Thursday, April 13, 2006

Subsidies for developers and the missed opportunity ($320M this year) for affordable housing

As I wrote, would the Atlantic Yards project be so big--a zoning override favored by the low-income community group ACORN and others--had sufficient affordable housing been built elsewhere? Unlikely, and the ground is shifting.

One factor hampering the construction of affordable housing--a city program that still subsidizes market-rate development without requiring an affordable component--has begun to face severe criticism. On Tuesday the Pratt Center for Community Development and Habitat For Humanity-NYC issued a report titled Reforming New York City’s 421-a Property Tax Exemption Program: Subsidize Affordable Homes, Not Luxury Development.

As the report states:
The 421-a program was created more than three decades ago, at a time of fiscal crisis and neighborhood abandonment, when New York was hungry for any new development. In today’s housing market, however, 421-a is subsidizing luxury housing in upscale neighborhoods, at a huge financial cost to the City. The program – which cost the City $320 million this year – is creating few of the affordable homes that average New Yorkers desperately need.

The report profiles ten buildings--seven in Manhattan, two in Brooklyn, and one in Queens--that will cost the city $94 million in 421-a tax breaks, though not one includes a two-bedroom rental for less than $2,000. One of the buildings (right) is 182 Montague Street in Brooklyn Heights, a 34-story, 192-unit building. Property taxes on the building without the 421-a exemption would be $1.46 million this year, but with the exemption they're only $131,000. The savings to property owners (and loss to the city): $1.34 million.

Large losses

Among the findings:
--The 421-a program has subsidized over 100,000 housing units since the program’s inception. However, according to a 2003 report by the Independent Budget Office, only about 8% of the units are affordable to low or moderate income families.
--The cost of the program to the City of New York has grown 150% in just 4 years, up from $130 million in lost tax revenue in 2002 to $320 million in 2006.
--The exemptions are especially lucrative for Manhattan developers, where housing stimulation is least needed. While Manhattan projects accounted for only 23% of all exemptions in 2005, Manhattan developers received over 78% of the value of these tax breaks.
--In some cases, developers contribute as little as 12 to 15 cents for affordable housing (in the Bronx) for every $1 of forgiven taxes on luxury buildings (in Manhattan).


Other cities don't need it

The report points out that other cities are far less generous. In Los Angeles, exemptions are given only if the development is fully affordable and owned by not-for-profits. In Seattle, 20 to 30 percent of the units must be affordable.

The 421-a program does have an “exclusion zone,” roughly between 14th and 96th Streets, where developers must either make 20 percent of their units affordable or buy “negotiable certificates” to create affordable housing elsewhere, usually in the Bronx. In Lower Manhattan and between 96th and 110th Streets, market-rate buildings are eligible for a 10-year exemption. Above 110th Street and in all of the outer boroughs, they are eligible for a 15-year exemption.

ACORN recently highlighted developers' use of such exemptions in Brooklyn without providing affordable housing, and pointed out that the Atlantic Yards project, by contrast, would provide significant amounts of affordable housing. (Actually, Forest City Ratner is not providing affordable housing in return for the as-of-right tax break it is gaining; the inclusion of affordable housing has helped FCR argue for building at a scale beyond what city zoning would allow.)

The Pratt-Habitat report does not mention the Atlantic Yards project.

Adding it up

According to a 2003 report from the Independent Budget Office, only 8% (4,905) of the 60,000 units subsidized through the 10-, 15-, or 20-year 421-a programs between 1985 and 2002 were affordable to low- or moderate-income families (insufficient data is available on the 25-year exemption to determine affordability). And many more projects have been constructed since 2002, such as the 23-story “Beacon Tower” built this year at 85 Adams Street in Downtown Brooklyn, where the 77 units start at $540,000.

Had 30 percent of the units built from 1985 to 2002 been affordable, that would've added another 18,000 units over those 17 years. Thousands more would've been built since 2002. Additionally, had affordable housing been built at urban--rather than suburban--density in places like East New York, as I noted, the debate about the Atlantic Yards project might be less charged.

While the 421-a program cost the city $130 million in 2002, it will cost $320 million this year, according to the Pratt-Habitat report. While the number of buildings receiving an exemption has remaimed relatively stable, the buildings are larger, and property values (and thus tax exemptions) have grown.

Developers' defense?

In a 4/12/06 Times article headlined Housing Groups Attack Luxury Units' Tax Breaks, Michael Slattery of the Real Estate Board of New York "defended the 421-a program, saying that it helps generate jobs and tax revenue in the long run, even when it does not produce low-priced housing."

But the Pratt-Habitat report argues that the housing market is strong because of the city's population growth, and the housing boom continues throughout the city.

Moreover, a majority of new construction since 1985 has occured without the 421-a tax break, because either developer chose not to use the program or the developments were sited on ineligible plots of land. Housing production has reflected "broad changes in market dynamics, including population growth, gentrification and interest rates." And the 421-a program has primarily supported buildings in already healthy neighborhoods.

What's next

The report identifies several proposals that will be considered by the city’s 421-a task force, which was appointed by Mayor Bloomberg in February and met for the first time yesterday:
--Abolish the 421-a tax exemption entirely, and steer new tax revenues to affordable housing or the city's general fund.
--Reduce or cap the benefit for any individual building, to level the playing field between Manhattan and the outer boroughs.
--Expand the “exclusion zone” to more neighborhoods where development would continue without subsidies.
--Require affordable housing as part of any new residential project that gets the tax break.

The task force includes a range of people, from housing advocates to developers to public officials. The advocates are pushing hard. "I would wipe the program out, take the $320 million and have a dedicated source of money for housing subsidy," Roland Lewis, executive director of Habitat for Humanity-New York City, told the Times.

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