Everybody Wins?

So, after months of study and discussion, the City Council approved a plan to revise the huge tax break that residential developers receive for building large new developments. The story of the so-called 421a program is the recent history of the city in microcosm. When the program was originally enacted in the 1970s, the city was going bankrupt, the Bronx was burning, and whole neighborhoods were turning into depopulated wastelands. New York basically had to bribe developers to build here. Then the city rebounded. But the program remained. In the 1980s, the Koch administration revised it to create the so-called 80-20 formula within an "exclusionary zone"--basically Manhattan between Houston and 96th Street, except for the East Village--whereby a developer wishing to take advantage of the tax break would have to make 20 percent of his units affordable to low and middle income people. With some adjustments, that's more or less how the program remained until yesterday--or, I should say, will remain until the city's revisions are approved by the state legislature next year.

The reason the program had to change was obvious to anyone who has seen shiny glass buildings rising in, say, Astor Place or Fort Greene. The developers of these buildings, and the owners of the condos within them, were getting incentives worth tens of millions of dollars to build in areas that, because of changed market conditions, really aren't so risky anymore. Furthermore, because these areas are rapidly gentrifying, and poorer people are being pushed out by higher rents, they are desperately in need of affordable housing. Expanding the exclusionary zone to encompass such neighborhoods is a simple, relatively painless way to increase the affordable housing stock. Sure, developers make a bit less money, and maybe a few fewer mammoth apartment towers get built, but maybe that's not a bad thing for these neighborhoods, activists say. Who wants their brownstone block to be swallowed up by development, anyway?

It seems like everybody wins. But not long ago, for another story I am working on, I was talking to a well-known developer in Brooklyn who raised an interesting point.

He'd been around for a long enough to remember what happened when the exclusionary zone was originally created. According to his--admittedly self-interested--version of the story, a lot of developers pushed their construction schedules forward to "get in the ground" before the tax break took effect. (Also, some changes in the federal tax code came into play.) The city ended up with a glut of new buildings, all coming on the market at the moment that a recession was setting in. The result: A lot of developers went bankrupt--in the real estate community, people still talk about the early '90s the way old Londoners talk about the Blitz.

I posed this scenario to one clued-in analyst, and he said, sure, everyone knows that developers are going to push their timetables forward in order to take advantage of the tax break before the new exclusionary zone goes into effect at the end of 2007. That's no reason not to close a gaping loophole. But it will be interesting to watch whether some of these more, ahem, ambitious projects--I'm thing about, say, the proposed luxury buildings along the Gowanus Canal--that might not normally get off the drawing board in a market like this, end up getting built just because it's now or never. A glut of apartments and condos on the market might be good for renters and buyers, but it would be disastrous for many developers--and that's one group, you can be sure, that will be heard from when the revisions to the 421a program go to Albany next year.

-- Andrew Rice