Following the end of the state legislative session on June 2, the controversial 421-a tax exemption that subsidizes housing construction expired on June 15. Proponents of 421-a and its alternatives claimed the exemption was necessary to promote housing construction, both for affordable and market-rate units. However, opponents of 421-a criticized the relatively low levels of deeply affordable housing that the program produced compared to the number of market-rate units that were subsidized. New York City Comptroller Brad Lander’s office released a report in March that called the program “expensive and inefficient.”
The expiration of 421-a is a step in the right direction that demonstrates a departure from the real estate lobby’s interests. Still, the city continues to face dual interconnected crises around affordability and homelessness.
A recent report by the real estate company Douglas Elliman found that median rental prices in Manhattan, Brooklyn and Queens have risen above pre-pandemic levels, and in many areas rents are setting records or near-records. A study using 2017 census housing data found that 42% of New York City renters pay more than 30% of their pretax income on rent, classifying them as “rent burdened”. According to the Coalition for The Homeless, a near-record number of 48,524 homeless people, including 15,087 children, were sleeping in city shelters every night as of March 2022.
More housing is needed, and this housing has to be affordable. However, recent major construction in the city, spurred by 421-a and similar tax policies, has been dominated by massive luxury condominium developments.
The units in these developments – like the Hudson Yards project or the Billionaires’ Row luxury condo towers in Midtown – feature troubling rates of residential vacancy. Part of what produces these vacancy rates is a simple lack of demand for this form of luxury unit, resulting in large numbers of unsold units. According to an analysis by brokerage firm Serhant, 44% of condo units on Billionaires’ Row had not been sold as of August 2021.
Another driver of these vacancy rates is condominiums that are owned by foreign or out-of-state investors are rarely occupied. Scholars Jae-Yong Chung and Kevin Carpenter from Hongik University coined the term “safe havens” to describe major cities like London, New York and Melbourne that incentivized foreign investment in luxury real estate markets following the 2008 financial crisis and are now experiencing high rates of vacancy in these luxury markets, creating a downward supply pressure and a strain on affordability in the apartment market as a whole.
Take Hudson Yards, for example. The $25 billion development received $6 billion in government funding from a mix of state-level subsidies and the controversial EB-5 visa program. The development hoped to bring luxury retailers and condos to Manhattan’s West Side. While multiple phases of construction have been completed, hundreds of condo and office units remain unsold, and the development group has scrapped the initial 2024 completion date for the final phase of the project. Hudson Yards is now a gilded ghost town, a monument to a foolish model of private-public partnership in housing. The development’s signature public art piece, The Vessel, became permanently closed to visitors in January following several suicides.
So where should lawmakers go from here, now that 421-a has expired? A start would be revising or doing away with Section 581 of the state’s Real Property Tax Law. Section 581 requires condo and co-op units to be appraised as if they were rental properties. A 2021 report by New York City Advisory Commission on Property Tax Reform found that this practice results in condos and co-ops being consistently undervalued, resulting in a significant loss of tax revenue via tax breaks to condo developers. Another 2015 report by the New York City Independent Budget Office used the One57 development on Billionaires’ Row as a case study and found that the building received a larger tax discount from Section 581 than it did from 421-a. Eliminating Section 581 from the tax code in addition to 421-a would reduce the scale of public funds going to these excessive luxury development projects.
In addition, cities like Paris and Vancouver have implemented so-called vacancy taxes or pied-a-terre taxes, which impose a tax on units that remain vacant for a portion (typically six or nine months) of the year. In Vancouver, the vacancy tax is 3% of the property’s assessed value, and in Paris the pied-a-terre tax is an extra 60% tax on top of the regular property taxes. These taxes have caused issues and complications in some places during implementation, but cities have seen benefits like reducing vacancy, curbing speculation and raising money for the municipality. New York legislators should learn from the tax programs in Vancouver and Paris.
State Sen. Brad Hoylman has repeatedly introduced a bill in Albany that would add a tax on pieds-a-terre. The tax would apply to nonprimary one-, two- and three-family residences worth at least $5 million at a rate between 0.5% and 4.0% of the excess value over $5 million, as well as nonprimary co-ops and condominium units worth more than $300,000 at a rate between 10% and 13.5% of the excess value over $300,000. Owners would be exempt from this tax if their property is their primary residence, the primary residence of their parent or child, or if the property is rented to a tenant as their primary full-time residence. Still, real estate industry professionals have criticized the bill as unfairly impacting retirees who spend half of the year out of state. However, this bill would encourage owners to rent out properties instead of hoarding them and would generate much-needed revenue for the state. Lawmakers should consider the needs of the people who live and work in New York full-time before carving out tax exemptions for snowbirds.
Ultimately, curbing publicly subsidized luxury developments and reducing luxury vacancy should be a priority for the New York City Council, the mayor’s office and lawmakers in Albany. While the end of 421-a is a step in the right direction, much more is needed to address the issue of empty luxury apartments in a city that struggles with housing affordability and high rates of homelessness. Eliminating these vacancies would change the purpose of housing development in New York to create space for people to live in, not for the extremely rich to park their wealth.