The 421-a tax incentive program was created in 1971 to encourage housing development at a time of shrinking population and falling property values in the City. Under the original program, developers of apartment buildings on vacant or underutilized lots throughout the five boroughs received a temporary exemption from property tax on the value added to the site by new construction. (As such, a developer could build a $5 million dollar building on a $500,000 parcel of land and continue to pay tax only on the original $500,000 value.) The abatement phased out over a ten-year period, with full exemption for the first two years, followed by 80% for the next two, then 60%, and so on. In rental buildings, a statutory formula set a maximum initial monthly rent (generally equivalent to prevailing rates in the neighborhood) and required that units remain rent stabilized for the duration of the abatement period. Condominiums could be sold at any price, since the tax savings were passed on to the individual owner.

As Manhattan real estate prices surged in the mid-1980s, some argued that the 421-a program had become a needless and costly subsidy to developers of luxury condominiums. While officials pointed to the more than 60,000 units constructed under the program between 1971 and 1987 as evidence of its success, critics emphasized the approximately $550 million dollars in tax revenues the city had forgone for those units. There was, after all, no way to prove they would not have been built in the absence of a tax incentive. Critics also argued that the abatement program had the effect of artificially inflating the price of City land, because almost every multi-family residential development in the city was eligible for participation. Landowners, the logic went, knew developers would save from the abatement and thus raised their asking prices accordingly. Developers, in turn, passed the cost on to individual lessees and homebuyers.

The City responded to these criticisms by restructuring the 421- a program in 1985 to encourage construction of affordable housing. The new regulations created a Geographic Exclusion Area (GEA) running from 14th Street to 96th Street in Manhattan in which developers of purely market-rate housing could only receive the ten-year tax benefit by purchasing certificates from developers of affordable housing elsewhere in the City. A unit affordable to a family earning 60% of the Area Median Income (AMI) generated five certificates, each of which provided an abatement for one market-rate unit. The certificates were sold privately by the affordable-unit developer, generally garnering between $10,000 and $20,000 per certificate. Alternately, a new development anywhere below 110th Street could garner a twenty-year abatement if 20% of its units were set aside for low or moderate income tenants. Average tenant income in a development’s affordable units could generally not exceed 80% of the AMI.

Under the 1985 legislation, developments outside of the GEA still received an as-of-right, fifteen-year abatement, regardless of whether they included affordable units (some areas with particularly weak housing markets even offered an as-of-right 25-year abatement). However, as housing prices soared throughout the city during the 1990s and 2000s, critics began to question whether such incentives were necessary to encourage development in rapidly gentrifying areas like the Lower East Side, Long Island City, or Downtown Brooklyn. Others argued that the City was spending too much to generate too little affordable housing. A 2003 study by the City’s Independent Budget Office (IBO) found that, since 1985, the program had generated 4,900 units of affordable housing throughout the City (compared to 54,000 market-rate units in Manhattan alone). The IBO also calculated that the average lifetime subsidy to a market-rate unit covered by the ten-year certificate program was $22,600, while the average lifetime subsidy for a unit covered by the twenty-year, on-site program totaled $91,500.

In 2006, Mayor Bloomberg convened a task force made up of city officials, affordable housing advocates, and developers to evaluate 421-a and suggest alterations. The committee’s recommendations were largely integrated into Local Law No. 58, passed by the City Council in December 2006. The changes, however, required approval from the state legislature, which in August 2007 passed its own set of reforms that features a much larger expansion of the GEA than adopted by the council and much lower income limits for affordable units. The City claimed the additional restrictions, championed by Brooklyn Assemblyman Vito Lopez, would undermine its efforts to develop new middle-income housing. The compromise ultimately reached by the City and state expanded the GEA to include all of Manhattan in addition to select neighborhoods in each of the outer boroughs, eliminates the negotiable certificate program, and caps the portion of a market-rate unit’s value that is eligible for tax exemption at $65,000. The new laws also limit average tenant income for a development’s affordable units to 90% of AMI, require that affordable units remain stabilized for 35 years from the completion of construction, and establish a $400 million trust fund to subsidize the development of affordable housing in areas outside of the expanded GEA.

Though the revised rules only went into effect on June 30, 2008, the Real Estate Board of New York (REBNY) has already begun lobbying for further reform. REBNY argues that the current housing crisis justifies a return to a broader incentive program. To date, the City has indicated no plans to revisit the legislation.

Further Reading:

Recommendations of the 421-a Task Force. New York City Department of Housing Preservation and Development, 2006. (PDF)

Reforming New York City’s 421-a Property Tax Exemption Program: Subsidize Affordable Homes, Not Luxury Developments. Pratt Center for Community Development, 2006. (PDF)

Worth the Cost? Evaluating the 421-a Property Tax Exemption. New York City Independent Budget Office, 2003. (PDF)

Policy Brief: An Overview of Section 421-a Housing Subsidy Distribution. Office of the New York City Office of Policy Management, Comptroller William C. Thompson Jr., 2006 (PDF)

Last updated: October 26, 2009