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Affordable Housing Made Expensive

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eye on the news

Affordable Housing Made Expensive

New York City officials and activists seek not cost-effective solutions to the city’s housing crisis but ideologically satisfying ones. January 18, 2023
Economy, finance, and budgets
New York

Beleaguered New Yorkers wanting to witness that rarest of occasions—a public official speaking frankly about the limits of public largesse—can watch Governor Hugh Carey’s 1975 State of the State speech. Facing fiscal crisis at both the state and city levels, Carey said, famously, “The days of wine and roses are over.”

New York’s contemporary politicians do not speak as bluntly as Carey, but they should. Fortunately, the current fiscal stringencies of New York’s governments, though significant, remain manageable. What’s not manageable, thus far, is a housing crisis in New York City and its downstate suburbs driven by restrictive land-use controls that strangle the supply of new housing, and by draconian rent controls that pump up demand while taking dilapidated units out of the rental housing supply. Both the current governor, Kathy Hochul, and Mayor Eric Adams have set ambitious housing goals that could solve this crisis, if achieved. The route to success involves drafting detailed proposals and legislative bargaining with an uncertain outcome.

Many public officials, activists, and commentators seem to believe that the route to housing success will be paved with copious public subsidies, ensuring that a large share of new housing units are “affordable”—that is, offered at rents below market levels. These subsidies would take the form of both “on-budget” cash expenditures and “off-budget” tax breaks. But such arguments often display no concern about whether these are within governments’ fiscal means, represent good value for money, or come with opportunity costs as other possible uses of the same resources are foregone.

I’ve written critically of Adams’s practice of securing city council approvals for zoning changes with extravagant and unachievable promises of future affordability. That effectively sets up a long queue of projects waiting for public subsidies and precludes efforts to ramp up housing construction. Meantime, consider some other recent examples in which officials and activists reflexively propose generous public subsidies.

The January 2023 report of the city’s Office Adaptive Reuse Task Force proposes regulatory changes to facilitate conversion of obsolete commercial buildings to residences. The need for these changes has become more pressing as office vacancy rates have remained consistently high post-pandemic.

An appendix to the report notes strong market interest in residential conversions of office buildings under current rules. These conversions are unsubsidized and lead to a substantial increase in property-tax payments.

That would seem to make residential conversions a great success story for the city, whose five-borough consolidated fiscal structure is based on redistribution of the strong tax revenues generated in Manhattan’s business districts to underwrite public services in residential neighborhoods. According to the city’s Department of Finance (DOF), in the 2022–23 fiscal year Manhattan office buildings paid an average of $16.10 per square foot in taxes—so improving on that through conversion is impressive.

That’s not, however, what the task force is thinking. Rather, it views the added revenues from office-to-residential conversions as a potential subsidy source for affordable units within the converted building, through a state-enacted tax exemption. The task force points out, correctly, that few affordable-housing units exist in the city’s office districts, which obviously offer good access to jobs and in some cases, public and private services. And, undoubtedly under the watchful eye of the city’s Office of Management and Budget, the report notes the need to consider “the implications for city property tax revenues.” But it gives no consideration to what the most cost-effective means of producing affordable housing might be. Should the city pay double or triple the cost per affordable unit in less expensive neighborhoods, just to score an ideological point? Perhaps, if high-income households want to live in converted office buildings and private developers want to provide them with expensive housing, while paying the city’s high taxes, then we should just let it happen.

That’s not the only case where these issues arise. Another can be seen in proposals to lift the state Multiple Dwelling Law (MDL) cap that limits the size of new residential buildings. The cap means that new residential buildings can’t be as large as new office buildings in the city’s major office districts, such as midtown and Lower Manhattan. That doesn’t make much sense from the perspective of rational land-use regulation: office buildings generate much greater demands on street and sidewalk capacity and transportation infrastructure than do residential buildings.

Amending the law to let the City Planning Commission and city council decide how big residential buildings should be makes sense. Indeed, both Hochul and Adams endorse it. Again, however, ideology intrudes.

In a recent City & State op-ed, two activists with the pro-housing organization Open New York assert that raising the size cap offers an opportunity to apply the city’s affordable-housing mandates—called Mandatory Inclusionary Housing (MIH)—in its prime business districts, where those mandates don’t apply today. Those are the same neighborhoods studied by the office reuse task force, where land values are extremely high and wealthy households will pay top dollar to live. Condominium units built in recent years under the current rules, such as Lower Manhattan’s 30 Park Place tower, pay five-figure property taxes quarterly, according to publicly available DOF data.

To ensure that affordability mandates don’t deter new housing from being built, the city would need to compensate property owners, who otherwise would lose money. Until June 2022, a tax-exemption program existed to do just that, called Section 421a. Under 421a, for large buildings like those that might exceed the current size cap, a 35-year, 100 percent tax exemption was allowed in exchange for below-market rents on 30 percent of the units, for a period of 40 years. Union-level hourly wage requirements also were required for construction workers.

Despite the apparent generosity of those tax benefits, developers still built condominiums in places like Lower Manhattan. It’s not clear that the New York legislature wants to reinstate that level of tax exemption, though without it, amending the MDL and simultaneously applying MIH through the city’s onerous zoning amendment process will be fruitless exercises. But given the revenue that’s being sacrificed, why would the city want to pay for affordable housing this way?

New York City needs to use revenue from its highest-value land to provide all residents with high-quality services, not just to offer cheap apartments in expensive buildings to a handful of lucky households. Politicians should start educating their constituents to care about what affordable housing costs. Activists should point them to the most cost-effective solutions, not the most ideologically satisfying ones.

Photo: krblokhin/iStock

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