In 1984, NYC Mayor Ed Koch denied a 10-year property tax abatement to a new development at the corner of 57th Street and Fifth Avenue, in the heart of midtown Manhattan.
“Most people in this state, including me, believe that this program was intended to stimulate much-needed housing construction in areas where no housing would otherwise be built,” Koch said at the time. “Now the Court of Appeals has found that some of the most expensive and luxurious accommodations, not only in the United States but in the world, are entitled to a tax break. Does that make sense? Not to me.”
The developer sued the city, and won his tax break, reportedly worth $50 million. In place of the former Bonwit Teller Department Store, the developer built a 58-story tower covered in dark tinted glass. It’s his signature building. He lives inside, in a gold-plated penthouse, and loves to hold press conferences in its gold-plated lobby. If you haven’t guessed yet, the developer’s name is Donald Trump.
Over his career as a developer, Trump has received at least $885 million in tax breaks for luxury apartments, hotels and office buildings in NYC. The property tax abatement program has become known locally as the “Trump Tax Break.”
However, the Trump Tax Break, officially known as 421-a, expired in June 2015, meaning that no new developments have been granted the exemption since then. But according to a report last week from Politico New York, the real estate industry, construction worker unions and the office of N.Y. Governor Andrew Cuomo have been in closed-door talks to bring it back.
They also want to reform it — potentially adding minimum wage requirements between $45 and $60 an hour based on the size and location of the building under construction. In exchange, developers could get 421-a property tax abatements extended to 45 years, from the current 25 years.
According to NYC budget documents, 421-a cost the city more than $1.2 billion in foregone revenue in FY2016, on par with previous years. Data are starting to show that the city isn’t getting much, if anything, in return for that annual subsidy to developers.
In 2014, one analysis found that the program covered 152,402 residential units, estimating only 12,748 of those units had affordability restrictions of some kind.
The program wasn’t originally designed to encourage affordable housing, after all. It was created in 1971, during a period when nobody wanted to build in any city. A perfect storm of white flight to the suburbs and a financial system still in the habit of redlining meant that the people who most desired to build, maintain or own property in cities couldn’t get the capital to pay developers. NYC needed something to bring developers back, so it convinced the state to create the 421-a program, foregoing additional property tax created by all-new multifamily housing development inside the city.
The city has since tried multiple times to reform 421-a and leverage it to build more affordable housing. After the Trump Tower lawsuit debacle in 1984, the city convinced the state to reform it by creating a “Geographic Exclusion Area (GEA),” covering most of Manhattan including midtown. New developments inside the GEA were required to have affordable housing, with 20 percent affordable as a rule of thumb. In 2010, the city got the GEA expanded to include hot neighborhoods in the outer boroughs, such as Williamsburg, Greenpoint and Park Slope in Brooklyn.
But a map of buildings granted 421-a property tax breaks, created by the Municipal Art Society of New York, clearly shows that 421-a exemptions know no geographic boundaries within New York City limits. GEA or not, developers are benefiting from the Trump Tax Break.
It might have made things worse in neighborhoods that were already affordable. As it was designed, 421-a effectively froze the assessed tax for a given property, giving developers a huge artificial incentive to go into low-income neighborhoods and develop luxury housing, with or without affordability restrictions.
“One possible outcome of the suspension of 421-a is that land prices in relatively weak real estate markets — where new privately-built housing will be more naturally affordable — would soften without the artificial stimulant of the tax exemption, with the effect of making new housing development in those neighborhoods more affordable,” reads a statement from Association for Neighborhood and Housing Development (ANHD), a citywide community development coalition. “New data suggests that the suspension of 421-a has softened land prices, which makes new development more economical even without 421-a.”
Meanwhile, even inside the GEA, developers have successfully gotten exemptions from onsite affordable housing requirements — most famously in a big 2013 state housing bill that waived onsite affordable housing requirements at five prominent luxury condominium developments in midtown Manhattan, pretty much along the same 57th Street as Trump Tower. The area is now known as Billionaire’s Row.
Supporters, mainly the real estate industry, have claimed that thousands of affordable (and market-rate) units would likely never be built without 421-a tax abatements. Yet construction permit data show that development activity in the city has returned to levels before the lapse of the program last year.
Forty years since its creation, 421-a now faces a different world. Developers of affordable housing, community activists, taxpayers and many others are wondering what the city is really getting for its tax subsidy dollars.
“Our city’s housing market is booming without it,” reads the ANHD statement.
Oscar is a Next City contributing writer, and was a Next City 2015-2016 equitable cities fellow. A New York City-based journalist with a background in global development and social enterprise, he has written about impact investing, microfinance, fair trade, entrepreneurship and more for publications such as Fast Company and NextBillion.net. He has a B.A. in Economics from Villanova University.