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State revision of 421-a "corporate welfare" subsidy repudiates Doctoroff’s “nothing gets built” warning

It was front-page news last December 20 when the New York City Council passed a reform of the 421-a subsidy law, which offers "corporate welfare" (in State Sen. Liz Krueger's words) to developers in thriving neighborhoods thanks to a 1971 law that long outlasted its usefulness.

So it should be front-page news again, given that the state will further tighten the subsidy. The city's reform increased the Geographic Exclusion Area (GEA) where developers would be required to build 20% affordable housing in exchange for the subsidy, extending it to Brownstone Brooklyn, among other places. (Update 5:50 pm: More details are emerging about this bill, so it may not be as much of a reform as initially assumed.)

(Graphic of 12/21/06 Times front page from New York Magazine's Daily Intelligencer.)

But that wasn’t the end of the story--and now even fewer luxury condos will get that free ride, which lasts ten to 25 years. The New York State Legislature had to approve its own reform and legislators, as Crain’s New York Business reported yesterday, have apparently agreed on a bill demanding more from developers. The state revision, to be finalized on Thursday when the legislative session ends, apparently adds a dozen more outer-borough neighborhoods to the GEA. (Update: Still, it's not over until all parties sign off, so we can't be certain.)

The result suggests that Brooklyn Assemblyman Vito Lopez, chair of the Housing committee, had more sway than the real estate industry and lobbyists for the city, who wanted the state to endorse the bill the City Council passed. And if the city’s reform was to add 20,000 affordable apartments over the next decade, the state effort likely would bring more.

The result suggests that the “market” is a shifting beast, dangerous to predict. It also signals a defeat for the Bloomberg administration’s stance that, if a more stringent state bill was passed, we faced the risk that “nothing gets built.”

It’s also a reminder that affordable housing is a product of complex governmental policies and decisions, and that this legislative change will deliver far more such subsidized housing—and to a less economically-advantaged group of people—than the Atlantic Yards project.

Compromise issues

Note that the affordable housing provided by the 421-a revision would go to families with household incomes up to 60% of Area Median Income, or $42,540. Most of the Atlantic Yards affordable units—1350, or 60%—would go to families above this level, as the affordability scenario has already been tweaked upward.

The law still on the books requires developers building within the GEA to make 20% of total units affordable to families making less than 80% of AMI. The city’s revision set the bar for most units at 60% of the AMI. The state’s bill follows that, and may go further. (We'll see Thursday.)

Still, the results apparently represent a compromise from Lopez’s original proposal. Lopez and allies wanted the market/affordable mix to go from 80/20 to 70/30, but the former percentages will remain, according to a Lopez aide.

Also, as Crain’s reported, the implementation date of the new law will be pushed back six months, to June 2008 instead of December 2007. (The Real Estate Board of New York, or REBNY, had asked for a year.) That gives developers another chance to get as-of-right buildings started; indeed, as the New York Observer recently reported, developers had been working feverishly to get buildings started to beat the anticipated December deadline.

(Update: Will that affect Atlantic Yards? I'll deal with that later.)

The state law also would require a prevailing wage for workers at buildings receiving the tax breaks unless they contain fewer than 50 units or a certain percentage of affordable units.

Doctoroff’s defense

The state's revision has happened mostly under the radar. The contour of the subsidies and the effect on gentrification was the subject of a remarkable Assembly Housing Committee hearing on March 16, in which Deputy Mayor for Economic Development Dan Doctoroff squared off against Lopez; the former essentially argued that any construction was good, while the latter countered that taxpayer-supported market-rate developments distort poor neighborhoods.

(As far as I can tell, the only other media outlets to cover that hearing were the Brooklyn Downtown Star/Queens Ledger, to which I contribute, and, later, City Limits Investigates.)

Doctoroff cited the city’s steady and expected growth, with the addition in the 1990s of 700,000, setting up a situation in which the “demand for housing is far outstripping supply” Now, nearly 29% of renter households pay 50% of their income in rent, while affordability is defined as 30% of income.

The city has launched a multi-prong effort to increase the supply of housing, including rezoning to add density and policies like 421-a, initiated in 1971 when no one was willing to build. In the 1980s, the city established a GEA between 14th and 96th Streets in Manhattan, but clearly that wasn’t enough. It was extended to Brooklyn with the 2005 rezoning of the Greenpoint/Williamsburg waterfront.

Doctoroff called the law passed by City Council last December “a delicate compromise,” as it extends the GEA to encompass parts of Harlem, Brownstone Brooklyn and the waterfront strip of Queens. (Graphic of previous GEA extension from New York Times; I'm waiting for a map of the new extension. Click to enlarge.)

It would establish a new $400 million citywide fund for housing, eliminate the opportunity for developers to fulfill their affordable housing obligation by buying certificates to build housing in low-cost areas like the Bronx, and establish a “luxury cap” so only units will receive abatements for no more than the first $650,000 in value.

It also eliminated 25-year as-of-right benefits for market-rate construction in certain low-income neighborhoods, offering the extended benefit only if affordable housing on-site is included. And it created a commission to review the GEA boundaries.

“We’re trying to strike the right balance,” Doctoroff declared.

Lopez bites back

Lopez set out a different vision. “The big dilemma we have, with federal government getting out of public housing and Section 8, it puts a real burden on the underclass, people who earn $15,000, $18,000 a year.” (Lopez used the term “underclass” as a description of very low incomes, rather than an indicator of entrenched poverty or even pathology, as it’s also been used.)

“Affordable—it’s a relative thing,” Lopez said, noting that, while the AMI for a four-person household in New York is $70,000—since the figure is calculated by including wealthier suburbs—“the AMI in Bushwick is $22,000. In Brooklyn, it’s $37,000.

“When we talk about affordable housing, maybe that’s great for Manhattan, that mindset,” Lopez said. “You can build all the $70,000 homes in the South Bronx and Bushwick, it will only go to people out of our neighborhoods.” Later, he said simply, “Regional AMI is a joke.”

He called it “the worst thing in the world” for taxpayers to subsidize luxury condos in Bushwick that are marketed in Manhattan. “I really believe, no construction is better than that,” he said. “You say, we need middle-income houses. That need is great but it shouldn’t be at the expense of people in Bushwick or Williamsburg.”

In the 1970s, he said, the need was different, but Bushwick has since grown by 28,000 units. (Note: a fascinating exhibition on Bushwick at the Brooklyn Historical Society, Up From Flames, points out that land worth nothing in the 1970s might now be worth $500,000, and that developers are responding not only to tax incentives but to zoning that allows some fairly large buildings.)

Doctoroff replied conciliatorily. “Our goals are exactly the same,” he said. “The only thing I’d raise a question about: the sense that it’s better not to build than to build without affordability.”
Lopez pointed out that, after the City Council passed its bill, a local store closed so the property could be redeveloped before the new law kicked in. “No one benefits, except you say the city does.”

“It’s overall pressure on the market as a whole,” Doctoroff responded. “We have a fundamental supply problem.”

(That mantra has so penetrated the discourse that the New York Times last Sunday, reporting on the controversial Ariel towers on the Upper West Side, observed that “[t]he greatest need is for affordable apartments, but even luxury buildings like the Ariel towers relieve pressure on the housing market,” without acknowledging that the buildings benefited from tax breaks.)

Assemblymembers weren’t convinced, in part because the question is whether and how subsidies should be directed to increase the supply. (For example, the Forté condos in Fort Greene, according to a 1/17/07 article in the Brooklyn Daily Eagle, would not have been built without 421-a. But something else might have.)

A free-market oriented critic of the city’s housing policies, Nicole Gelinas of the Manhattan Institute, argues that the city should instead invest in expansion of public transit, thus generating new incentives to build. I’ll discuss her ideas more at a later date.

Gentrification issues

At the March hearing, Assemblyman Hakeem Jeffries, who represents Prospect Heights and environs, described his district as “ an area I believe is ground zero for gentrification in the city,” said he though that 80% of AMI was too high to be deemed affordable. (The city’s mixed-income 50-30-20 program, which would include the 4500 rentals at Atlantic Yards, involves 50% market, 20% low-income, up to 50% AMI, and 30% middle- and moderate-income, 60% to 160% of AMI.)

Shaun Donovan, the commissioner of the city’s Department of Housing Preservation and Development, said the city couldn’t challenge the federal AMI standard. “We agree we need low-income housing, but we need more middle-income housing,” he said, noting that most of the city’s efforts do go to low-income housing.

Lopez said the state should do more. “Somebody has to say, ‘how does 421-a impact Brooklyn?’” He reported that clergy offer stories of elderly congregants displaced from their apartments because they can’t afford to stay in their apartments. (For more, see Jim O’Shea’s comments.)

Whatever the benefits of gentrification, such shifting markets can fray community ties. Williamsburg activist Phil DePaolo, president of the New York Community Council, commented, “Instead of hardware stores, affordable supermarkets and laundromats, the commercial core changes to noisier bars, expensive restaurants, boutique food markets and so on.”

Lopez offered a similar aside about Atlantic Yards: “The stadium in Downtown Brooklyn, it has an impact; it changes the stores, the business, the mentality.”

Doctoroff’s response to Lopez’s take was technocratic. “We are driven by financial analysis, where can we get people to build,” he said. “To the extent you lower that, the risk you’re running is nothing gets built. You’re biting off your nose to spite your face.”

Lopez called the $400 million promise “a good p.r. piece,” but, “at $200,000 per unit, you’re talking about 1000 units.” (Actually, that would be 2000 units, but if the subsidy per unit were less, more units could be produced.) He added, “Four hundred million dollars is not a lot of money when it comes to housing.”

Doctoroff couldn’t resist a mild jab: “Is the state going to match it?”

Lopez: “The state should not only match it, but double it.” (Such a match has not been announced.)

“Just for the sake of building”

Brooklyn Assemblyman Karim Camara also challenged Doctoroff. Owning a house, he said, leads to community stability, pointing out that a member of his grandmother’s generation could buy a houses on a domestic worker’s wages. How, he said, “I have friends working in finance; they can’t afford to live in New York.”

Doctoroff, Camara noted, “said that we don’t want to cut off our nose to spite our face. That’s what we’re doing, if we’re building just for the sake of building.”

Donovan responded, “It’s not either or—we have to build new housing and ensure that a lot is affordable.”

Lopez returned to the contour of the law. “I think 421-a was great,” he said, “but we’re at the point where we’re running out of land. There isn’t a need for stimulating building… As one of my staff said, we’re giving a benefit for doing nothing.”

City Council Member David Yassky, testifying along with a panel of colleagues, took up the issue: “The city is giving away a lot of money in tax breaks and is getting nothing in return. If it’s expensive housing, the taxpayers shouldn’t be subsidizing it.”

Predicting the market

Yassky offered a crucial observation: “People say, ‘you won’t see development without subsidy.’ That may be true today… but ten years ago people couldn’t predict, and look now," he said. “To try to figure out the real estate market ten years from now, it’s a losing proposition…. We should have a simple statement: if it’s affordable, it gets the subsidy.”

Such a blanket citywide GEA didn’t pass City Council, nor did it emerge from the legislative compromise. Still, Yassky and fellow Council Members Letitia James, Charles Barron, and Gale Brewer, who came before the Assembly to support a stricter state bill, got some of their wish.

And apparently the administration, along with the real estate industry, can deal with it. After all, as Michael Stoler reported last month in the New York Sun:
Another prominent real estate leader who prefers to not be identified said, "As to the reductions in prices for condos, I've never met a market rate developer who wasn't all of a sudden going broke because of any adverse change in the law."

Support for city bill

At the hearing, REBNY had argued for no furthering tightening of the law, citing “the continuing rise in construction costs, with the recent surge in land prices and with a property tax system that imposes significant tax burdens on new development, particularly new condominiums…”

The New York State Association for Affordable Housing, an organization of developers and others involved in the construction of affordable housing in the city and state also endorsed the city bill and expressed concern about the 70/30 proposal.

Hope Cohen, Deputy Director of the Center for Rethinking Development at the Manhattan Institute, described 421-a as “a complication invented to offset the problems of a needlessly complicated and unfair system." She called the City Council compromise reasonable, and said the Assembly proposal would be too burdensome on small developers.

Bonds running out?

The New York State Association for Affordable Housing also pointed to a shift in the pattern of subsidies sought by developers. Given that the certificate program expires next this year, “developers in prime neighborhoods… are instead applying for tax exempt bonds to build 80/20 rental buildings.”

Given the finite amount of bonds available, the organization expressed concern that demand for 80/20 financing would “crowd out the 100% affordable projects that our members hope to use this same financing to build.”

Support for reform

Brooklyn Community Board 8, which includes Prospect Heights, endorsed Lopez’s bill, as did the housing advocacy group ACORN. Robert Furman, chairman of the Four Borough Neighborhood Preservation Alliance, also endorsed the Assembly bill, saying the city reform didn't go far enough.

“Taxpayers are subsidizing the destruction of our neighborhoods by developers of so-called luxury housing,” he said, nothing that the GEA was not expanded to most of Queens, “in most of southern Brooklyn, which is also middle-class, not to mention Staten Island.” Apparently his point got through.

Other issues

Lawrence Brinker of the Building Industry Association of New York City pointed to some other issues. “We believe the single most problematic impediment to affordable housing is the cost of land,” Brinker testified, urging the committee “to examine the true cost of downzoning on affordable housing.”

Brinker also asked the committee “to examine the rising cost of building materials,” which affects housing affordability.

Tax policies & federal support

Jerilyn Perine, executive director of the Citizens Housing and Planning Council, blamed “the City’s tax assessment policies which unfairly tax residential rental property,” noting that elevator apartment buildings have an effective tax rate that is more than five times higher that of condos or co-ops.

Beyond the “inequalities in the tax assessment system which continues to unfairly burden the construction of new rental housing,” Perine also pointed to the declining federal support for public housing and Section 8 rental subsidies, which have had a ripple effect in diminishing affordable housing.

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