Stakeholders Say 2024 Will be the Year for a 421a Replacement. Good Luck

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New York Gov. Kathy Hochul is this year attempting another maneuver to resurrect a generous tax break for developers after lawmakers let it lapse in 2022 — but it comes with a catch that lawmakers won’t like.

Last week, the governor floated legislation allowing New York City to draft its own incentive to replace a property tax abatement known as 421a and extend the deadline for owners of half-completed projects to receive the benefits of the expired program. 

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“Now, I remember last year, a number of the loudest voices in opposition said they believed in local control,” Hochul said in her annual address to state legislators at Albany’s Capitol on Jan. 9. “OK, let’s put that to the test. … Let them build!”

Reviving the tax law this year is a centerpiece of legislative agendas of the Real Estate Board of New York (REBNY), which represents the city’s property owners, managers and developers, and Mayor Eric Adams, who has argued an incentive will be necessary for the city to reach its goal of creating 500,000 new units over the next decade.

But Adams and REBNY have differed over their respective approaches to an incentive. The mayor has been open to linking a developer tax break to legislation that strengthens tenant protections such as “Good Cause Eviction,” as evictions have skyrocketed in 2023 and the city grapples with record levels of homelessness. The real estate lobbyist group has dismissed any proposals that would make it harder to evict tenants or restrict rent raises.

“Finding tenant protections and, at the same time, incentivizing building in the city and state is a duality we should be able to live with,” Adams told The Capitol Pressroom after the governor’s address. “Tenant protections, that’s what people are looking for. How do we protect tenants in a meaningful way without hurting small property landlords?” 

Few specifics about the new incentive were included in the governor’s 181-page briefing book other than that it must include requirements regarding wage standards for construction and building workers.

“Gov. Hochul will work closely with Mayor Adams to advance legislation that increases New York’s housing supply,” Hochul spokesman Justin Henry said in a statement last week. “The governor will announce further details about these proposals when she presents her Executive Budget next week.”

Legislators may not go along with it anyway. Several leaders have said that a tax break without eviction and rent hike protections is a non-starter and that lawmakers would be reluctant to hand over taxation powers to a mayor whose popularity has cratered. They are equally unlikely to extend the 421a deadline after a similar effort to do so failed near the end of last year’s legislative session, some lawmakers said. 

Leaders in both houses are also preparing to draft their own housing packages, which could be released before the budget is due on April 1. Senate Finance Committee Chair Liz Krueger of Manhattan said there is room to negotiate over the incentive but legislators will be skeptical of anything seen as favoring developers.

“Are we underwriting an enormous amount of luxury housing to get a small percentage of affordable housing? That was always my problem with 421a in all its versions,” Krueger said. “There are all types of ways to play with formulas, and we’ve proposed alternatives that the governor and real estate didn’t want to take.”

What owners want
Real estate developers still want an abatement replacement in order to build new rental properties, but there’s little consensus about what that would look like.

The previous program offered owners an abatement if they set aside 30 percent of their mixed-income units as affordable to residents earning 130 percent of the New York metropolitan region’s area median income (AMI) while rents for the rest of the units could be set at market rates. 

Hochul gave developers three options with different AMI ranges in a previous proposal when the law was up for renewal in 2022, but did not do so this year. One of her variations would have kept a quarter of the rental building affordable but the AMIs would be significantly lower, with 10 percent of them for families at 40 percent AMI, another 10 percent for families at 60 percent AMI, and 5 percent for those at 80 percent AMI. 

Whatever ultimately gets floated needs to pencil out, which will be difficult because interest rates remain high, real estate insiders said.

“You need a program that’s economically viable and useful,” said Jordan Barowitz, principal at Barowitz Advisory, which has clients in commercial real estate. “The lower the amount of affordable units in the building, the lower the AMIs. The higher the number of affordable units, the higher the AMIs.”

Many owners have their own suggestions. 

YuhTyng Patka, a land use attorney with Adler & Stachenfeld, said the developers she works with are looking for an expansion of the governor’s Gowanus, Brooklyn, pilot program. There, the state is purchasing properties and leasing them back to owners with tax relief and mandatory inclusionary housing requirements with a 421a-like exemption.

In addition, owners want additional property tax and insurance relief for existing landlords and the ability for rent-regulated landlords to recoup expensive capital costs for improvements to their units that are greater than the value of the units.

Brett Gottlieb, a partner at Herrick Feinstein, hopes the three main stakeholders outside of government — property owners, tenant advocacy groups and organized labor — reach a compromise. That could mean prevailing wage requirements coupled with income qualifiers for units that are set according to a neighborhood’s economic data instead of the region’s, and any proposed rent caps linked to measures that account for landlords’ increased expenses to run their buildings.

“Any solution which effectively results in negative cash flow or stymies the ability of a property owner to operate a profitable business will never be a starting point,” Gottlieb said. “However, providing particular protections for tenants will likely be part of the discussion.”

What City Hall suggests
The Adams administration is counting on a new incentive to galvanize its “City of Yes” plan, designed to update the city’s zoning regulations to potentially create hundreds of thousands of homes.

City officials expect to negotiate with the governor’s office on the tax abatement’s levels of affordability, depth and labor standards over the next several months. They’ve also publicly stated a need to balance an incentive with new rental protections, which is something the governor’s office has not said.

“The mayor has been clear that tenant protections are important, and our own initiatives and policies to protect renters have been really strong,” said Maria Torres-Springer, deputy mayor for housing, economic development and workforce. “We believe that together with tenant protections, there’s a package to ensure the well-being of renters in the city, which positions the city for a type of growth we need to have.”

Torres-Springer insisted that any new incentive won’t replicate the old program but is necessary to add affordable homes in high-cost neighborhoods. Use of the 421a tax exemption was so widespread between 2010 and 2020 that developers of two out of three new buildings in the city with more than four units took advantage of it, an NYU Furman Center report found.

“Housing costs are too high and affordability is threatened for them in this city,” Torres-Springer said. “The people who we serve are saying, ‘We need to do something with our housing crisis,’ and that’s what’s going to dictate how aggressively we try to get a deal done in Albany.”

What labor could propose
Labor leaders are also looking for a measure that will deliver higher wages for any project that opts into an incentive program.

That will almost certainly include some form of eviction protection. Some officials have floated establishing a “Good Cause Eviction” law that mirrors housing laws in New Jersey, whose cities have some of the lowest eviction rates in the country.

“All you can do is look across the river and you see Jersey City and construction is continuing at quite a rapid pace, and they’re living under Good Cause laws for a long time,” said Kevin Elkins, political director of the New York City & Vicinity District Council of Carpenters. “There is no math to pass a 421a-type bill without strong labor standards and commonsense tenant protections.”

Rising housing costs are the top concern of the city’s property service workers, SEIU Local 32BJ union President Manny Pasterich said. He wants more protections against unreasonable rent increases attached to any measures that would boost the state’s housing supply.

“What we’re pushing is we should link them,” he said. “They shouldn’t be separate things. A supply-side bill without Good Cause is not going to work, and we’ve shown a Good Cause bill without supply isn’t going to work.”

Pasterich acknowledged that opposition to the supply-side program, which includes tax incentives, is stronger in the Senate but believes lawmakers will be amenable to an omnibus bill this year. Elkins is equally optimistic that lawmakers will work with the governor to put forward a housing plan with incentives, but said real estate owners would have to compromise as well.

“There is going to be a push to get it done,” Elkins said. “It’s going to be up to REBNY to make a decision whether they will sit in the corner crying and throwing a tantrum because they don’t want any tenant protections like Good Cause, or whether they will be part of those discussions to solve it.”