New York City’s real estate subsidy program is dead. What should a revived version look like?

Remember “the poor door,” the unofficial name for the separate entrance for nonrich people in an Upper West Side luxury development? Heard of so-called 80/20 projects? Know anyone who scored an apartment via New York City’s housing lottery? 

Those are all better-known keywords for New York’s 421-a program, which gave real estate developers decadeslong tax breaks in return for tucking a percentage of affordable housing units into their new projects. The program began in 2016 and just expired at the end of the legislative session in June, with few Albany lawmakers making much of a stink about reviving it.

Why? Because it has not been short on controversy. But will it ever be resurrected? And if so, how will it square the difference between developer and community needs?

But first, let's back up a bit: 421-a was actually the dry-sounding name of a version of the program that began in 2016 but has actually existed in New York City since its cash-strapped days of the early 1970s, when the city was desperate to incentivize new development. Over the years, as the city climbed from impoverishment back into prosperity, the program got renewed, each time with more and more requirements to fold affordable units into projects.

Which leads us to the current moment, when the housing affordability crisis in the city is so severe that the average Manhattan rent just exceeded an unprecedented $5,000 a month. Everything in New York City costs a fortune, including land and construction, and myriad zoning restrictions often make building new housing even more difficult. Meanwhile, more than 600,000 people have moved here in the past decade, bringing the population to a record 8.8 million – and there simply aren't enough affordable apartments for everyone who needs one.

Not that there hasn't been any new building since 2010 – far from it. According to a June report from the NYU Furman Center, in the past decade, more than 185,000 new multifamily units were completed, with about 32% of them being income-restricted (meaning artificially below market rate), and nearly all of those units targeted to households earning up to 80% of the area median income, or AMI, which is $74,720 for a single person and $106,720 for a family of four.

So that’s about 52,000 new deeply affordable units in the past decade – and of those, about 9,300 benefited from the 421-a program alone, while the rest got other kinds of federal, state and city subsidies.

But despite the fact that 421-a led to more than 9,000 new units for low-income people, few entities in the city except for the development and construction sectors were clamoring for its renewal – and many, especially low-income housing advocates and their fiercest progressive allies in Albany, demanded its permanent death.

Why? Opponents said the program favors developers too much. Slightly more than 9,000 very affordable units is a drop in the bucket compared to the majority of 421-a units that were earmarked for people who make as much as 130% AMI, in the realm of $100,000 or more.

Developers pay almost no taxes on 421-a properties for up to 35 years – owing only what was owed in taxes on the land and/or property before the project began. For too long, detractors have said 421-a and all the versions that came before it have amounted to a huge giveaway to developers – at a tax loss to the city of $1.77 billion annually.

“It simply shouldn’t exist anymore,” said Debipriya Chatterjee, senior economist for Community Service Society, who in February co-authored a report about the program. “We want developers to build more 100% affordable projects, subsidized by something that’s like 421-a, but with no market-rate units in it.”

But other housing experts called 421-a an important driver of new housing overall, which the city desperately needs. “So much housing was built with 421-a,” said Matthew Murphy, executive director of the NYU Furman Center. The city Independent Budget Office reported that, from 2016 until June 2021, nearly 40,000 units were created under 421-a, with about 30% of them income-restricted at various levels.

“In its absence, what happens now?” he asked.

That’s a good question. The city won’t feel the building dropoff from the end of 421-a immediately, as several projects were pushed through under the program recently in anticipation of its expiration. “(But) we’re already losing a year of pipeline planning,” Murphy said.

But at the heart of 421-a’s future were the details – actual metrics that almost nobody wants to throw out there on the record – because the balancing act between developers versus activists and lawmakers is so fraught.

One key piece of the 421-a controversy was the 35-year tax exemption. “That’s an egregious waste,” said one longtime observer. “It’s longer than anywhere else in the country. In Philadelphia, it’s 10 years. Here, it should be five to 10 years with some kind of sunset.”

But, as Murphy pointed out, “the less exemption there is, the less affordability” that developers can build into a project. How much reduction in an exemption could the real estate industry tolerate? Asked for metrics, James Whelan, who heads the powerful Real Estate Board of New York, responded over email: “Leading labor unions, elected officials, research organizations and editorial boards agree on the need for a program to spur rental housing production by the private sector that includes affordable units, as 421-a did successfully. New York City’s housing crisis will only get worse without one, and we’ll lose much-needed family sustaining (construction) jobs in the process.” A handful of large developers declined to comment.

The other big sticking point is 421-a’s actual affordable unit formula. The last version gave developers three options for projects: The first was to do 10% of units at 40% AMI, 10% at 60% AMI and 5% at 130% AMI. The second was to do 10% at 70% AMI and 20% at 130% AMI. The third, which restricted the use of any other government subsidy, was to do 30% of units at 130% AMI.

If that sounds wonky, the program was basically telling developers they could access additional public subsidies if they put more low-income units in their projects, but none if they were going to price their nonmarket-rate units at the highest level possible, aimed at middle-class and upper-middle-class renters. Despite that, the net outcome of those three options was many studio and one-bedroom units being offered in the realm of $2,000, and far fewer family-friendly two-bedrooms offered in the realm of $1,000-$1,500. 

That has been a big grievance among housing advocates. Addressing it, Gov. Kathy Hochul earlier this year proposed a 421-a revision called 485-w that would have lowered the program’s highest nonmarket-rate renter level from 130% AMI to 90% AMI and would have required that nonmarket-rate units remain permanently affordable (versus 35 years in the previous version) in projects with 30 or more units. Moreover, Hochul’s version required that projects with more than 30 units reserve 10% of units for households earning up to 40% AMI, 10% for households earning up to 60% AMI and 5% of units for households earning up to 80% AMI.

Despite these efforts to build more affordability into 421-a, Hochul’s proposal tanked – a sign of just how unpopular 421-a overall was with lawmakers, especially in an Albany that’s now more solidly progressive, and attuned to housing advocates, than it was a few years ago.

All this begs the question: Just how much affordability could a revised version of 421-a sustain? One observer, asking to remain anonymous, said that a new 421-a program must prioritize low-to-middle income families, requiring that up to 70% of affordable units in a project be two- and three-bedroom apartments renting between $900 and $1,200. This observer also said that a new version could retain the 130% AMI option but cut the tax exemption period on such units in half, thus incentivizing developers to do projects with more low- and middle-income units rather than upper-income units. In the final version of 421-a, the reverse was true.

With few developers willing to talk about this, it’s hard to know if they think these numbers would work for them. Then, of course, there’s the market itself. If it continues to bear ever higher rents, developers have less need for 421-a because they can profit from strictly market-rate projects, while affordable housing development remains on an entirely separate track. If the market dips, however, primarily market-rate projects will need tax subsidies to go forward.

So what will happen when the next legislative session begins in January? Murphy thought it could go either way. “On one hand,” he sayid, “they might not take it up again.” (And indeed may never take it up again, at least until middle-income renters attain as strong a voice in Albany as affordable-housing advocates currently have.) On the other hand, "they could acknowledge that we have a housing shortage and they need to get this right, meaning reforming the program to serve the housing needs of New Yorkers."

Another observer thought that 421-a will “get mixed into a grand bargain,” such as green-lighting a new version of the program, to please developers, in exchange for passing a “good cause” eviction law, which would please housing advocates. Such a law, which basically would impose new rules on market-rate apartments, including rent increase limits and guaranteed lease renewals, tanked in this year’s legislative session.

“Tenant advocates will give developers 421-a in a heartbeat in exchange for ‘good cause’ eviction,” said this observer, noting that in the last legislative go-round, “it was the developers who rejected that.”

But if you telescope out from the details, what’s left is a philosophical discussion about exactly what, if anything, 421-a is supposed to be. Murphy noted the program brought low- and middle-income units into projects in booming, affluent neighborhoods, such as Hudson Yards, Long Island City and Williamsburg, thus playing some role in racial and economic desegregation. (Most purely low-income housing is built in low-income neighborhoods.)

“Is 421-a a supply program for middle markets? Or is it an integration-based program?” Murphy asked philosophically. And if you accept that it’s both, he said, then it all comes down to “a balancing act – and a lot of tricky math” to make it work.