New York New York City

Hochul’s Housing Deal Will Help New York’s Affordable Housing Crisis, but Not Solve it – Manhattan Institute

Introduction

Rather to my surprise[1] and perhaps that of others, New York governor Kathy Hochul was able in April 2024 to negotiate a housing deal[2] with leaders of the two houses of the state legislature that meets the very low-bar criterion of being better than no deal at all. The deal is significant because in it, the legislature acknowledges that profit-motivated private investment has a role to play in mitigating New York City’s housing supply crisis. But that recognition is freighted with ideologically driven conditions and handouts to favored constituencies, which make the changes less effective than they could have been.


Buy/sell, rent/lease residential &
commercials real estate properties.

The state deal creates a context for NYC’s City Planning Commission and city council to map higher-density zoning districts in targeted areas[3] and enact a zoning text amendment, City of Yes for Housing Opportunity,[4] to increase housing supply. However, those proposals are encumbered by investment-impairing conditions imposed by state law and by the city government’s own ideologically driven priorities.

In total, the state housing deal and city proposals (if enacted) should push NYC’s permits for new housing units meaningfully higher than would have been the case, had the legislature not acted. NYC Department of City Planning (NYC DCP) reports that in 2023, just 16,359 units obtained permits, the lowest number since 2016, when 15,744 units were permitted. Both years followed a large spike in permits in 2022 and 2015, respectively, as a tax-incentive program for new housing expired, in accordance with state law.[5] With a new tax incentive in 2024 and the proposed zoning changes, the city should see a step-up in new housing units permitted. NYC’s new housing permits rose to 28,963 in 2019, before falling off with the pandemic. A similar stepping-up pattern is likely in the next few years, provided the nation avoids an economic recession.

This is welcome and will accommodate modest population and employment growth. However, housing will remain in critically short supply in the city. Mayor Eric Adams’s “moonshot” goal of 500,000 units in a decade[6]—a figure ambitious enough that it might, if achieved, result in abundant and affordable housing for anyone who wants to live in the city—remains far out of reach.

The State Housing Deal

The big question in the 2024 negotiations between the governor and the legislature was whether the legislature would agree to a new version of the Section 421-a tax exemption for new housing,[7] which expired in 2022; and what concessions the legislature would extract in the form of “good cause eviction” legislation[8] that, in fact, would represent the extension of rent control to currently unregulated housing units. The outcome is that New Yorkers were granted carefully negotiated versions of both measures. While the new tax exemption—Section 485-x—will likely produce more housing, “good cause eviction,” even in a looser form, will do what rent control does: deter tenants from moving and lower already-low vacancy rates.[9] While the trade is likely favorable to housing—that’s why Hochul agreed to it—housing’s edge is hardly decisive.

The New Tax Exemption: Section 485-x

Every iteration of NYC’s tax-exemption program for new housing is required, at a minimum, to lower taxes enough to equalize the tax treatment of new rental housing, compared with cooperatives and condominiums.[10] Without such equalization, few new privately financed rental apartment buildings can be built. To this objective, the state legislature has added two more: first, achieving a mix of market-rate and below-market units; and, second, increasing construction workers’ wages. NYC needs a tax break to make its zoning-based Mandatory Inclusionary Housing (MIH) program[11] (a mixed-income housing mandate in rezoned areas) economically viable. Furthermore, the city is proposing, as part of the City of Yes for Housing Opportunity zoning amendment, a new Universal Affordability Preference (UAP) floor area bonus for mixed-income buildings.[12] This, too, depends on the existence of tax incentives for new mixed-income housing. The amount of forgone taxes necessary to achieve all these objectives results in an extraordinarily expensive program.

Table 1 compares 485-x with the expired 421-a program. In the table, options are arranged on both sides of the chart in the order of increasing generosity of the tax exemption, rather than by the arbitrary labels given them by the legislature.

Under 421-a, the most generous and widely used option was Option C, which provided a 35-year property-tax exemption for any new unsubsidized rental building outside Manhattan south of 96th Street, if 30% of units were set aside for households earning not more than 130% of Area Median Income (AMI). Income limits are generally stated as percentages of AMI, which is calculated annually by the U.S. Department of Housing and Urban Development (HUD). In NYC the formula used by HUD includes a “high housing cost area adjustment” that raises the “very low income” limit, which is nominally 50% of AMI. In all but the highest-rent neighborhoods in the city, the permissible rent under Option C was at or above market rent. This means that housing activists and many elected officials viewed the “affordable” units set aside by a building as worthless.

Notably, 485-x retains a de facto market rental option, Option C, only for small rental buildings of six to 10 units outside Manhattan. These properties already enjoy favorable tax treatment.[13] Thus, whether the 10-year tax exemption under the new program is enough to induce owners to accept permanent rent stabilization on 50% of the units is uncertain.

Source: NYC Dept. of Housing Preservation and Development (HPD), “421-a”; Metropolitan Realty Exemptions, “421a Affordable New York”; NYS Assembly, Bill No. A08806C, Part U; Rosenberg & Estis, “Updated 4/22/24: Summary of the 2024 Housing Laws”; NYC Open Data, “2020 Neighborhood Tabulation Areas (NTAs)–Tabular”; NYC DCP, Population Division, “New York City Neighborhood Tabulation Areas

Note: For the 485-x program, Generally Applicable Option A is superseded by Option A for Buildings with 150 or More Units for buildings of that size located in Zones A and B. For buildings of 100–149 units located in Zones A and B, Generally Applicable Option A continues to apply.

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Alternatively, owners of these small buildings, as well as larger rental buildings up to 99 units, are eligible for the same 35-year tax exemption under 485-x Option B that formerly applied to 421-a Options A, B, and C—but only if 20% of the units are set aside at rents affordable to households at an average of 80% AMI. Some units may be targeted to households at an income of up to 100% AMI if others are targeted to a lower level of income, as long as the 80% AMI average is maintained. This option has no geographic restrictions or construction wage requirements and represents a more favorable tax deal than was available in Manhattan below 96th Street under 421-a.

This option is likely to be widely taken up by property owners, who may subdivide their property into multiple developments under 100 units to avoid construction wage requirements applying to larger buildings. We have some supporting evidence for this option’s viability from the city’s experience under a previous iteration of 421-a, which expired in 2015. Under that iteration, within a Geographic Exclusion Area (GEA), new residential development could get a 25-year tax abatement, but only if 20% of units were set aside at 80% AMI. In a 2020 report, I found that where GEA was paired with floor area incentives under the Voluntary Inclusionary Housing program enacted in the Michael Bloomberg mayoral administration (2002–13), the city was generally successful in achieving its goals for mixed-income housing.[14]

A similar set of incentives is promised for development sites that were zoned for new housing on January 1, 2014, before the Bill de Blasio mayoral administration instituted MIH. Should the Adams administration’s proposed UAP be approved by the city council, zoning will allow additional floor area to accommodate the 20% below-market units but require in exchange that the set-aside units be affordable to households at 60% rather than 80% AMI. However, because of “AMI creep”[15] (see Box 1), the UAP option is more comparable with the older 421-a/GEA option than the headline requirements imply.

Prospective developers will be running financial feasibility analyses to determine whether the new 485-x option by itself, or in combination with the UAP floor area incentive, provides a greater economic benefit. (A second issue for developers’ consideration is stagnant market rents, adjusted for inflation, as explained in Box 2.)

Development sites for fewer than 100 units that are in MIH areas, rezoned after 2014, may also use 485-x Option B without wage requirements but are at an economic disadvantage with pre-2014 zoned sites because MIH zoning requires more below-market units. The most common MIH options are 1 and 2. Option 1, which was designed to work with Option A under the recently expired 421-a program, requires that 25% of a residential building’s floor area be in units affordable to households averaging 60% AMI, with at least 10% affordable at 40% AMI. Option 2, designed to work with the expired 421-a Option B, requires that 30% of a residential building’s floor area be in units affordable to households averaging 80% AMI.

In a 2020 report, I noted that most MIH buildings since the program’s enactment in 2016 were 100% affordable, utilizing tax-exempt bonds, low-income housing tax credits, and other subsidies. Those buildings qualified for tax exemptions under provisions of law that did not expire, unlike 421-a. The few mixed-income “421-a only” MIH developments, which took advantage of the 35-year tax exemption but used no other subsidies, were in highly marketable locations where the project was justified financially by unusually high market rents.[16] At the program’s expiration in 2022, we saw additional “421-a only” MIH developments, helped by rezonings in highly marketable areas, such as Gowanus in Brooklyn, and the effects of AMI creep, which decreased the amount of subsidy needed for the affordable units.

The NYC Planning Department continues to propose rezonings in which MIH would apply. To lessen the city’s dependence on cash subsidies to achieve its affordable housing goals, the city will now be counting on the development of “485-x only” buildings in MIH areas, as it counted on “421-a only” buildings. However, developers will be searching for sites outside MIH areas where the same 485-x Option B tax incentive is available but fewer below-market units must be provided. That might result in increased dependence on public cash subsidies to make MIH development economically attractive.

The problem is compounded for buildings of more than 100 units, which are eligible for a slightly better tax incentive (the net present value today of the additional 10 years of full exemption in years 26–35 is relatively small). In exchange, these buildings have a higher 485-x affordability requirement, which is still less than MIH demands.

However, the larger buildings also are subject to wage standards, which raise construction costs and offset the benefits of the more generous tax exemption. The 485-x Option A wage standards will likely have the least deterrent effect in the Zone A and Zone B areas, which generally correspond to the city’s strongest rental markets.

The “homeownership” Option D in the expired 421-a program was little used, likely because the assessed valuation cap of $65,000/unit was very restrictive. The option has now been revised, with a new assessed valuation cap of $89/sf. This still seems quite restrictive, given typical market prices for condos, even outside Manhattan and the pricier neighborhoods in Brooklyn and Queens. The least expensive, recently constructed, condominiums list for $400,000–$500,000 on real-estate websites, and initial assessments are at 45% of market value. Since these lower-priced apartments are one-bedrooms, initial assessments will typically exceed the $89/sf cap.

In summary, 485-x creates a strong incentive to construct rental buildings with fewer than 99 units outside MIH areas. It strongly supports the proposed UAP in the City of Yes for Housing Opportunity zoning amendment, as well as the Town Center Zoning proposal,[17] which would encourage small apartment buildings in commercial districts. It is a deterrent to buildings of more than 100 units, except where market rents in high-rise buildings are high enough to offset the cost of both affordability and construction labor requirements. The provisions for small rental buildings and condominiums will likely be little used, but the need for tax benefits is less for these types of residential buildings, which are more favorably treated by the underlying tax regime.

Good Cause Eviction

One of the odder aspects of the multiyear political controversy over “good cause eviction” is that its advocates never identified a problem that the proposed legislation would plausibly solve.[18] Rather,“good cause” functioned as a poison pill that would make an unpalatable trade for the real-estate industry interests advocating for a 421-a replacement. Of course, that would work only if the legislative leaders did not want a deal. As it turned out, they did want a deal, which necessitated backing off the maximum “good cause” demands. However, the enacted legislation has no more underlying logic than the original. There’s no reason to believe that it is specifically targeted to a group of households threatened by unfair eviction. Rather, it is targeted to benefit a group of relatively affluent people who mostly live in Manhattan and presumably will show their thanks, even for loose rent control, to their legislators in future elections.

The enacted “good cause” bill[19] applies only to a subset of unregulated rental units in NYC and effectively limits annual rent increases to 5% plus the rate of inflation, but not more than 10%. Under normal economic conditions, that probably does not represent a large constraint on typical rent increases. What happens in inflationary circumstances is unpredictable. In the last post-pandemic bout of high inflation, median market rents in strong housing market areas lagged the price index.

It is difficult to calculate exactly how many units are covered by the legislation. One analyst estimates a range of 321,000–473,000 units.[20] This would be fewer than half the approximately 1.1 million rental housing units that were heretofore unregulated.[21] Housing owned by entities that have fewer than 10 units in NYS are exempt, as are owner-occupied buildings with fewer than 10 units. Investor-owned units in cooperatives and condominiums that are rented out are exempt. New buildings are exempt for 30 years, including buildings completed in 2009 or later. Very high-rent units are also exempt, defined in NYC as those renting for more than 245% of the HUD-defined Fair Market Rent, which rises annually. At the time of enactment, this rent threshold ranged from $5,846 for a studio to $8,413 for a three-bedroom.[22]

The main effect of the “good cause” legislation is likely to be making the end of a lease for many unregulated units a contentious and litigious occasion. That might help some people negotiate to remain in units even though their landlords would prefer another tenant. An alternative scenario is that some tenants will be successful in demanding payment from the landlord to agree to vacate.

A 2023 city study found that the city’s overall rental vacancy rate was 1.4%—the average of a 1% vacancy rate for rent-stabilized apartments and a 1.8% vacancy rate for unregulated apartments.[23] “Good cause,” even in a looser form, is likely to push the unregulated apartment vacancy rate down, because fewer units will become vacant. This will be offset by the new unregulated units spurred by 485-x (only the affordable units are rent-regulated under this legislation). It is likely to be a net gain, but New Yorkers should understand that their hugely expensive new housing tax-incentive program would be more effective at alleviating the city’s housing crisis, had “good cause” not given new tenants’ rights to affluent Manhattan households.

Other Components of the State Housing Deal

421-a Deadline Extension

The required completion date for projects that met the 421-a construction commencement deadline in 2022 has been extended for five years, to June 15, 2031.[24] However, such projects using the extended deadline may not apply for 421-a Options C or G, which are the most generous in terms of required rents on “affordable” units. The extension allows some large projects to proceed while avoiding the upgraded wage requirements of 485-x. This might make those projects financially feasible and underscores the incentive that future developers will have to keep projects under 100 units and avoid construction wage standards.

FAR Cap

NYS’s Multiple Dwelling Law (MDL) has long capped the size of a residential building at a Floor Area Ratio (FAR) of 12.[25] NYC has tried for years to repeal this cap, which would return control of local zoning to the city, a policy that the legislature has stoutly defended for the suburbs. The legislature’s prior refusal to lift the cap indicated that its real priority was not local control but stifling the construction of new housing by whatever means was effective.

The latest deal does lift the cap but in a manner likely to limit the usefulness of the change.[26] For zoning enacted by the city, a new residential building can exceed 12 FAR but only if the zoning requires “minimum percentages of permanently affordable housing equivalent to or exceeding the requirements under any mandatory inclusionary housing program.” By not specifying actual percentages of affordable units, the legislature grants the city some flexibility in designing its MIH requirements.

There are several implications of the way the legislation has been drafted. First, it forces large increments of residential floor area in a rezoning, unless the city tailors its MIH requirements to require lesser percentages of affordable units. Currently, in midtown Manhattan, lower Manhattan, and Long Island City—three Central Business Districts with the city’s highest-built densities and best transit infrastructure—the highest permitted residential FAR is 12, without including below-market units.[27] Additionally, in certain high-density commercial districts mapped in downtown Brooklyn, the city’s fourth Central Business District, and a few other areas, 12 FAR can be achieved through a floor area bonus for constructing a public plaza.[28] Imposing the typical MIH Options 1 and 2, without taking away property owners’ current zoned capacity for market-rate housing, would require a minimum FAR over 17.[29] In other areas, the maximum FAR is 10. In those latter areas, imposing MIH Options 1 and 2 would require a minimum FAR over 14.[30]

NYC’s planners also want to provide property owners with a small increment of market-rate housing, in order to encourage them to apply for a rezoning to a density higher than 12 FAR. Therefore, the City of Yes for Housing Opportunity proposed zoning amendment creates two new zoning districts, which allow 15 and 18 FAR, with MIH.[31] As a matter of city policy, MIH is applied to changes in the city zoning map that allow medium- and high-density housing. Since these districts need to be mapped, MIH will apply, consistent with the new state law.

Notably, the city government and state have gotten themselves into a bind. MIH requires a minimum 50% increase in residential density, from 10 and 12 FAR to 15 and 18 FAR. Intermediate residential densities, such as 13 or 14 FAR, are not considered. Since community activists and elected officials are sensitive to building scale, the inability to choose these intermediate building configurations might make rezonings more difficult to enact.

Particularly odd is that, in the absence of any MIH zoning provisions, virtually any proposed new residential building over 12 FAR would likely exceed 150 units and be in 485-x Zone A or B. Thus, the development would be required to make 25% of units permanently affordable at an average of 60% AMI—requirements very similar to MIH Option 1. Sure, a developer could build condos, but the 40-year 100% tax exemption for a rental is quite tempting. Piling requirement upon requirement is not only bewildering but likely results in less housing in exchange for asserting an esoteric principle regarding the exact type of income mix appropriate in a rezoning.

The state legislature’s interventionism creates additional problems. NYC is burdened with many office buildings constructed after 1977 that, under state law up to now, could not be converted to residences because they exceed 12 FAR. The City of Yes for Housing Opportunity proposes extending the cutoff date for the conversion of these oversize buildings to 1990, but needs state legislation to make this effective. The new state law gives the city authority to waive the 12 FAR cap for post-1977 buildings. However, these buildings would need to comply with MIH. Furthermore, the state legislature failed to extend the special MDL rules[32] for conversion to post-1977 buildings. This might create technical code compliance issues for some buildings unable to meet the underlying rules for residential buildings.

The legislature also created a tax-exemption program for commercial-to-residential conversions that include affordable housing. This is discussed more below. However, the requirement to provide affordable units will be a deterrent to office-to-residential conversions and make the absorption of the city’s current office space surplus more difficult.

An alternative for owners of obsolete oversize post-1977 office buildings that cannot feasibly be converted to residences is to demolish the building and reconstruct it as a residential building. The waiver of the 12 FAR cap makes possible zoning changes that would allow demolished commercial floor area to be replaced with residential. However, the MIH requirement makes this option economically less attractive to building owners, who must compare the economics of renting office space at currently reduced market rents with that of demolishing and replacing the office space. Again, adherence to an inflexible ideological posture diminishes the potential for successfully achieving a desirable land-use transition in the city’s Central Business Districts.

Commercial Conversion Tax Incentive

The legislation creates an Affordable Housing from Commercial Conversions (AHHC) tax exemption for conversions of commercial buildings.[33] Rather than being modeled on 485-x, AHHC is customized both in the duration and amount of the tax exemption and the affordable housing requirement. Tax benefits are for 35 years if construction commences before June 30, 2026; 30 years if construction commences after that date but before June 30, 2028; and 25 years if construction commences between June 30, 2028, and June 30, 2031. The formula for the exemption is more generous within Manhattan south of 96th Street than for other areas of the city. Rosenberg & Estis provides a helpful online chart summarizing the six exemption options thus specified.[34

AHHC tax benefits are less generous than 485-x Option A, which applies to buildings of 100+ units. In contrast, the affordability requirement is similar: 25% of units at a weighted average of 80% AMI, with no more than three income bands, none to exceed 100% AMI. However, there is an added proviso that 5% of units have rents affordable at 40% AMI. Mathematically, most of the remaining affordable units need to be at 100% AMI to achieve the desired average.

The legislation also amends the state labor law to make AHHC projects subject to “prevailing wage” requirements. In summary, AHHC makes a property-tax exemption available for conversions of post-1977 buildings over 12 FAR using MIH Option 1, which is more demanding in terms of affordability. However, this tax exemption is less generous than that for a new building of the same size also using MIH Option 1. Moreover, the tax benefit is structured to encourage projects to commence construction within the next two years, and expires in only seven years, compared with the 10 provided for 485-x. Residential conversion projects often have an extended time horizon because office tenants’ leases have long terms and need time to expire to achieve full vacancy. State legislators’ desire to micromanage the conditions under which conversions can take place seems at odds with how real-estate development functions. That makes the new tax incentive, combined with the amendments to MDL conditionally lifting the 12 FAR size cap, less effective than unencumbered legislation would have been.

Basement/Cellar Legalization

The legislation amends MDL to create a five-year window for property owners to apply for an amnesty to legalize heretofore illegal basement and cellar[35] dwelling units in specified community districts.[36] MDL applies to residential buildings with three or more units, so the effect of the legislation is to allow legalization, subject to enactment of a local law and zoning changes by the city, of existing illegal units in buildings with two or more existing legal units. The “illegal three,” a two-family house where a third illegal unit has been carved out of the basement or cellar, in violation of MDL and often zoning, is common in lower-density areas of NYC. Without this legislation, buildings applying to legalize would be subject to the requirements of MDL, which many could not meet.

The list of applicable community districts reflects bargaining among legislators, rather than any rational policy, and leaves out many community districts with large numbers of illegal basement and cellar units. For example, in the Bronx, Community Districts 9–12, reflecting most of the borough’s low-density areas, are included; but in Queens, only Community District 2 is included, leaving most of the borough unaffected. No areas are included on Staten Island. Consequently, the city’s ability to craft a meaningful amnesty program is severely hindered. Support for the amnesty on the city council is not likely to follow the exact geographic pattern specified by the legislature. The legislation also leaves out new basement and cellar units, meaning that the city’s proposal to permit an accessory dwelling unit (ADU) for each two-family house triggers MDL if the ADU is within the same building.[37]

An interesting component of this legislation is that the state’s onerous environmental review requirements are waived for any local law or zoning change that effectuates the basement/cellar unit amnesty. It is an initial recognition by the legislature that environmental review is designed to thwart change and is incompatible with effectively addressing the city’s housing crisis. The governor and mayor should build upon this acknowledgment in future legislative sessions.

Individual Apartment Improvements

New York’s 2019 amendments to rent stabilization severely cut back on how regulated rents could be raised to approach market levels.[38] The amendments came after the Democrats took decisive control of both houses of the legislature. Newly empowered majorities were concerned only in demonstrating their pro-tenant bona fides and were indifferent to the inevitable consequences. These include sharply declining rental vacancy rates and a maintenance crisis in rent-stabilized housing.[39

However, Democratic legislators’ attitudes are evolving as they slowly realize that the vast rent-stabilized housing stock must be sustained by rental cash flow. The budget deal includes the first positive changes to the 2019 law, which increase the costs recoverable through rents for individual apartment improvements from $15,000 to $30,000, and $50,000 for apartments that become vacant after an occupancy of 25 years or longer. Permitted rent increases are now permanent.

The change was condemned as ineffective by Jay Martin, executive director of the Community Housing Improvement Program, a landlords’ group.[40] He argues that the revised rent increases are still too small to finance typical scopes of apartment renovations after long-term tenancies, and the complex rules for securing a rent increase leave the landlord uncertain as to whether an apartment improvement is financially feasible. It is possible that Martin is overstating his case, and some vacant units will be helped on the margins. However, this change is mainly important as a symbolic gesture by the legislature that the 2019 rent laws are perhaps not as permanent as legislators declared at the time.

Housing Provisions Applicable Outside New York City

The state legislature, so eager to micromanage land-use regulation in New York City, shows no such inclination elsewhere in the state, where local control reigns. However, it did pass less publicized legislation to incentivize, but not require, pro-housing policies statewide:

  1. Tax exemptions for affordable housing outside NYC

    The legislation provides for two new tax exemptions, which any city, town, or village in the state can enact by local law.[41] The 421-p tax exemption applies to new buildings, or conversions of nonresidential buildings, with 10 or more units, within a designated “benefit area.” Twenty-five percent of units would need to be occupied by, and affordable to, households with average incomes of no less than 60% AMI but no greater than 80% AMI, as specified in the local law, for the tax-exemption period. No unit subject to this income averaging could be occupied by tenants with incomes of more than 100% AMI.

    At the end of the exemption period, tenants in place would continue to benefit from rents set to be affordable at the relevant income level. There would be a 100% tax exemption for the construction period and a 25-year post-construction tax exemption, beginning at 96% of the tax on improvements in the first year and declining at 4% a year.

    The 421-pp tax exemption applies to wholly affordable buildings and has similar applicable income levels as 421-p. However, the exemption period may be 30 years, with exemption levels to be set by local law.

    It is unclear whether these provisions are likely to be utilized by New York municipalities and, if utilized, whether they would produce a significant number of new housing units. NYS local governments already provide tax exemptions to residential developments through Industrial Development Agencies (IDAs). A 2023 report found that between 2018 and 2022, New York’s IDAs approved 425 projects that included housing, accounting for 39,625 units, of which 10,080 are affordable.[42]

  2. Tax exemption for accessory dwelling units

    The legislation also creates a tax exemption for ADUs, which any city, town, or village in the state may also enact by local law.[43] The exemption is for 10 years: 100% of the increased value for five years, and a declining percentage for the remaining five years. The exemption is limited to $200,000 of market value. As with the multifamily housing incentive, it is unclear how much interest exists among NYS’s municipalities to incentivize ADUs in this way. Some local governments might see the tax exemption as a sweetener to induce homeowners to accept ADUs. On the other hand, they would still need to provide services to ADU residents, which might result in higher property taxes elsewhere. Particularly in downstate suburbs, market rents are likely high enough to support taxable ADUs.

  3. New York Housing for the Future Homeownership and Rental Housing Programs

    The legislation creates two new state-supported housing programs, and the budget appropriates $150 million to support them.[44] Both the homeownership and rental programs are targeted to households at up to 130% AMI, the income level that was considered laughable as an affordable housing target by critics of 421-a. The homeownership component is meant to support the development of limited-equity cooperatives, where units are nominally owned by shareholders, but which limit the ability to capture price appreciation to maintain affordability over time. This requires complex income verification and unit resale regulations that households in the targeted income range—households that, in NYC, and likely most of the rest of the state, have no difficulty competing for housing in the open market—would likely find unappealing. The local legislative body would have the authority to enact whole or partial property-tax exemptions for these projects. The project would be subject to prevailing wage requirements, which would offset any economic benefit from the tax exemptions.

    The rental component requires fewer cumbersome rules but also raises the problem of persuading relatively well-off households to subject themselves to income verification to access housing that is likely no more affordable than what they can find on the open market. In summary, while a way might be found to spend the $150 million, which, given the cost of housing built with prevailing wages, is a relatively modest sum, these programs are unlikely to produce a significant number of new housing units.

Trying to Make the Housing Deal Work Better

The housing deal highlights the limitations of the process employed in the state legislature, in which legislation is drafted behind closed doors with only a few privileged insiders allowed to participate. Every constituency believed powerful enough to get something out of the deal does so. Less attention is paid to whether the legislation addresses the problem to which it is ostensibly targeted. The governor, mayor, and legislative leaders issue sunny press releases, either deluding themselves that they have accomplished more than they have, or counting on the media and the public being unable to tell the difference.

The downstate New York housing crisis lives on. It is driven on the demand side by the boost supplied by rent regulation. This ensures that households—that, in an open market, would get the price signal that NYC is too expensive for them—instead stay in place and block access to other households that want to live in the city. On the supply side, it is driven by land-use and rent regulations that suppress housing supply in the city and its suburbs. City of Yes for Housing Opportunity is a good start on lifting some of those restrictions in the city, but much is left to do.[45

The timeline for crafting better state legislation is long. Because 2025 is a mayoral election year, and 2026 a gubernatorial one, neither the mayor nor the governor can be expected to take on the controversies that flow from a less politicized, and more effective package of housing measures. New York has a big community of people who possess housing expertise and are public-spirited enough to contribute their time and effort to trying to craft good housing solutions, rather than just politically expedient ones. Thus far, many have not been asked. In 2024, even Hochul, the closest we have to a technocratic governor in living memory, proposed a half-baked “placeholder” version of 485-x, unsupported by analytical backup. No doubt she wanted to give the legislative process a lot of leeway, but that led to poorly thought-out legislation.

A nongovernmental entity needs to convene expert panels to examine the issues created by the 2024 legislative package and propose changes that could be enacted in a future legislative session—sadly, most likely in 2027. Those panels will inevitably bring to the surface the conflicts inherent in politicians’ desire to please every powerful constituency, but that needs to happen.

One expert panel needs to look at the use of the real property tax law as a backdoor funding source for affordable housing, which features in five provisions passed in the 2024 legislative session—485-x for new housing, AHHC for commercial-to-residential conversions, 421-p and 421-pp for statewide new construction, and the tax exemption for ADUs. The New York Housing for the Future program amends the private housing finance law, authorizing local property-tax exemptions.

Municipalities levy property taxes as their primary revenue source to support public services. While NYC has an unusually diversified revenue base, the real property tax is its biggest source of tax revenue and, with the office sector impaired post-pandemic, is projected to grow much more slowly than it did before 2019.[46]

Tax exemptions are similar in their economic impact on the city’s finances to municipal bond borrowing through the capital budget because they allow payments for long-term improvements to be spread over many years. Compared with bond financing, tax expenditures allow New York and other cities to stay within statutory and practical caps on municipal debt and move significant financing activity off-budget, where it is less visible to the public.[47] Tax expenditures also allow the city to avoid various requirements associated with bond financing, including prevailing wage, although this advantage has been eroded by successive iterations of 421-a and 485-x legislation.

The recent housing deal stretches the advantages of tax expenditures, perhaps to the breaking point, by diverting the city’s revenues from 15 and 18 FAR residential buildings and office-to-residential conversions, to create extraordinarily expensive affordable housing.[48] While this might be politically expedient and benefit a small number of lucky households, it is storing up trouble for the future, because these affordable units are likely to be developed in parts of the city with the highest property values and thus the highest taxes. The governor’s and legislature’s vast tax giveaway shifts the current tax burden, as well as the burden of a future fiscal crunch, onto other properties and taxpayers. Politicians might find the idea of spending today and leaving the costs to their successors appealing, but New Yorkers need to be educated about the downside so that they might demand a more responsible policy.

The real property tax expenditures panel should weigh the cost-effectiveness of the new laws and make recommendations about how affordable housing–related tax expenditure programs can be revised to provide the maximum public benefit at the lowest cost. It should also consider how the city could concurrently propose amendments to the zoning resolution to revise its MIH mandates to work effectively with the tax-based subsidies available.

The panel should also look at the role that tax expenditures should play in making housing more affordable in other parts of the state. Municipalities outside NYC have less diverse tax bases and less valuable commercial property, making them more dependent on the residential property tax to support public services. Providing a local option to approve a tax-based affordable housing program might also not be good policy, since all local politicians are prone to short-term viewpoints and the state ultimately must step in if local governments encounter financial distress.

Another nongovernmental panel should look at MDL as it relates to office-to-residential conversions and the legalization of “illegal threes,” as well as the construction of new, small multifamily buildings, and propose appropriate revised standards that relieve unnecessary costs while ensuring residents’ safety. A third expert panel should review the 2019 rent laws considering the legislature’s belated recognition that rents, not public spending, must be the primary source of the cash flow that sustains the state of good repair of the rent-stabilized housing stock. The panel should develop a fact base to evaluate whether additional rent law changes are appropriate to return vacated units to the rental stock as quickly as possible and to head off a looming maintenance and foreclosure crisis.

The membership of the panels should be sufficiently diverse and credible so that the governor can use their work to craft proposed legislation that, in a revolution for NYS, would be supported by policy analysis based on facts and data. Even if the legislature insists on its usual closed-door process, the existence of fact-based policy analysis still raises the likelihood of better drafting and a closer fit between goals and outcomes.

Conclusion

At its base, NYS’s 2024 legislative housing deal was a trade of renewed tax exemptions on new housing for loose rent controls on previously unregulated housing units. The tax-exemption program, 485-x, will not be as effective in spurring housing construction as its predecessor, 421-a, but is much better than keeping the current overtaxation of new NYC rental apartment buildings in place with no compensating tax break. It supports the city’s current zoning proposals—City of Yes for Housing Opportunity—and lasts for a welcome 10 years rather than expiring quickly, as did its predecessor. The enacted version of “good cause eviction” will exacerbate the extremely low vacancy rates attributable to the 2019 rent laws—but probably not too much.

The other components of the package range from moderately helpful (the extension of the 421-a completion deadline), to questionable (the commercial-to-residential conversion tax incentive), to dubious (basement/cellar legalization and individual apartment improvements). Elected officials’ celebratory press releases notwithstanding, the whole package needs to be evaluated and constructively revised. New York City, as well, needs to evaluate how its zoning-based Mandatory Inclusionary Housing program could work successfully with new tax incentives that favor housing constructed under other regulatory regimes and shift subsidy resources from affordable housing to labor.

Unfortunately, the city and state are now entering a two-year political season in which frank discussions of the shortcomings of current policies are unlikely to happen. However, civic-minded nongovernmental entities can use this time to evaluate changes and educate the public and elected officials as to why they are necessary. New York’s legislature has moved from a posture of performative hostility toward private housing investment to grudging acceptance. The next step is to move to constructive engagement with facts and data: how much housing costs to build and maintain, how housing is financed, and how investment decisions are made. New York will begin to climb out of its self-inflicted housing crisis only when the 2024 laws are amended to recognize that these represent real constraints on what public and private benefits government can demand from private housing developers and property owners.

Endnotes

Please see Endnotes in PDF

Photo by Spencer Platt/Getty Images

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