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Analysis shows tax breaks for multi-family housing may not reflect the City’s current real estate market

A property tax savings program created to spur housing development three decades ago may have outlived its usefulness, as Manhattan luxury developers and apartment purchasers have reaped the bulk of the program’s benefits, according to a report released today by Comptroller William C. Thompson, Jr.

An analysis of the distribution of property tax savings granted under the City’s Section 421-a tax incentive program shows that most of the benefits have subsidized some of the most expensive housing in the City. The analysis was delivered to Mayor Michael R. Bloomberg today.

The 421-a program offers developers tax exemptions to encourage them to build new multi-family housing, and requires that, in return, recipients in the Manhattan “exclusion zone” – generally between 96 th Street and West Houston/14 th Streets – must help finance affordable housing. The Comptroller’s analysis documents that relatively little affordable housing has been financed compared with the value of the exemptions that have been taken.

In Fiscal Year 2005, more than $320 million in Section 421-a subsidies was provided. Since 1998, the annual value of 421-a subsidies has increased by more than $240 million.

Comptroller Thompson commended Mayor Bloomberg for recently appointing a Task Force to evaluate the program, and said, “My analysis should assist the Task Force as it evaluates how to update the 421-a program to reflect that the City’s residential real estate market is stronger than it was in the early 1970’s when the program was enacted.”

The major findings of the Comptroller’s report, An Overview of Section 421-a Housing Subsidy Distribution, are:

• In Fiscal Year 2005, Manhattan developments received 78% of all 421-a benefits yet accounted for merely 48% of the number of units that received 421-a benefits. Elsewhere, this pattern was reversed, with the percentage of the number of units receiving 421-a benefits exceeding the percent of total value of the 421-a exemptions.

• Developments with subsidies of more than $10,000 per unit in 2005 accounted for only 19% of units in the 421-a program but received more than 50% of the 421-a benefits. These deeply subsidized units are nearly all in Manhattan and had a market value of $4.2 billion.

• Since there is no cap on subsidy levels, in 2005 owners of some units in a few 421-a buildings, such as 845 United Nations Plaza and 176 Perry Street, received subsidies of more than $100,000 per unit.

• The 421-a program also subsidizes non-residential uses within a residential development such as parking garages, commercial office and retail spaces, day care centers, medical offices, and even wine cellars. Commercial condominiums received $19 million in subsidies through the 421-a program in 2005.

• Under the 421-a 80/20 program, developers receiving 20-year tax exemptions in the Manhattan “exclusion zone” are required to set aside at least 20 percent of their apartments as affordable rentals for lower-income households. Buildings participating in this program received $103 million in 2005 alone, or nearly $50,000 per unit of affordable housing, and during their remaining years in the program will receive more than $1 billion in taxpayer assistance, non-discounted, or more than $520,000 per unit of affordable housing created.

• In Manhattan south of the exclusion zone, subsidies provided through 10-year exemptions totaled more than $24 million in 2005, yet there was no requirement for developers or unit purchasers to contribute to affordable housing.

• Developers in the Manhattan “exclusion zone” may also opt for a 10-year exemption in return for purchasing negotiable affordable housing certificates from affordable housing developers. More than 7,675 housing units received subsidies through the 421-a negotiable certificate program in 2005, helping finance approximately 1,918 units of affordable housing. The subsidy for each affordable unit was estimated to be between $42,000 and $52,000, while the average tax expenditure per affordable unit of housing in 2005 financed through this program was more than $58,000. Developments receiving 421-a benefits in the exclusion zone received approximately $119 million in tax exemptions.

• Outside of Manhattan, most of the projects receiving 421-a subsidies are located in growing, gentrifying neighborhoods.

The Comptroller’s analysis raised several issues for further research, including:

• The feasibility of extending the exclusion zone.

• Reevaluating the affordable housing contribution to be required in exclusion zones.

• The possibility of revising the negotiable certificates program.

• Devising alternative methods of determining which 421-a projects must contribute to affordable housing.

• Determining the impact of 421-a subsidies on land costs.

To view a copy of the report or the letter to Mayor Bloomberg, please visit the Comptroller’s web site: www.comptroller.nyc.gov.