421a Stalemate: What’s Next?
The stalemate over the extension of the 421a program continues, with no indication that a resolution is near. The governor’s representatives have indicated that the program is dead, while the program’s critics continue to question whether 421a is even worth reviving.
This tax incentive program was created at a time when real estate development in New York City was virtually at a standstill. Developers and financers were looking at a city with swaths of vacant land and a city flirting with bankruptcy. Over time, the program was reformed to encourage development in certain areas of the city and to include affordable housing. Obviously, the real estate climate has gone from ice cold in the early days of 421a to the current red-hot market that the Big Apple has enjoyed for the past few years.
The stalemate should be no surprise to anyone familiar with the parties to the negotiations, trade unions and the real estate industry. The two parties have a long history of battling over whether publicly financed developments containing affordable housing should be treated as though they were public projects and thus be subject to prevailing wage requirements.
The real estate industry has fought this idea using persuasive arguments. Prevailing wage laws only cover public work projects such as roads and bridges; prevailing wage rates and benefits artificially inflate labor costs, and prevailing wage requirements can increase construction costs by 50 percent—essentially making affordable housing development infeasible.
Trade unions similarly present compelling arguments: that workers need to be paid decent wages, that sub-par wages result in sub-par construction and that many construction workers cannot afford the rents charged for affordable rentals.
The idea that the two sides would come together to resolve these fundamental differences is wishful thinking, at best. Clearly it is time to explore alternatives to the 421a program despite the ingrained bias in real estate development toward change. New York State and City have an arsenal of programs that can be modified, resurrected or expanded to fill some of the void left by the death of 421a.
Many existing state and city programs (i.e., Private Housing Finance Law Articles V and XI) create a role for not-for-profit community-based organizations by providing tax benefits when those organizations are part of the ownership structure. Additionally, many not-for-profit organizations own property that could be accessed for affordable housing opportunities.
The state’s prevailing wage program is far from efficient or accurate in establishing wage rate. If it is to be included in affordable housing programs, the program should be revised to base wage rates and benefits on current conditions and similar development projects.
City and state regulations are necessary, but there is room for improvement in the scope of the regulations and the administration of these programs. The need for affordable housing should be the impetus in looking at the building codes and the rent regulation laws in order to identify and eliminate impediments. For example, the rent laws could be amended to allow demolition of existing buildings if tenants are relocated and the number of affordable units in the new building is greater than what existed before. Finally, the city and state should look to waive filing fees and create expedited reviews of filings in order to facilitate development of affordable housing.
Given the magnitude of today’s crisis of income inequality and the shortage of affordable housing, it is time for all interested parties—the government, real estate developers and labor unions—to come together to creatively and comprehensively address the impediments and reform the opportunities for the creation of more affordable housing.
Brian Lawlor, special counsel at Jones Walker, is the former housing commissioner for New York State and New Orleans, Louisiana. He can be reached at email@example.com.