Hochul Takes on 421-a. Will It Be a Rebrand of the Existing Developer Tax Break?

In her State of the State plan, the governor pitched “a different kind of abatement program” to replace 421-a, which critics see as a developer-friendly policy that siphons nearly $2 billion per year from the municipal property tax pool.

Gov. Kathy Hochul on Wednesday proposed replacing the state’s expiring 421-a property tax abatement with another break for developers who build affordable housing. It’s the opening salvo in what will likely be a heated legislative battle and a wedge issue in her bid for a full term. 

The 421-a program, a reference to a section of the state’s property tax code, waives most property taxes for developers who erect new residential buildings in New York City. The program has been around in some form since the 1970s, a time when the city was willing to give up tax revenue in exchange for new development. Over the years, 421-a was amended to include some affordable housing requirements for recipients while reducing their property taxes for up to 35 years.

The abatement is popular in the real estate community because it lifts a hefty tax obligation and makes it easier for developers to construct profitable residential buildings. For that same reason, 421-a is extremely unpopular among progressive lawmakers and housing advocates who consider it a massive giveaway in exchange for a miniscule amount of deeply affordable units. Most of the “affordable” homes created under 421-a are actually priced for middle-income earners, though New York City is mired in low-income housing and homelessness crises.

Hochul acknowledged the affordability issue in the broad strokes of a 421-a replacement proposal, which she included in a policy book accompanying her State of the State speech Wednesday.

“With 421-a set to expire in 2022, there is an opportunity to enact a different kind of abatement program that can continue to incentivise rental housing construction across New York City while creating permanent and deeper affordability and spending taxpayer money more efficiently,” the policy book states. 

READ MORE: In First State of the State, Gov. Hochul Pledges ‘New Era for New York’

Hochul’s text noted the “critical need for affordable and market-rate rental housing” in the five boroughs and said abatements like 421-a have driven new development. About 200,000 New York City apartments have been created and remain subject to tax breaks under the program.

On the left, 421-a is seen as a developer-friendly policy that siphons nearly $2 billion per year from the municipal property tax pool—money that could be used to fund other needed services. Following Hochul’s speech, new Comptroller Brad Lander called the program an “obscenely excessive giveaway to developers masquerading as an affordable housing program.” 

“421-a is a multi-billion [dollar] taxpayer-funded giveaway to developers that subsidizes construction of luxury housing,” Assemblymember Linda Rosenthal tweeted Wednesday. 

Hochul’s policy book says the abatement she plans to propose will create more deeply affordable homes, subject to rent restrictions for longer periods—apartments priced for people earning much lower than the current model allows, perhaps permanently. There are multiple options for developers looking to qualify for 421-a tax breaks, with one allowing them to set aside 30 percent of units for people earning 130 percent of area median income (nearly $140,000 for a family of three, not exactly low-income). 

She will also propose changes to mandate that buildings meet carbon-neutral and other climate-related requirements.

So far, the real estate industry has responded to her proposals with approval. The Real Estate Board of New York said in a statement that it supports “creating a new program that incentivizes the development of rental apartments and produces more affordable housing for New Yorkers.”

Brett Gottlieb, a partner in the real estate department at the law firm Herrick, Feinstein and a 421-a supporter, said Hochul’s stance is probably the best that developers could hope for in an election year with Democrats in control of the state legislature who are critical of the tax break.

“We have a one party legislature and governor, and that one party has spoken about their feelings regarding this program,” Gottlieb said. “Given the landscape that exists, I think it’s a positive first step.”  

Hochul faces a tenuous situation as she seeks a moderate-left path ahead of June’s primary election. On the one hand, progressive Democrats who make up a significant portion of the party base hate 421-a. On the other, wealthy developers who make up a significant portion of Hochul’s donor base love it. 

“She’s positioning herself as the moderate and she is trying to thread that needle, but at the end of the day, beyond politics, it really is a necessity,” Gottlieb said.

But opponents of 421-a dispute that notion and worry that Hochul’s proposal will simply be a rebrand of the existing tax break. There’s precedent: In 2017, state lawmakers, led by Gov. Andrew Cuomo, reinstated the lapsed abatement but labeled it “Affordable New York.” It had some deeper affordability options, but longer-term tax reductions. The new item was still located in, you guessed it, section 421-a of the property tax code.

“While it’s good to see the governor say she wants to end 421-a—New York’s most expensive, anachronistic and regressive housing program—we don’t yet know much about how she plans to replace it,” said Samuel Stein, a housing policy analyst at the Community Service Society (a City Limits funder) and a critic of the tax break. 

Stein referenced the Affordable New York rebrand and said the majority of the homes created under the program since 2017 have been priced for households making more than double the average renter’s income in New York City.

A 2015 report by Community Service Society’s Tom Waters and Victor Bach found that the city lost more than $1 billion in tax revenue as a result of 421-a the prior year, money that could have funded 100,000 Section 8-style housing vouchers for low-income New Yorkers. The amount of lost revenue has only increased since then.

Their report recommends replacing 421-a with a tax credit that provides benefits based on affordability. Gottlieb, the real estate lawyer, said Hochul may pursue even more flexibility, like a plan that bases affordability on zip code or community district needs, rather than a one-size-fits-all approach. 

“Look at the needs of the community and look at what the market rate is there, rather than taking a global approach and treating all neighborhoods as equal,” he said. That way, the program would not incentivize developers to build “affordable” apartments priced for six-figure earners in a neighborhood where the median income is more like $45,000.  

Hochul’s proposal also includes another provision that caught the eye of housing advocates: an “all-affordable homeownership option” for low- and middle-income New Yorkers. 

Previous iterations of the 421-a program have not created homeownership opportunities affordable to the vast majority of New Yorkers, said Matthew Dunbar, the chief strategy officer for the New York City chapter of Habitat for Humanity.

Dunbar has advocated for more affordable homeownership programs, including a funding boost for the state’s Affordable Housing Corporation, which subsidizes the development of homes meant for affordable sale.

Home ownership is out of reach for most residents of New York City, where median home sales have reached $760,000, according to the website PropertyShark. 

“This is the first time in a long time that a governor’s plan is putting significant weight behind the equity-building part of their housing plan,” Dunbar said. ‘It would be a huge benefit for the city.”

Correction: A previous version of this article incorrectly attributed the 2015 Community Service Society report to Samuel Stein and not Tom Waters.