By Chris Gillis, Investment Real Estate Salesperson, Ackman-Ziff
Affordable New York, the replacement for the expired 421-a housing development program, is far from living up to its name. While it may have launched with lofty intentions, the program has produced virtually no new affordable units for New York City.
New York’s 421-a program, starting in 1971, is a housing development incentive program which gives real estate developers tax abatements for building new multi-family residential buildings. Since its inception, it has included provisions which mandate the creation of affordable (income restricted) units in order to qualify for real estate tax abatements. When the program reached expiration and lapsed in January 2016, a void was created for both the city’s need of affordable housing and developers alike.
Disagreements between state and local government were the main cause for the renewal delay, with a deal eventually being made in November 2016 between unions, developers, and government. The revised program was officially instated in April 2017 budget negotiations, however this time with a refreshed, more suggestive name of what we all know now as “Affordable New York” (the “New Program”).
When the New Program took effect in April 2017, it aimed to make up for lost time by working retroactively for any new development that commenced construction on or after January 1, 2016 (projects looking to apply for the expired program must have commenced before December 31, 2015).
Depending on the project type and size, the New Program gives developers a choice to build under guidelines of Option A to G, all of which require an affordable component of 25 percent to 30 percent.
It has been a little over a year since the New Program retroactively went into effect, and the results are in— with over two years of development activity eligible for the program, the Department of Finance has confirmed receiving only three certificates of eligibility for the tax abatements. That translates to 96 affordable units delivered to help New York City take on its affordability problem, out of a total of 461 total units completed within the projects. By the numbers, that 21% of units actually turning out “affordable” with almost 80 percent of units being subject to mercy of the supply-constricted free market.
See table below:
The results are telling, and we can see that Affordable New York is facing headwinds on multiple fronts:
1) There is not a whole lot of new development being spurred under the New Program, as developers are either struggling to pencil out returns on projects even with the tax incentives, and/or are not comfortable with risks they face with the New Program’s more complicated guidelines.
2) When looking at the few completed developments taking advantage of the New Program, the projects were built along minimum requirements and nothing more. The program has not incentivized any meaningful affordable development, but rather to build just enough for a tax break.
3) The New Program is failing to enforce even its own affordability requirements of 25-30 percent, as both completed and planned projects show an affordability component of less than 22% on average.
So with a number approaching 80 percent for renters and a growing population, how does New York City fix its affordability problem?
We need less legislative solutions and more market based solutions, loosening the reigns on development of free-market supply. Rents will come down if developers are allowed to develop more, bringing new, affordable places to live for New Yorkers.
One of the more obvious solutions is to allow developers to build vertically providing more as-of-right air. The City’s glass ceiling needs to be raised on the fundamental building rights of residential parcels throughout every borough. We can start in places where rental housing can and will be built, such as transit orientated outer-borough neighborhoods. The City could even require that rental housing be built in order to take advantage of the increased FAR, if there is any concern with developers planning condominiums instead of rental housing.
A second solution, which could work in tandem with the above, is to re-zone strictly commercial or manufacturing blocks to a mixed-use designation. Developers can take advantage of air which will not be utilized for commercial or manufacturing developments, as well as convert existing office or other commercial square footage into apartments. This could be very effective with today’s shrinking need for office and retail space.
Last, we need to reconsider onerous landmark and historic designations. For example, gas stations shouldn’t be protected as a landmark; they have no historic value whatsoever, and are not a logical use of the designation in any way, shape, or form. Far too many developable properties are frozen by these improper designations. The same goes for preserving outdated, run-down tenement housing. Let the free-market – not legislation – bring new life to these once bustling blocks, with new supply of quality housing with rents New Yorkers can afford.
