What is the 421a Tax Exemption?
- By Alan Lightfeldt May 18, 2015
Before discussing what the 421a Tax Exemption was, it’s important to note that the measure expired in January 2016 when New York state lawmakers could not agree on terms for a new deal. That left New York City developers, politicians and real estate professionals wondering how development projects would be funded in NYC. It also presented concern that affordable housing units — which had been boosted by provisions in the 421a Tax Exemption — would cease to keep up with critical demand from New York City residents.
Throughout 2016, Gov. Andrew Cuomo and Mayor Bill de Blasio have each expressed frustration over their individual calls for reforming 421a. The mayor has made affordable housing key element of his administration and wants whatever new Tax Exemption law that gets drawn up and enacted to speed up affordable housing development.
“No more tax breaks without building affordable housing in return. Period. This can’t be a city of just penthouses and luxury condos,” said de Blasio. “We are turning the page, and making sure the same pressures that have pushed New Yorkers out of their neighborhoods are harnessed to build the next generation of affordable housing.”
Other pieces of housing reform that de Blasio wants to tackle include a mansion tax on condos, co-ops and homes that cost more than $1.7M; the elimination of “poor doors,” which is essentially a 421a-subsidized building with a separate entrance for tenants with lower incomes; and changes to rent-regulation and rent-stabilization laws.
Cuomo, meanwhile, had encouraged lawmakers to come up with a new deal, has signaled that he wants minimum wages to be part of an tax exemption negotiation in order to bolster union jobs and salaries. It is of some consequence that Cuomo and de Blasio, both Democrats, are nonetheless rivalrous in their separate efforts to lead on affordable housing and development. In addition to leadership from the city and state, buy-in for any new tax exemption must come from the Real Estate Board of New York and the Buildings and Construction Trades Council. There was no agreement on terms for a new 421aa exemption as of September 2016, but city development and the ability to create any affordable housing units is seen to be dependent on reviving this tax incentive.
What exactly is the 421a tax exemption?
The 421a tax exemption program was started July 1, 1971 during Mayor John Lindsay’s tenure when the city’s population was declining and residential real estate development was reeling from the city’s economic downturn.
Legislators thought a good way to kick-start construction was to drastically reduce property taxes for developers for a set period of time as a way to encourage the development of vacant or underutilized land.
An important and defining feature of the 421a program is that its primary goal was to lift the city’s lagging real estate industry during one of the worst economic times for the city – not to provide affordable housing. It was not until the 1980’s that New York policymakers used the 421a program as a vehicle for affordable housing development. Thousands of Manhattan condos were built under this program and continue to be built to this day.
The 421a program has been renewed and refined throughout the years, but at each turn, major reform was called for to help combat the city’s shortage of affordable housing. This excellent timeline delineates the issues around 421a.
How do developers benefit from 421a?
The primary benefit for developers is a tax exemption for their new construction projects. For example, if the land for the development was valued at $1 million and the resulting new property is worth $10 million, the property owner will not be taxed for the $9 million increase in value for the exemption period, which can last up to 25 years, depending on the project.
In return for this tax exemption, the developer must set aside affordable housing, which may or may not exist in the building being developed. In the 1980s, 421a was amended with a “geographic exclusion area” (GEA) in Manhattan, which is generally between 14th and 96th Streets. Developers building in this area are only eligible for a tax exemption if they constructed affordable units on-site (making 20 percent of the properties affordable) or they could purchase “certificates” and create affordable housing in the city elsewhere.
How do condo buyers benefit from 421a?
The 421a tax exemption gives condo owners a 100 percent exemption from any increases in their property taxes for the first two years and then taxes are increased by 20 percent of the normal tax rate every two years for the remaining eight years. The tax exemption usually lasts for 10 years, but can be for 15 or 25 years in upper Manhattan, some parts of the outer-boroughs and other areas still in development.
Does the 421a tax exemption expire if the owner sells the condo?
No. For example, if you bought an apartment that qualifies for a 421a exemption in the first year and sold your apartment in the seventh year, the buyer would have the remaining three years of reduced taxes since the exemption stays with the property, not with the owner.
How do renters benefit from 421a?
According to the NYC Rent Guidelines Board, if the building is newly constructed and the developer received an exemption from real estate taxes for a prescribed period from the city, the building is placed under rent stabilization. Generally, these buildings are stabilized only while the tax benefits continue. For renters, they benefit from stabilized rent rates. (Read how to find a rent stabilized apartment.)
Where are the 421a buildings?
According to a CityLab report, Manhattan has only 6.7 percent of 421a-exempt buildings, but because of density, it accounts for 40 percent of all units. Thousands of other buildings were built in Brooklyn, the Bronx, Queens and Staten Island. This fabulous, interactive map by the Municipal Art Society of New York shows the building locations and value of 421a exemptions throughout New York City.
For renters, you can find out if an apartment is rent stabilized by contacting the NY State Division of Housing and Community Renewal (DHCR), the state agency which administers the rent laws. Call DHCR’s InfoLine at 718-739-6400.
What do advocates for 421a reform want?
Due to rising rent costs and stagnant incomes, New York City is becoming increasingly more difficult for low- to moderate-income families to afford monthly rent. Rent advocates say the 421a program is a misuse of public funds, is inefficient and the taxes lost through the incentives ($1.1 billion in fiscal year 2013) could be used for the development of affordable housing rather than market-rate development.
What changes is de Blasio proposing to 421a?
According to the Office of the Mayor, the goals are to:
- Require affordable housing in all areas of the city: The current 421a program only requires affordable housing in 16.5 percent of the city – builders in the remaining 83.5 percent of the city can receive the tax benefit without providing any affordable housing. The City is calling for 100 percent of New York City to be subject to the affordable housing requirement.
- Increase affordable housing requirements: The current 421a program requires 20 percent affordable housing, leading to so-called ‘80-20’ buildings, and virtually no affordability in the rest of the city. The de Blasio administration proposes increasing that requirement to between 25 and 30 percent citywide.
- Help more New Yorkers access affordable housing: The affordable housing built through the current 421a program is targeted to families who make up to 60 percent of the Area Median Income (AMI), or approximately $1,260 per month for a two-bedroom apartment. The City is proposing variations to that model to reach New York families making as little as $31,000 per year on up to vital segments of the city’s workforce like teachers, nurses and police officers.
- Eliminate tax breaks for condominiums: The City proposes eliminating the 421a benefit for condos – which do not require tax incentives to spur construction – and making it a purely rental program. The benefit for condos has produced relatively few affordable units, and to continue the program as-is would impose a cost to the City of approximately $1.6 million per affordable unit.
- Rationalize benefits to match a 35-year affordability requirement: Current 421a benefits expire after 20 or 25 years. The City proposes aligning the length of the 421a benefit to the 35-year term of affordable units. Benefits would be extended for 10 years at the 25 or 30 percent affordability levels to ensure the affordable apartments remain financed and stable. In addition, ‘80-20’ buildings built under 421a prior to 2008 would be incentivized to keep their units affordable an additional 15 years, and in the process increase their percentage of affordable units to 25 percent. The hope is that an additional ten years of tax abatement – a highly attractive reward for developers – will spur further development, thus increasing the city’s total number of affordable units.
Additional resources with coverage of 421a:
- Pratt Center for Community Development – Understanding the NYC 421a Property Tax Exemption Program
- Association for Neighborhood and Housing Development (ANHD) – 421a Developer’s Tax Break
- NYU Furman Center for Real Estate and Urban Policy – Directory of New York City Affordable Housing Programs