Halstead Property

William S. Ross
Director of Development Marketing
wross@halstead.com
(212) 613-2001

In Case Of 421-A Reform

Good Governance Is In Eye of Beholder

State Bill Overhauls Affordable Housing Requirements for Tax Breaks

By Sarah Ryley

BROOKLYN — Depending on who’s talking, the revision of the decades-old 421-a property tax abatement legislation, expected to become state law next month, will forever end the construction of affordable housing in Brooklyn. Or it could help stave off the trend of gentrification in places like Fort Greene and Downtown Brooklyn while lower-income residents, often minorities, are segregated to the less “desirable” neighborhoods in the farthest reaches of the city.

Adding to the confusion over the controversial bill — which determines how much affordable housing, if any, developers have to include to receive property tax breaks — few people close to the issue were clear on exactly what the bill says, particularly in regards to the controversial Atlantic Yards “carve out.”

Under the old legislation, developers could receive the 25-year property tax exemption without including any affordable housing unless they built in the “exclusion zone,” Manhattan between Houston Street and 96th Street and a small portion of the Brooklyn waterfront. And before the City Council passed its revision of the rules last year, developers (and homeowners) could still receive tax breaks for building within the zone without including low-income housing onsite by purchasing “certificates” from other developers who built the units in places like Brownsville and East New York.

Under the new legislation, the exclusion zone is expanded to parts of all five boroughs, including Downtown Brooklyn, Red Hook, Fort Greene, Sunset Park, and sections of Bushwick and East New York in Brooklyn. When passed, in those neighborhoods developers would only receive the tax abatement if 20 percent of the units in new buildings are made available to families earning no more than 60 percent of the area media income, or $42,500 for a family of four. Half of those units must be made available to those living in the immediate area.

However, after recent revisions to the legislation — the result of months of political wrangling between city and state officials — special provisions for Atlantic Yards and other planned projects that are heavily subsidized by tax dollars still remain.

Would Reform End Segregation, or Development?
Advocates for 421-a reform like Councilwoman Letitia James say the allowance for off-site low-income housing in the old legislation “led to segregation. And we have to end that policy in the city of New York, which tends to segregate people by income, and in effect by race.

“We should applaud the Assembly and the Senate for passing legislation that would end this discrimination,” she says, adding that the reformed bill would help assure that people living in the low-income units could have the same access to services as their more wealthy counterparts.

“There wasn’t a lot of affordable housing being built in Brooklyn under the old legislation anyway,” she says, listing high-profile residential developments that were recently completed, or are being built, from DUMBO to Prospect Heights that have no affordable housing, yet still receive 25-year tax breaks.

But when it comes to 421-a reform, good governance is in the eye of the beholder.

“It is probably the most dangerous and bad piece of legislation passed by the state Legislature in my lifetime. It will absolutely guarantee that no affordable housing will be built under this program,” says Bill Ross, executive director of sales for Halstead Brooklyn, echoing sentiments expressed by the powerful Real Estate Board of New York.

“Development is absolutely going to slow down enormously,” says Ross. “And I will specifically, today, blame [Assemblyman] Vito Lopez for losing thousands of union construction jobs.”

He explains that a developer makes less profit from the tax break than the cost of building the low-income unit, the result of some tricky math that also takes into account how much (or little) the developer makes renting that affordable unit.

Ross adds that in places like East New York and Bushwick — where the “market rate” units sell and rent for little more than the “affordable” units — that profit margin is further diminished, along with a developer’s motivation to build the project.

“The government sometimes has an unerring instinct for changing tax policy at exactly the wrong moment,” said former City Councilman Kenneth Fisher. “Since the City Council started tinkering with the law last year, the premise was that the real estate market in New York was so good, and would continue to be so hot, that developers would no longer need an incentive to build, and could afford to internally subsidize below-market units.

“And what seemed like a good idea a few months ago now needs to be measured against the fact that the financing for new residential development has stalled, and that only the strongest proposals and the most solid financial backing are being entertained by the banks right now.”

James agrees that the market is slowing down, which means “a lot of developers are having a hard time selling these units,” referring to ones priced for those earning more than 125 percent of the area median income.

“But nonetheless, if the market tends to heat up again, and if there’s any future development, it now requires that there be affordable housing onsite to receive a tax break.”

Atlantic Yards’ ‘Carve Out’ Remains
James, and other Atlantic Yards opponents, were not happy that the controversial “carve out” for the Atlantic Yards, the 22-acre development planned at the intersection of Atlantic and Flatbush Avenues that includes 6,400 units of housing in 16 towers, remained in the legislation.

Atlantic Yards would be the only project within the exclusion zone that receives tax breaks for buildings that have only market-rate condominiums, but the tax exemption was changed from 25 years to 15 years, according to Gov. Eliot Spitzer’s office.

The original bill allowed only Atlantic Yards to average the income level of tenants in the “affordable units” so it would equal 70 percent of the area median income (versus requiring that tenants earn no more than 60 percent of the area median income). After recent revisions, the developer can make 20 percent of its units affordable to those earning up to 120 percent of the area median income, as long as they all average out to 90 percent. The new requirement is the same that other heavily government subsidized projects must adhere to, mainly because those projects were originally conceived to create more middle income housing in the city.

It should be noted that Atlantic Yards was planned under the old legislation, when developer Bruce Ratner promised to include low- and middle-income housing in the project even though he could have built no affordable housing in any of the buildings and still received a 25-year tax abatement.

Although no one will come out publicly in support of the special provisions within the legislation, including developer Forest City Ratner’s own people, privately some are calling it a grandfather clause. Also, Ratner is expecting other subsidies and financing that dictate what percentage of the housing in the project must be made affordable — but none would have given the company tax abatements for the market rate buildings.

“It’s unfortunate that again, public benefits are again being utilized to subsidize middle-income housing in Atlantic Yards,” says James. “So many community-based organizations came out in support of Atlantic Yards primarily because of the alleged affordable housing.”

Wednesday, August 29, 2007