GEA.

After a successful start--in the first two years (1988-89) that affordable housing was completed under the negotiable certificate program, there were 8 projects built totaling 882 units-the onset of the recession in 1990 slowed production between 1990 and 1997 (5 projects totaling 155 units).  As the economy improved new affordable housing picked up and in the last two years (2005-2006) of the program there were 27 projects totaling 2,017 units.  The units built under the affordable housing program were targeted to a low income population and in many cases were the first new housing development in these neighborhoods in decades.

In the midst of the economic slowdown in the early 1990s, the city amended the 421a program to spur new market rate and affordable housing, introducing a twenty year benefit for having 20 percent of the units on site and available for households earning up to 80 percent of AMI.  Over the next twenty years, this program alone generated, primarily in Manhattan, approximately 25,000 new housing units, including 5,000 affordable units.

In mid-2008 when the city and state legislative changes, which dramatically reduced the availability of benefits and expanded the GEA, began to take effect, the economy and the city’s housing market plummeted.  However, one indicator of the importance of 421a to housing production was the number of permits issued before the program changed and the economy faltered.  In June 2008, virtually the last month to vest benefits under the pre-2008 program, the city issued permits for approximately 17,000.  That was more units permitted than the other 11 months of 2008.  It was also more permits than the total permits in the next two years (2009-2010).

The 2008 changes which greatly reduced the benefits available coincided with the worst recession in 50 years.  New housing permits over a three year period 2009-2011 averaged 7200 a year, this following a decade in which we averaged 3 times as many units a year.  The 2008 changes which were renewed in 2011 did nothing to attempt to reverse this decline in housing production.  Many of these changes and the elimination of the certificate program were impediments, not inducements to the production of housing.

THE NEED FOR 421A TODAY

As we face another renewal of the 421a program we need to see the program as one very important tool to address our housing issues and to meet the goals of the administration’s housing plan.  Equally important to the production of new housing is the program’s partial exemption of real property taxes to alleviate the inequitable burden of property taxes on housing which is an impediment to the production and preservation of rental housing.

The city faces a systemic housing problem. New housing production has not kept pace with the growing population which is projected to reach 9 million by 2040.  We will need an estimated 20,000 new units a year for 20 years to meet this demand, as well as replacing every unit that may be lost as a result of demolition of unsafe buildings.  Even if we reach this level, we will not have created enough units to raise our vacancy level above five percent and create some downward pressure on rents.

At the same time we have a more challenging affordable housing problem.  The median New York City renter household income is approximately $41,000.  These households can afford rent of approximately $1,000 a month.  According to the Census there are approximately 1 million households who could afford to pay this rent and below.  However, there are only 700,000 units that rent at this level or below.  We will need to build at least 300,000 rental units affordable to these household to significantly mitigate this affordability problem.  Tax exemption programs, like 421a, are vital tools to address these production problems.

 Real property taxes have become virtually an unsustainable burden on rental housing.  Between 2002 and 2014 the real property tax levy has increased 130 percent, or approximately 11 percent a year.  This growth has fallen more heavily on Class 2 property (multi-family residential property) and especially on rental housing.  In 2014 Class 2 paid 37 percent of the real property tax levy and accounted for only 24 percent of the market value of taxable real estate.  Within Class 2 the inequitable tax burden has fallen disproportionately on rental housing compared to coops and condos which are also in Class 2.  According to the Independent Budget Report on Real Property Taxes, residential rental buildings pay property taxes at a rate five times greater than coop and condo buildings.  Given the enormous and inequitable tax burden on multi-family residential rental property, we will continue to need a robust, as-of-right tax exemption program to offset for a period of time the crushing burden of property taxes to build new housing and to preserve existing rental housing.

There has been a continuing effort to transform 421a from a housing production plan to an affordable housing production program.  This evolution has been underway for more than 30 years with some genuine successes. We should continue to search for ways to make the 421a program better serve the housing needs of our city without jeopardizing overall housing production.