421-a tax exemption: Is there a future for this program? by Bernie Kennedy

Bernie Kennedy, Bond, Schoeneck & King

The expiration of the 421-a tax exemption on January 15, 2016 has raised questions on all sides of the issue over the continued viability and necessity of this tax abatement program.

Many housing advocates see the program as little more than a give-away to developers that largely benefits the wealthy, while depriving the city of approximately $1.2 billion annually in tax revenue. Most developers, on the other hand, see 421-a as a necessary component of mayor DiBlasio’s goal to build 80,000 new units of affordable housing in the city. Without 421-a, they argue, taxes would be prohibitively high, threatening the construction of new mixed-income rentals.

In one instance, the Durst Organization, a major NY developer, put a halt to the second phase of its 2,000 unit mega-development at Halletts Point in Astoria, claiming that the project was simply not viable without the tax subsidy. According to Durst, some 300 affordable units are at stake in that project.

Before 421-a was set to expire, the debate seemed to focus on whether to continue the program in its current form, allow the legislation to lapse in its entirety or amend the program to increase the number of affordable units required and make more units available for lower income residents.

But thanks to the NYS legislature and governor Cuomo, the future of the 421-a tax exemption will come down to the resolution of one issue – whether the Building and Trades Council, negotiating on behalf of construction unions, and The Real Estate Board of New York, representing NY developers, can come to an agreement over prevailing wages (i.e. union) on projects receiving 421-a subsidies. Governor Cuomo has sided with the unions on the issue, saying at a recent meeting in Washington, D.C. of the North America Building Trades Union that he would stand “shoulder to shoulder with organized labor” over the issue of prevailing union wages.

Not surprisingly, the governor’s and mayor’s position on the issue are at odds, as they seem to be on most issues these days, with the mayor’s office having spoken out against the prevailing wage in the past, arguing that insisting on its inclusion could cost the city thousands of affordable units.

So how did a legislative program that was established in 1971 in response to concerns about increasing numbers of city residents moving to the suburbs end in a debate over union wages for construction workers? And what are the chances now that the program will be revived? The answer to the first question is either simple or complex, depending on your perspective.

The complex answer involves an analysis of the various changes that were made to the legislation over the years as it evolved from a legislative program focused on building multi-unit residential projects on vacant land into a program popular with the city’s developers that had become a lynch-pin of the mayor’s promises regarding affordable housing.

The simple answer is politics, with the governor entering the fray and insisting that the renewal of 421-a be conditioned on resolution of the prevailing wage issue, either for reasons having to do with perceived need to improve relations with the unions or as part of his continuing feud with the mayor.

So then what about the answer to the second question–the likelihood of a revival of the statute? That appears to be dependent on the ability of the unions and developers to come to an agreement on the wage question.

Compromises have been suggested in the past, including one suggestion that developers agree to forego an abatement during construction in lieu of paying the prevailing wage, and another that would create exclusion zones requiring developers to pay prevailing wages on projects located in high rent areas only.

So far the developers group has publicly rejected any proposal to include prevailing wages in the proposal to revive 421-a, citing the city’s Independent Budget Office’s estimate that union-level wages would increase constructions costs on the mayor’s affordable housing program by $2.8 billion. But Building and Construction Trades Council president Gary LaBarbara says those cost increases should be reduced substantially when the tax breaks received by the developers utilizing 421-a are taken into consideration.

Both the developers and the unions are expert negotiators who know how to frame the debate to suit their own positions. But just as importantly, each of them understands the importance to their respective constituencies of continuing the 421-a program, even in a modified form that requires each of them to compromise. And there are a lot of numbers in between those cited by the developers regarding the cost of paying prevailing wages and those cited by the unions regarding the economic benefits of 421-a.

Given these factors, the odds would seem to favor a compromise and revival of 421-a in a somewhat modified form before the end of the current legislative session.

Bernie Kennedy is a co-managing member (partner) at Bond, Schoeneck & King, Garden City, N.Y.