Brewing fight in Albany over controversial tax break signals an uncertain future for the housing program

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A controversial tax break for developers is slated to expire this June — setting the stage for a fight in Albany over the future of a program that’s been framed both as key to rental housing production in the five boroughs, and as a massive giveaway to big real estate.

Last month, Gov. Kathy Hochul unveiled what she said would be a “different kind of abatement program” in her State of the State book. Her proposal would replace the current iteration of the housing allowance known as 421-a with a new iteration promising a more effective use of tax dollars and greater public benefits. But key members of the state Legislature aren’t convinced, leaving the future of the program uncertain.

The program, which offers tax incentives to developers in exchange for affordable housing, was last approved in 2017, in a decidedly different Albany. The issue will be debated again in the coming months under a new governor, a new mayor and a state Legislature that has undergone a significant leftward shift in the intervening years, with Democrats taking control of the chamber in 2019. Meanwhile, tax breaks have also faced heightened criticism, and the real estate industry’s power in Albany has significantly waned.

“This might be the fourth reform rendition of 421-a I have lived through, and it never gets better as a program,” state Sen. Liz Krueger, chair of the body’s finance committee, said in an interview. “I would be fine with just letting the program expire.”

Sen. Brian Kavanagh, chair of housing, said in a statement to POLITICO that Hochul’s proposal is “not anywhere near where we would need to be if we were going to enact a new tax subsidy program—in terms of affordability, labor concerns, and environmental sustainability.”

“My concern with the proposal is it is just modest changes,” Senate Deputy Majority Leader Michael Gianaris said in a radio interview last week. “421-a is a boondoggle for wealthy developers and has not done very much to increase the affordable housing stock…We need more than just modest changes to this program. We should end it and start all over with a new approach.”

Hochul’s proposed replacement would give developers of rental buildings a 35-year property tax exemption, while requiring them to set aside a portion of new apartments for low- and middle-income households. It would lower the upper threshold for what is considered “affordable” housing when compared to the current iteration, and require that income-restricted apartments created through the program remain affordable permanently. The current program is slated to expire on June 15.

For instance, under the current version, a two-bedroom apartment renting at nearly $3,400 a month could be considered affordable, since developers can target the income-restricted apartments to households making up to 130 percent of the region’s area median income, or $139,620 for a family of three.

Under the replacement proposed by the governor, the upper limit for being considered “affordable” in rental buildings would be 90 percent of the area median income, or $96,600 for a family of three. (Hochul’s version would also include an option for condo and co-op projects that would require all units in a given project to be affordable at 130 percent of area median income, with a 40-year tax exemption.)

But the broad contours of the tax break would remain the same, prompting criticism that Hochul’s proposal would not address the root problems cited in the current program, namely that it’s too costly and produces too little legitimately affordable housing. The tax break cost the city $1.7 billion during the last fiscal year, according to the Department of Finance. Critics include city Comptroller Brad Lander, who called the program an “obscene tax giveaway” in a statement on the governor’s proposal last month, and said “slightly altering its numbers and letters won’t change that.”

On the other side, proponents argue the absence of the tax break would bring a significant drop in rental housing production in the five boroughs, particularly affordable units, as the city faces a housing shortage.

New York City Mayor Eric Adams is supportive of the governor’s proposal, a City Hall spokesperson said in a statement to POLITICO on Tuesday.

"We need to build more rental housing, and without this kind of tool, the housing crisis will only get worse,” a mayoral spokesperson said. “While the administration may suggest tweaks in the future, this proposal is incredibly important, and the Adams administration supports it.”

State housing Commissioner RuthAnne Visnauskas explained why it's vital to New York.

“We feel like it’s a critical tool to get housing produced in the city of New York, rental housing,” Visnauskas said at a budget hearing last week. “In the absence of a tax incentive that requires affordable housing, we would have all market-rate housing …The issue would be that those buildings would get built, they would just get built as 100 percent market-rate buildings and we would lose the opportunity to get affordability into neighborhoods around the city.”

She said the state estimates the new version of the program will cost less than the current iteration, but did not state a specific figure.

The real estate industry’s leading trade group, the Real Estate Board of New York, called Hochul’s proposal “an important tool” for the private sector to produce affordable rental housing. But the organization raised some concerns with the governor’s proposed changes in testimony submitted to the Legislature last week.

Basha Gerhards, REBNY’s senior vice president of planning, said the elimination of the higher-income affordable housing option “stresses economic viability of projects in medium-low rent markets.”

“The proposed program is not perfect, and will likely result in less new housing production than the [current] program,” she said.

But there is an acknowledgement among people in the industry that the politics of the issue has become more challenging.

“It’s more expensive for developers than the existing program,” said Dave Lombino, managing director of external affairs at the real estate firm Two Trees. “But I think there’s a realization that the incentives are — because of politics and just the way the world is going — are going to get less generous with this next iteration.”

Some in the industry were relieved to see Hochul introduce a proposal, acknowledging it’s an easier issue to address in the budget than later on in the legislative session.

“It’s a good sign for the real estate industry that there is a proposal, I don’t know that any of us were banking on anything coming out,” said one developer who asked for anonymity to speak freely about political dynamics. “Had the governor not put it out there, I don’t know who would have.”

Assemblymember Steven Cymbrowitz, who chairs his chamber’s housing committee, said he doesn’t agree with calls to end the program entirely, though he declined to comment on the governor’s proposal specifically until the Assembly majority conferences the housing portion of the budget.

“I think a program like this has its benefits, it just has to be done correctly,” he said.

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