The legislative session in Albany has begun to take on a tired refrain – one that pits “affordable housing advocates” against “powerful real-estate interests.”
This year the battle lines have formed around 421-a, a tax abatement for new construction whose elimination has become a rallying cry for some, even though most people don’t understand the program’s details or that it is essential to the development of housing.
We desperately need to insert some perspective into what’s become a weary debate about supposed taxpayer “giveaways.” It starts with understanding that 421-a is part of a much bigger property tax system that is, in many ways, uneven and irrational.
Under the laws we have today, New York City condos and rentals – which are the properties impacted by the temporary 421-a abatement – pay far more than their share of property taxes compared to single family homes and co-ops.
I have two business partners who live in comparably valued apartments. One is a co-op, the other a condo. Is there any good reason the condo’s taxes are twice as much?
Now look at single-family homes in New York City. Their taxes are typically far lower than those of condos and far, far lower than they’d be if they happened to be in the suburbs of New York City.
The fact is that today, given the cost of land and construction – but especially, given the massive burden of property taxes on condos and rental units – the 421-a program is critical to constructing most multi-family housing in the city.
The way it works is that these housing developments get a break on taxes for 10, 15 or 20 years before the full, eye-popping property tax assessment sets in.
To get the break, the new housing either has to include affordable housing or be in a neighborhood where the city wants to encourage multi-family housing but acknowledges that the economics don’t make it possible without a tax break.
As designed, the program is a huge contributor to increasing the supply of market-rate and affordable housing in the city.
But there is no way to have a rational conversation about 421-a unless you understand the city’s property tax practices. What should a fair tax rate be for new condos and rental buildings?
Take an apartment building we own near the Manhattan Bridge with rents totaling $3 million a year. We have operating expenses of $900,000 and mortgage payments of $600,000.
What’s a fair tax bill? I’ll tell you what we do pay – $850,000 in taxes, or almost 30% of gross revenue and more than half of our profit.
Think how crazed a restaurant owner would be if she paid $3 in taxes each time she sold a $10 meal, irrespective of the cost to her of food, staff, insurance or utilities.
How do New York City’s property taxes compare to those in other high-rent cities? In Miami, they pay half of New York City’s taxes. In Washington, they pay 25% of our taxes. Boston and Seattle, and on and on – every other city is significantly lower when it comes to taxing apartment buildings.
My company is developing a new 170-unit rental building in Prospect Lefferts Gardens at Clarkson and Nostrand Aves. It’s intended as middle class housing. Without help on property taxes, our project would be expected to pay annual taxes of $1.3 million the year that its construction is finished.
If that were the real tax bill, the building would never get built. We would never get a construction loan. There’d be no “giveaway” of taxes to the developer – because there wouldn’t even be a project.
With 421-a, the city is saying: Please develop this building now, and we’ll get you paying full taxes down the road as rents rise and a project’s economics improve.
Not all housing it enables is like the ultra-luxury condos being built on 57th St. That’s a gross caricature. In fact, opponents often ignore that Manhattan condos are no longer eligible for any 421-a benefits.
There are many of us building all kinds of housing – affordable, middle income and market rate developments.
Meanwhile, while some are eager to place 421-a on the chopping block, the city has long endured decades of property-tax inequalities which seem practically impossible to correct. Elected officials don’t want to raise property taxes on voters who are single-family home or co-op owners – but they pay far less than their fair share.
Renters bear the brunt. Maybe that’s because, no matter how upset they are about the rent, tenants aren’t focused on how property taxes paid by the landlord are calculated.
Let’s be clear. If you shred 421-a now, it will kill much needed affordable and rental housing development. How is that a victory for any of us?
Kramer is president of The Hudson Companies, a developer of affordable and market-rate housing throughout New York City.