NYC Officials, Developers Scrambling For New Mechanisms To Build Affordable Housing

As New York City grapples with the one-two punch of apartment rents at all-time highs and residential construction dropping precipitously, developers and city officials are still lamenting the failure of the state legislature to pass any solutions and are grasping at how to reverse the current trajectory.

“We have an affordability crisis. It's related to supply,” New York City Department of Housing Preservation & Development Commissioner Adolfo Carrión said at Bisnow’s New York Affordable Housing Conference on Wednesday. “We need creative, aggressive tools.”

Developers and policymakers alike have spent the past year scrambling to find alternatives for the now-expired 421-a tax abatement, which granted developers a tax break in exchange for keeping a certain percentage of units income-restricted.

While a handful of other incentives still exist for developers, panelists at the event, held at Ease Hospitality at 605 Third Ave., urged the audience to advocate at federal and state levels to stimulate more housing production.

“There probably is no way to bring back affordable or market-rate rental housing without a property tax exemption,” said Mark Willis, a senior policy fellow at New York University’s Furman Center. “You can get other ways of subsidy from [Low-Income Housing Tax Credits] or whatever, but even those are built on having a property tax exemption.”

The 421-a program created a path to fund mixed-income developments in exchange for a tax break. But it expired last summer, and the number of new development plans filed with the city has since fallen off a cliff: In the third quarter of last year, the number of construction permits filed for new rental housing in the five boroughs fell by 68% compared to Q2, according to the Real Estate Board of New York. 

For the past year or so, HPD has been looking at what policy and financing levers can be pulled without 421-a, HPD Deputy Commissioner Kimberly Darga said. In recent history, there have been two ways to ensure affordable housing construction, she said.

“Path one is a 100% affordable project with an allocation on the Low-Income Housing Tax Credits. [That] has basically been not enough for New York City for a very long time,” she said, adding that the city has learned how to stretch the allocation as far as it can.

“But it's limited in terms of how much we can finance. The second option for the past several decades has been 421-a, which allows for mixed-income housing creation," she said. “We don't have anything in between.”

Other policy tools are available, Herrick Feinstein partner Brett Gottlieb said. There are two city-run tax incentives: Article 11, which is for rehabilitation or construction by a company formed to build low-income housing; and 420-c, which provides a tax break for partnerships between for-profit and nonprofit developers that create low-income housing.

Another state-level incentive that expired last year, J-51, was reinstated by lawmakers in Albany in June. Now operating under the moniker of the Affordable Housing Rehabilitation Program, landlords of buildings that are 50% affordable, Mitchell-Lama developments or otherwise rely heavily on government subsidies can apply for a tax break for major renovations. 

But these tools are narrowly applicable to housing developments in the city, and won’t help create new construction of affordable housing at the volume needed — meaning the city’s supply of rent-stabilized properties will shrink, said Yuri Geylik, CEO of real estate consulting firm MGNY.

“Any newly created quality housing, rent-stabilized units were created as a result of the partnership with the city or by virtue of 421-a,” he said. “421-a not only has been the main vehicle for just creating housing, it has been the main vehicle for creating rent-stabilized housing.”

While it waits for new solutions from legislators, HPD is examining new options with the city’s budget, which has allocated more than $2B for the department to finance affordable housing next year, Darga said.

One of the options on the table is a potential partnership with the Human Resources Administration to create affordable housing models for homeless New Yorkers that wouldn’t rely on tax credit executions, she said.

HPD is also talking with developers about subsidizing mixed-income affordable projects with market-rate units, and seeing if it’s possible to finance new construction without tax credits. But directly financing construction rather than working with a tax break like 421-a means city agencies need to do more due diligence on each project, likely extending construction timelines.

Construction is already significantly more expensive than it was before the pandemic because of inflation and labor shortages, Darga said — meaning that the $2B may not go as far as it would if disseminated through tax incentives.

“It's probably not going to be enough,” she said. “If you take the thousands of units that we financed this year with 421-a inclusionary housing, and you try to sub in capital to finance those projects instead, you need another $3B annually.

The agency is appealing to Albany and the federal government to pass an expanded version of the Low-Income Housing Tax Credit proposed by a bipartisan collection of lawmakers this spring, Carrión said. 

The legislation would help boost low-income housing construction nationally by increasing the number of tax credits allocated to each state, as well as increasing the number of affordable housing projects that could be built using private activity bonds, elected officials backing the bill argue. 

Carrión said he plans to travel to Washington, D.C., in mid-September with HPD President Eric Enderlin to advocate for the LIHTC legislation, which he said could double NYC’s firepower when it comes to financing and building affordable housing. The real estate industry needs to be part of that ask, he said, along with voicing support for funding for Section 8 vouchers — which are currently under attack in the House of Representatives but remain vital for the multibillion-dollar affordable housing industry, Carrión said.

“Please lobby the New York congressional delegation. Both parties love tax credits,” he said. “We've been hat-in-hand in Washington for a while.”

In the meantime, Carrión is hopeful that developers will approach HPD with their own ambitious, creative deals. 

“What we're doing is saying to you all: Bring us deals where you have 30, 40% market[-rate units and] 60% affordable, or make your best offer,” he said. “We're interested in creating deals without these tax credits.”