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New York’s $1.7 Billion Developer Tax Break Set to Expire (1)

June 1, 2022, 4:52 PMUpdated: June 1, 2022, 8:28 PM

Lawmakers in the state capital are poised to allow a lucrative $1.7 billion New York City property tax break to sunset, leaving developers in limbo on rental housing projects and skirting one of the few legislative efforts to reform the city’s arcane property tax system.

New York state lawmakers hustled to finish a swath of legislative packages, from gun laws to reproductive rights, but steered clear of renewing the controversial property tax subsidy for the real estate industry as legislators eye bids for re-election this fall.

“There is no bill,” state Sen. Liz Krueger (D), who chairs the Senate Finance Committee, said Wednesday, adding that it’s too late for any bills that don’t already exist to be passed before the session is scheduled to end Thursday.

The decision not to renew the generous 40-year property tax break, which expires on June 15, comes as policy makers in both Albany and New York City have struggled to move the needle in addressing the city’s property tax system. Neither the Democrat-controlled Legislature, Gov. Kathy Hochul, nor Mayor Eric Adams introduced plans of their own or revisited a set of reforms released in late December under former Mayor Bill de Blasio to reform the city’s property tax system controlled by state lawmakers in Albany.

Legislators this session faced a barrage of attention-grabbing issues—from the invasion of Ukraine to a racially motivated mass shooting at a Buffalo grocery store to a fight over reproductive rights—leaving little room for a serious effort to tackle property tax reform and the city’s affordable housing crisis despite repeated political pledges.

“Given all the issues in the city and Albany, housing didn’t seem to be the primary issue, but there were a lot of things affecting housing this year, of which 421a was one,” said Matt Murphy, executive director of New York University’s Furman Center for Real Estate and Urban Policy, referring to the soon-to-be expired tax abatement program.

No Political Champion

Instead, the Legislature appeared to have little appetite to either extend the tax abatement program or consider an overhaul of the tax credit that was floated as part of Hochul’s five-year, $25 billion housing plan initially proposed in the state’s fiscal 2013 budget.

“It’s a very complicated program, and I think it does require a lot of political championing to make the argument that it’s necessary and that it can be changed to reflect what they want to accomplish,” Murphy said.

Since the start of the legislative session, both Hochul and Adams appeared unified on the necessity to address affordable housing. Adams threw his support behind maintaining the developer tax break, arguing that the program would create more affordable apartments and produce good-paying jobs for construction workers.

“If we are serious about expanding the city’s affordable housing stock, we need a serious plan on the table to make it happen,” Adams wrote in an op-ed in the Daily News in March.

But six months into his tenure Adams has yet to take any formal action to reform the city’s property tax system, which he promised to tackle during his first year in office. He has yet to reinstate his predecessor’s New York City Advisory Commission on Property Tax Reform or name a chair to oversee those efforts. A representative for Adams didn’t respond to requests for comment.

Hochul last week acknowledged that the measure, one of the state’s largest tax break programs, would likely lapse, potentially putting residential projects permanently on hold as rents continue to skyrocket across the city due in part to low supply.

“This is not resolved yet. If it is not resolved in this session, then I would say, we certainly will be revisiting this early next year as a priority,” the governor said during a news conference, while stressing that the issue of affordable housing remains a top priority.

Asked for comment Wednesday on lawmakers’ decision not to act, Hochul’s office referred to her earlier remarks.

‘This is a Crisis’

The real estate industry had lobbied leaders in Albany to keep the incentive program in place to reach New York’s housing affordability goals.

Those in the industry pointed to confusion by legislators about the governor’s proposal, which involved income bands and other technical details, and to discussions around addressing long-delayed property tax reform in New York City, with many lawmakers opposing the prospect of reviewing the subsidy program in isolation.

“The discussion is really going to come down to either there is some change to the property tax system or something like 421a, in some form, is going to continue to need to be adopted,” said Daniel Bernstein, member of Rosenberg & Estis, New York’s largest real estate law firm. “The problem is that property tax reform is a generational political lift, and it may not happen—or it may not happen soon, and then what do we do in the city? Do we just say development stops while property tax reform gets considered and fought out? I don’t know.”

Basha Gerhards, senior vice president of planning for the Real Estate Board of New York, said that even in municipalities where the property tax system is more equitable, policy makers understand the importance of multifamily rental housing and so will include some type of incentive to encourage production of housing that meets the needs of the city. But that part of the conversation didn’t happen during these set of negotiations, she said.

“There’s a number of people who said, ‘We don’t like 421a. We don’t like 485w either,’” said Gerhards, referring to Hochul’s proposed new developer tax credit. “And then, ‘This is a crisis. This is a crisis.’ And then failed to put forward any viable alternatives.”

‘Overpriced Band-Aid’

Critics of the subsidy argue the program has failed to address the state’s affordable housing needs and only has benefited developers instead of those most in need.

“421-a is a flawed, overpriced Band-Aid placed on top of New York City’s broken and unequal property-tax system,” said New York City Comptroller Brad Lander. “Legislators are right to let it sunset rather than extending a program that produced barely an iota of housing affordable to most New Yorkers.”

But developers and the real estate experts warn that without the tax incentive in place, new residential construction would become too expensive to pursue and would likely be scaled back significantly at a time when the city is facing an affordability crisis.

Because of the city’s property tax system, new housing built will simply end up favoring condo development over rental units because owners would be able to qualify for a tax break.

“We will just see less rental housing getting built if we don’t have 421a and if we don’t have reform for property taxes,” said Murphy.

Builders have been rushing to break ground on new projects with only a few weeks left to take advantage of the tax incentive program, while others have stepped on the brakes to see what a new development program, if any, might look like.

“The fact that this is kind of shelved right now, and nobody has clarity, makes it a little bit different,” Midhat Serbagi, owner of Press Builders, referring to the last time 421a expired, in 2016.

Housing experts are concerned that a limited pipeline caused by delayed decisions around affordable housing will have a big impact on New York’s economic future.

“If lawmakers couldn’t negotiate around 421a, I think it’s very unlikely they are going to be able to negotiate around an entire reform of the property tax system anytime soon,” Murphy said. “I’m worried about what it means for our housing shortage and for the renters that are seeking new housing opportunities. If those opportunities are limited, then it just means people are going to have to put up a lot more money to be able to afford to live in New York City, and that’s a long-term problem—big time.”

(Updates throughout with interviews and background. )

To contact the reporters on this story: Donna Borak in New York at dborak@bloombergindustry.com; Keshia Clukey in Albany, N.Y. at kclukey@bloomberglaw.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com