The City Council calls 421-a “the City’s most expensive real property tax expenditure.” Last year, the program cost an estimated $1.2 billion in lost tax revenue. With that in mind, City Council member Stephen Levin last week introduced a new bill that seeks to address “serious oversight gaps.”
“Over the years, enforcement has been lax to the point that developers never felt the need to even do a basic-level of conforming with the law,” Levin explained. “They still received their tax abatements, so they just continued on with that practice. We can’t allow that to continue.”
Levin’s district covers Williamsburg, a neighborhood that’s already seen enormous growth, and it will only continue to grow with the Domino site and other new developments set to add 22,000 new apartments to the area when they are completed in 2019. Many of these developers will benefit from 421-a.
“The goal of this legislation is to close loopholes in enforcement, and have more proactive enforcement,” he explained. “We want to make sure that all the affordable units are truly affordable and are being maintained as such.”
The problems with 421-a go way back. It was first created in the 1970s, when the city was in economic turmoil, and was initially aimed at motivating developers to build more multi-family housing in what was then a struggling real estate market. Eventually, it was tailored to fit the affordable housing needs of the city. In 2008 a major overhaul outlined Geographic Exclusion Areas, which meant that to qualify for 421-a, developers building inside certain areas (generally the more expensive, wealthier parts of the city) were now required to include affordable housing. What’s often referred to as “80/20” was also added, and meant that at least 20 percent of the total units must be set aside for affordable housing.
Recently the major problems with the tax incentive have come to light, setting off a debate over whether to eliminate 421-a altogether or to fix it. Tenant advocates want 421-a gone; the real estate industry argues that without 421-a, private developers would stop building affordable housing altogether.
Most lawmakers, including Mayor Bill de Blasio, have pushed for reform; last year, Public Advocate Letitia James told Gothamist, “Mend it, don’t end it.” But the efforts seem piecemeal at best, and at worst they seem like measured, delicate actions on the part of tiptoeing officials who are beholden to the powerful real estate industry at the expense of their middle- and low-income constituents.
Levin is convinced that lawmakers need to take more decisive action, and what’s more, he’s personally dedicated to repairing 421-a: “Because I worked on the legislation back in 2007, I feel somewhat invested in ensuring that people are protected under this law.”
In January, when 421-a was up for renewal, lawmakers allowed it to expire, until the real estate board (REBNY) and the construction unions could agree to worker wages. The two groups finally came to an agreement on November 10, and it’s now up to the state legislature to approve the reauthorization of 421-a. But that doesn’t mean the serious issues have been solved. Not even close.
On Tuesday, City Council committees on Finance and Housing & Buildings held a joint hearing devoted to finding ways to fix the 421-a mess, specifically the problem of oversight. Council Member Levin and colleagues like Jumaane Williams were partly inspired to introduce the fix-it legislation by a damning investigation conducted by ProPublica last year, which uncovered some jaw-dropping revelations about 421-a.
ProPublica found that until recently, oversight and enforcement were essentially non-existent, and they uncovered a veritable goldmine of examples of landlords reaping the benefit of the tax break without keeping up their end of the bargain. “In reality, state and New York City officials have tolerated the problem for years — and ignored pleas to investigate,” the report concluded.
Of the 15,000 buildings benefiting from 421-a that ProPublica looked into, 40 percent had failed to register for rent regulation, “casting doubt on the legality of leases for about 50,000 apartments.” That meant that more than $100 million in property tax breaks was, in all likelihood, forked over to developers for nothing. That $100 million loss is just one year of property taxes. Considering that 421-a is good for up to 25 years in some cases, many of the building owners have benefitted from the tax break for years on end, so the revenue loss for the city is unfathomably enormous.
So how on Satan’s vast earth did this happen? As Levin explained, “There’s a significant gap in terms of enforcement between city and state agencies.” Translation: although 421-a units are technically the domain of the city’s Housing Preservation Department (HPD), which oversees rent regulation, and the State’s Department of Homes and Community Renewal (DHCR), which governs affordable housing tax benefits, there are no mechanisms within either to keep track of building owners who fail to comply with the existing registration requirements. And the oversight measures that are in place are keeping track of numbers that are somewhat arbitrary. For example, Levin pointed out that “HPD signs off on the aggregate rent of the building, not the individual units’ rent.”
The blame shouldn’t be levied on these two agencies alone, Levin argued. Instead the problems with 421-a are indicative of systemic, deeply embedded problems across the board at the city and state level. “This is a collective enforcement issue,” he said.
Levin’s bill, Intro 1359, would require HPD to audit final certificates of eligibility and determine whether or not buildings were in compliance. Because of the huge number of 421-a recipients, auditing each and every beneficiary might not be necessary– at least, this is what Levin is assuming. Instead, the law would require HPD to audit “randomly sampled buildings,” which won’t cover everyone, but could be an effective deterrent nonetheless. Council Member Jumaane Williams introduced a similar bill, Intro 1366, that would govern oversight of rent-stabilization registration and would require HPD to report landlords in noncompliance to the Department of Finance, which would in turn decide whether or not to revoke the 421-a benefits.
The bills are part of a slow uptick in enforcement over the last year. Measures at the State level have taken place under the auspices of the Real Estate Tax Compliance Program, an elected officials’ dream team that includes Attorney General Eric Schneiderman and Governor Cuomo’s Tenant Protection Unit, which coordinates with the city’s HPD.
In 2015, they started sending out compliance letters to landlords who had failed to register their 421-a buildings. The first cluster of letters went to owners of 285 buildings, and generally the compliance team was effective in getting those landlords to register, although 35 had their benefits revoked. Every once in a while the compliance program sends out more letters, most recently on Monday when they contacted 178 building owners.
De Blasio said in a press release related to the mass letter sending (not exactly a siege): “Owners wrongfully receiving 421-a are on notice.” And Cuomo declared that the action sent a “strong message” to the bad guys.
Overall, it seems like a rather weak response to a huge number of people who were breaking the law, in many cases over long periods of time. What’s more, the enforcement letters only hit at a fraction of the bad-acting landlords and those who have failed to register. Given that ProPublica identified at least 50,000 apartments that were potentially in violation, sending out letters is a bit like expecting to cure terminal cancer that’s spread throughout the body by removing a single tumor and telling the rest of those malignant cells to watch their backs.
However, punitive measures might be satisfying as an end in and of itself, but they’re not so workable as a means of solving the larger problems: the city’s affordable housing shortage and massive (and growing) homeless population. As Levin stressed, “I’m not quite sure the ultimate goal is revocation, because we do want to keep the affordable housing units. We obviously don’t want those units to turn market-rate.”
Even if 421-a is fixed, it’s not a very efficient way to create affordable housing. “It’s incredibly expensive compared to other affordable housing programs,” Levin explained. But the situation is also something of a catch 22: if 421-a went bye-bye, then presumably the city would start buying up land on which to build its own affordable housing developments. As Levin said, there’s not much land left in the city, and what remains is incredibly expensive or far from the city center. Probably that would mean the city would have to build in neighborhoods with lower property values, essentially ghettoizing affordable housing, and contributing to a decline in the economic diversity of the city as a whole. “That means you wouldn’t have affordable housing in places like my district, in neighborhoods where the cost of land is high,” Levin said.
Regardless of the outcome, the problems with 421-a are indicative of a system that is designed to benefit the real estate industry. As with any issue that pits landlords against their tenants, the burden is always on the tenants, who have to then rally elected officials to support their cause. “Not all tenants know that their unit is technically rent-stabilized,” Levin explained.
He recalled an incident in his district wherein a group of tenants felt they were being overcharged for their apartments, which were property-tax-free for the landlord under 421-a. Though Levin heard them out, he told them that they were wrong, their units were market rate. “I was wrong,” he said. “A couple of years passed, and the developer actually identified as [one of the owners in violation of 421-a], and in fact these tenants were right. The question is how widespread is that? I gotta assume it’s pretty widespread.” He paused for a minute, and admitted: “I worked on that bill and I didn’t even know that those units were rent-stabilized.”