LUXURIOU$ LOOPHOLE: How Developer$ Use Taxpayer$ to $ubsidize Housing for the Rich A New Report on Downtown Brooklyn

and the 421-a Program, Researched and Written by the Real Affordability for All Campaign April 2014

Table of Contents: Fact Sheet I. Introduction i. ii. II. III. Synopsis Executive Summary 2 3 3 3 5 7 7 8 10 12 15 16 10

Public Money Funding the Creating of Luxury Housing Overwhelmed by Gentrification i. ii. iii. Making Neighborhoods off Limits for Average New Yorkers Disappearing Affordable Housing Evidence of Displacement

IV. V. VI.

Area Developments Recommendations Conclusion

Table 1. Demographics By Percentage

Table 2. Demographics By Number

11

Table 3. Break Down of Affordable Housing

14

Table 4. Studied Buildings

18

FACT SHEET Between 2008-2012 61 buildings, with a total 4,395 units, were built that received 421a tax abatements in zip codes 11201, 11217, and 11215 which encompass the area in and around downtown Brooklyn1. Only five of the 61 buildings included any below market rate apartments. Of the 4,395 units identified for this project, only 257 6% of the total were affordable to low- or moderate-income households. The average purchase price for new condos was $777,000, which would require an income of at least $150,000 almost double the study areas median household income. The average rent for rental units was $2,643, which would require a household income of $106,000 20% higher than the study areas median household income. This is 40% higher than the existing median rents in the study area. Between 2002 and 2009 the percentage of the study areas residents living in rent regulated, subsidized, or public housing decreased by 23% from 71% to 48%. The average building saved $2,598,937.56 in property taxes ($642,000 per affordable unit) through the 421a tax abatement program. 45 of the 61 buildings received a 15-year real estate tax abatements-of-right, with no requirement to build affordable housing.2 Between 2000 and 2011 the average household income in the study area increased by 61%, which is double the citywide increase. Within the study are the percentage of residents earning below $75,000 has been decreasing while the percentage of those earning more than $75,000 has been increasing. Between 2000 and 2011, the Black population in the study area dropped 23% (40% since 1990). Between 2000 and 2011 the Hispanic population decreased by almost 20% (40% since 1990) even though it was increasing city and borough wide.

The study area goes as far west as the East River, as far south as 36th Street, as far east as Prospect Park and, just slightly further north than Flatbush Avenue. 2 11 of the buildings that received 25 year abatements received their New Building permits before 6/30/2008 (the date that the expanded GEA went into effect) so those developments were not required to provide any affordable housing. 3

Between 2000 and 2011 the White population in the study area increased 23%, while it declined citywide.

I.

Introduction i. Synopsis

Rising rents and stagnant wages have dramatically increased the need for affordable housing. Yet the city continues to subsidize the creation of housing for the wealthiest New Yorkers. The 421a tax abatement program has been a crucial factor fueling this disparity. Because developers receiving the 421a tax abatement are not required to provide any substantial affordable housing in exchange for the subsidy, many of these developments, while generating new housing units for the marketplace, do not generate new affordable housing units. In fact, these taxpayer-subsidized buildings have significantly contributed to the displacement of longtime residents by causing rents to rise in the surrounding neighborhoods. This phenomenon can be seen with particular clarity in the neighborhoods in and around downtown Brooklyn and the zip codes studied herein. ii. Executive Summary

According to the New York City Department of Finance (DOF), 61 buildings receiving 421a tax abatements were constructed between 2008-2012 in zip codes 11201, 11217, and 11215. There are a total of 4,395 units in these buildings, and they will receive a total of $158 million in tax subsidies over the next 25 years. Only 151 (about 3.5%) of these units are affordable for low-income families3 and only 106 more (about 2.5%) are affordable to moderateincome families. In total, the affordable-units generated in these new developments are a mere 6% of the total units created. Ninety percent of taxpayers who subsidized these new buildings cannot afford to live in them. The luxurious loophole that developers exploited to create these new buildings came at the extreme expense of low-income and moderate-income families.

Low-income families are those earning 50% or less of the Area Median Income 5

Indeed, this is heavily subsidized housing even though the units are only affordable to wealthiest residents of the city. The average purchase price of the condo units included in this study was $777,000, and the average rent for leased units was over $2,600. The increase in high-income earners within the study area was accompanied by a sharp increase in the white households even as the white demographic declines citywide. This increase was accompanied by a decrease in African-American and Hispanic households within the study area. Although the African-American population decreased borough-wide and citywide, it decreased five times as fast in the study area (in and around downtown Brooklyn). Even more striking is that, despite an increase in the Hispanic population borough-wide and citywide, the Hispanic population in and around downtown Brooklyn has been decreasing at nearly the same rate as the African-American population. The need to create housing that is affordable for low- and moderate-income families is greater than ever. In recent years, the number of rent-regulated apartments has been steadily declining throughout the city and more rapidly in the study area. Over the past 10 years, rents have increased at twice the rate of household incomes both in the study area and citywide. Without a serious intervention, it will become increasingly difficult for everyday New Yorkers to find housing hey can afford. A recent study by the Real Affordability for All campaign found that more than 700,000 low-income New Yorkers were shut out of the Bloomberg housing boom. The use and abuse of 421-a to subsidize new housing for wealthy New Yorkers at the expense of low and moderate New Yorkers is a key factor in that trend. To reverse this disturbing trend, Mayor de Blasio should include in his affordable housing plan set to be released May 1, 2014 a requirement that developers who receive tax

exemptions for their new developments set aside a minimum of 50% of new units for real affordable housing. Requiring a minimum of 50% of new apartments within the existing tax-abatement parameters to meet these standards would ensure long-term real affordability to a wide array of low-income and moderate-income households shut out of the new housing developments built under Bloomberg. And it would give city taxpayers a much better return on their investment in new housing developments while still enabling real-estate developers to reap significant profits. There are many ways to achieve a significant number of 50/50 developments. We recommend two 50/50 scenarios: 1) for the highest-cost areas of the city (particularly Manhattan), 50 percent of the units are market rate and 50 percent are targeted to low-income households (those earning 30-60 percent of AMI); 2) for the outer boroughs and lower-cost areas of the city, 100% of the developments are affordable: 50 percent of the units are for low-income households (those earning 30-60 percent of AMI) and 50 percent are middle income (for families earning up to 100 percent of AMI). The second scenario holds a lot of promise, as current residents and new arrivals look to the outer boroughs for real affordable housing, especially in neighborhoods that have not yet gentrified. But together, both scenarios can achieve a much greater level of real affordability across the city than was achieved by Bloombergs housing policies and programs over the past decade or so.

II.

Public Money Funding the Creation of Luxury Housing The city is using taxpayer dollars to subsidize the creation of luxury housing for the

wealthiest New Yorkers, causing rents to rise and making the area unaffordable for low- and

moderate-income New Yorkers. All of the buildings described in this report are receiving 421a tax abatements. 421a is a tax-exemption program for new construction that was initially created in the 1970s after an economic crisis in the city required an incentive to spur development within the citys limits. Under this program, developments anywhere in the city can receive tax abatements for 15 to 25 years except in the defined exemption zones. Instead of assessing real estate taxes in accordance with post-construction value of a property, owners of buildings with tax abatements are assessed real estate taxes based on the pre-construction value of the property. The tax-assessed value is then increased gradually over 15 or 25 years until the value used to assess real estate taxes is equal to the post-construction value.4 This results in thousands of dollars in real estate tax savings over the period of the tax abatement to developers and owners of these units. Developments that received new building (NB) permits before June 30, 2008 anywhere in the city, except between 110th Street and 14th Street in Manhattan, were not required to provide any affordable housing in order to receive the tax abatement. After the June 30, 2008 deadline, new developments in Manhattan and downtown Brooklyn were required to make 20% of a developments units affordable if they opt for a 25-year abatement. If they build in other areas of the city or opt for a 15-year abatement, there is no affordable housing requirement to receive these tax savings.5

New York City Department of Housing Preservation and Development (HPD), 421-a Legislative Overview and FAQ, 2-4 (2013) 5 Id. 8

Between 1989 and 2003, 69,000 buildings were constructed that received 421a tax exemptions, and only 7% of these units were affordable.6 According to the Independent Budget Office, there are 150,000 units receiving 421a tax exemptions and have cost the city $1.1 billion in uncollected taxes.7 A study published in 2006, looking at buildings built in this reports study area, found essentially the same percentage of affordable units that this report finds.8 After the extension of the GEA, developers simply opted for the 15-year tax abatement instead of a 25year abatement to get around the affordability requirement. That is the luxurious loophole they exploit. The city continues to engage in multi-million dollar giveaways to create housing for the wealthy, while low- and moderate-income families occupying older buildings continue to pay property taxes (either directly for homeowners or indirectly through rising rents for renters).

III.

Overwhelmed by Gentrification The area in and around downtown Brooklyn has experienced overwhelming

gentrification in recent years. Gentrification is the process by which low- and moderate-income urban neighborhoods begin to experience renewed commercial and real estate investment, an increasing population caused by an influx of affluent professionals, and a racial transition that is often marked by the displacement of longtime residents. During the past 25 years, downtown Brooklyn has gone from a majority minority to a majority white neighborhood. Median income has grown much faster than the rest of the borough and city, hundreds of new luxury apartment

Nilback, Preston, Molly Wasow Park, Worth the Cost? Evaluating the 421-a Tax Exemption, 1 (2003). 7 Champeny, Ana, What Type and Size of Buildings are Receiving 421-a Tax Exemptions in 2013, http://ibo.nyc.ny.us/cgi-park2/?p=436 (2013). 8 Timmer, Doug, Ann Sulliva, and Joseph Catron, Sweetheart Development; Gentrification and Resegregation in Downtown Brooklyn, 2 (2006). 9

buildings have been constructed, mainstream chain retailers have been replacing the mom-andpop retailers that historically characterized Fulton Mall, and affordable housing is disappearing. i. Making Neighborhoods Off Limits to Average New Yorkers

In recent years there has been much debate over how longtime residents are affected by the process of gentrification. In 2005, Lance Freeman and Frank Braconi studied the relationship between displacement and gentrification in New York neighborhoods and found no evidence of displacement in gentrifying neighborhoods, asserting that low- and moderate-income residents were actually more likely to stay in gentrifying neighborhoods because of improved services and employment opportunities.9 Likewise Mark Davidson found little evidence of direct displacement caused by gentrification in London.10 However, several other studies have demonstrated that these findings do not capture the entire picture. It is true that the type of gentrification experienced by downtown Brooklyn is often marked by the creation of new housing occupying previously unused space, which means that those moving into the new developments dont directly displace low- and moderate-income residents. However, new development for higher income households leads to neighborhoods that become increasingly unaffordable in the long run, which in turn results in gradual displacement of original neighborhood residents. The construction of new luxury housing puts upward pressure on rents and orients new retail toward the preferences and tastes of affluent newcomers, making such neighborhoods off limits to low-income people trying to move into or within the

Freeman, Lance, Frank Braconi, Gentrification and Displacement; New York City in the 1990s, 70, J. Am. Planning Assc. (2004). 10 Davidson, Mark, Spoiled Mixture; Where does State led Positive Gentrification End?, 45, J. Urban Studies (2008). 10

neighborhood.11 Luxury developments in downtown Brooklyn are raising rents in other nearby buildings, making the entire area too expensive for many residents.

Evidence of Displacement It is hard to determine the precise number of people who have been displaced by gentrification in downtown Brooklyn, but the changing demographics of the neighborhood show a racial and economic transition. In 1990, African Americans were the largest ethnic group in the study area, and the African-American and Hispanic populations combined comprised well over two thirds of the neighborhood. Between the 1990 and 2000 Census, the white population grew by 12% while the African-American population decreased by 17.2%.12 Between 2000 and 2011, the African-American population dropped by another 23%, the Hispanic population also dropped by 20%, and the white population increased by 23%.13 These demographic shifts are striking. It is worth comparing them to what has happened in the borough and across the city between 2000 and 2011. In Brooklyn and New York City as a whole, the African American population declined by just under 5%, which is less than one fourth the decline in downtown Brooklyn. The Hispanic population increased by 7% citywide and by almost 1% in Brooklyn, while it declined in downtown Brooklyn. The white population decreased by almost 3% citywide while increasing significantly in downtown Brooklyn.

11

Newman, Kathe, Elvin K. Wyly, Right to Stay Put, Revisited: Gentrification and Resistance to Displacement in New York City, 43, J. Urban Studies, 27 (2006); Davidson, supra; Freeman, Lance, There Goes the Neighborhood: Views of Gentrification from the Ground Up, (2006). 12 Community District Profiles, New York City Department of City Planning. December 2004. 13 U.S. Census 2010 11

Furthermore, the median income increased by 61% between 2000 and 2011, which is double the increase citywide.14 The number of people earning over $75,000 annually increased, while those earning less than that decreased; the largest rate of increase was among those making more than $150,000 annually.15 The African-American and Hispanic median incomes are well below $75,000 in the study area and the white median income is well above $75,000. During the past decade the median income of white residents has increased by 65%, which is roughly twice the increase of the median income borough and citywide. The African-American median income, on the other hand, increased by only 18%, which is only about half the increase in median income borough and citywide. Also, the number of people with professional degrees increased by 40%, which is double the increase citywide.16 A growing body of evidence shows that the socioeconomic character of downtown Brooklyn has changed dramatically. Taxpayer-subsidized luxury developments built with 421a abatements have fueled an aggressive gentrification process in the area. The areas stock of affordable housing is shrinking and new developments are making the area unaffordable for low- and moderate-income families.

Table 2. Demographic Data By Number

Statistics

White African American Asian Hispanic Professional Degrees

2000 Study Area 76,422 23,811 7,950 32,376 7,681

2000 Kings County 854,532 848,583 184,291 487,878 32,842

2000 NYC 2,801,267 1,962,154 780,229 2,160,554 156,649

2011 Study Area 94,354 18,437 11,175 26,404 10,731

2011 Kings County 886,855 807,108 256,869 492,496 35,680

2011 NYC 2,724,300 1,873,853 1,024,303 2,310,163 168,501

Change Study Area 17932 -5374 3225 -5972 3050

Change NYC -76,967 -88,301 244,074 149,609 11,852

Change Kings County 32,323 -41,475 72,578 4,618 2,838

Id. Id. 16 Id. 12

Median Income

$53,329

$32,135

$38,394

$85,985

$44,593

$51,312

$32,656

$12,918

$12,458

IV.

Area Developments

To document the taxpayer-subsidized gentrification that has been overwhelming downtown Brooklyn, this report looks at 60 developments in zip codes 11201, 11217, and 11215. These zip codes cover most of the area in and around downtown Brooklyn. This list includes every development listed on the New York City Department of Finances (DOF) website that was built between 2008-2012 and that is receiving a 421a tax abatement. Many buildings pulled permits prior to the 421a changes effective July 1, 2008 so they could benefit from the prior 421-a ruling. Appendix 1 lists the developments studied for this report. It includes the address, the date that new building permits were pulled, the date the certificate of occupancy was issued, the total dollar amount of subsides the development received, the number of units, the number of affordable units, and the cost of those units. It also includes information about the cost of the project and the identity of the developers. Information about permits and COOs and number of units was obtained from the New York City Department of Buildings Building Information System (BIS). Information about the number of affordable units and any mortgage-related subsidies were gleaned from ACRIS by looking at the deeds and mortgages associated with each property. The amount and duration of the tax abatement came from the DOF. Average prices per unit for market rate owner-occupied units were determined by averaging the deed prices for individual condos that can be found on ACRIS, rental prices were determined by searching rental listing records on streeteasy.com and 13

Zillow. Information about the owners and developers also came from deed and mortgage documents on ACRIS. The information obtained about the developments researched for this report shows that the city has been foregoing millions in tax revenue to create luxury housing for the rich, despite the growing need for affordable housing. Between property tax exemptions and special mortgage financing these developments received over $165,000,000 in subsidies.17 That is roughly $2.7 million per development, $37,000 per unit, and a whopping $642,000 per affordable unit created. Only a small percentage of the apartments were affordable for the majority of households currently living in the area or anywhere else in the city. Of the 4,395 units created, 257 were affordable to low or moderate-income earners.18 Fifty-six of the 61 developments had no affordable housing at all.19 The average purchase price of condo units was $777,00020 and the average rent for rental units was over $2,600.21 According to the Department of Housing Urban Development a households housing expense shouldnt exceed 30% of the households income.22 That means that in order to qualify to purchase the average condo in these developments, a household would need to earn over $150,000 a year; for one of the rentals, theyd need to earn over $100,000 annually, both of which are well over the areas median household income of $86,000 and more than double the
17

New York City Department of Finance, Property Tax Benefit Information, https://a836propertyportal.nyc.gov/ (last accessed Dec. 22, 2013); Automated City Register Information, Search Property Records, http://a836-acris.nyc.gov/DS/DocumentSearch/Index (last accessed Dec. 22, 2013). 18 ACRIS, supra at Party Name -> Document Type -> Mortgage. 19 Id. 20 Id. 21 www.streeteasy.com; www.zillow.com. 22 Bravve, Elina, Megan Bolton, Sheila Crowley. Out of Reach 2013. National Low Incom e Housing Coalition. March 2013. 14

$45,000 median income of African-American and Hispanic households. Even the vast majority of affordable units that were created are, in fact, unaffordable for low-income New Yorkers. Only 31 units, or 12% of the affordable units and .7% of the total units created, are affordable for families making less than 50% of the AMI ($40,900 for a family of four).

Table 3. % of AMI for Affordable Units Number of Units Percentage Percentage of Total of AMI Units if Affordable For 8.00% 40.00% 4.00% 45.00% 47.00% 50.00% 4.00% 65.00% 15.00% 80.00% 15.00% 90.00% 7.00% 130.00% 100% 71%

21 10 120 9 39 39 19 257

These findings unfortunately mirror the findings of a similar study done in 2006 that looked at 87 buildings in roughly the same area. The 2006 study found that barely 7% of the 6,000 units researched were affordable.23 Both studies found essentially the same amount of affordable housing in the developments researched as was found in a study by the Independent Budget Office that looked at all of the buildings receiving 421a tax abatements between 1989 and 2003 (7% affordability).24 This is especially alarming in light of the fact that the GEA was vastly extended in 2008 in order to compel real estate developers to create more affordable housing in exchange for the

23 24

Timmer, supra. Nilbakc, supra. 15

huge subsidies they were receiving. Buildings within the new GEA that received 25-year tax abatements were required to provide 20% onsite affordable housing.25 The fact that 45 of the 61 buildings researched for this report opted for the 15-year tax break indicates that developers have adjusted to the new policy by taking a smaller tax break to avoid the affordability requirement.

V.

Recommendations for Mayor de Blasio and His Administration The city must end its practice of subsidizing the development of expensive luxury

housing without requiring developers to include real affordable housing. The recommendations outlined below are offered as part of a larger effort to make low and moderate income New Yorkers the focus ofhousing policy and programs in the de Blasio administration. The goal is to curb and mitigate the worst effects of gentrification and preserve downtown Brooklyn and other neighborhoods as vibrant, diverse, mixed-income communities. The Real Affordability for All campaign is asking Mayor de Blasio and his administration to include these recommendations in their affordable housing plan set to be released May 1.

Replacing 80/20 and Luxury Condo Development with 50/50 to Ensure Real Affordability in Subsidized Buildings Any building being built within the geographic exclusion area (GEA) that is receiving tax abatements should have to provide 50 percent affordable housing. The current policy requires developers taking advantage of the 25-year abatement to provide 20% affordable housing, and the remaining 80 percent is market-rate, but those receiving 15-year abatements have no requirement for affordable housing. The luxurious loophole exploited on behalf of the wealthiest

25

HPD, supra. 16

New Yorkers should be closed by requiring 15-year abatement developments to provide 50 percent affordable housing. To increase real affordability in our citys housing stock, all future taxpayer subsidized buildings should set aside at least 50 percent of the units for real affordable housing. Real affordability is defined as housing that is affordable for low-income households of four earning 30% to 60% of Area Median Income and moderate-income households of four earning up to 100% of Area Median Income. The de Blasio administration should work with state legislators to amend the 421a tax abatement law so that it requires all developers receiving a tax abatement under the program to set aside 50% of the units as real affordable units to low- and moderate-income households. The 50/50 model can be implemented through common sense financing and policy reforms. Key elements of the 50/50 model could include: upzoning for maximum density in neighborhoods with the most vacant land; increasing floor-to-area (FAR) bonuses in all new developments; removing height and bulk restrictions in new developments; transferring air rights; providing permanent low-cost financing for new developments; and increasing current per unit subsidies marginally and applying those subsidies to all affordable housing units.

VI.

Conclusion

Developers have used millions of taxpayer dollars, from New York City residents including low and moderate income families, to create housing for the most affluent New Yorkers. For too many years, city developers receiving massive taxpayer subsidies have produced little affordable housing. Luxury housing built using these subsidies has contributed to the displacement of longtime residents in gentrifying neighborhoods like downtown Brooklyn. But Mayor de Blasio

17

and his administration can begin to reverse this trend by including the recommendations described above in their affordable housing plan set to be released on May 1.

Appendix 1. Study Buildings Information Number of Affordable Units 0 0 0 0 0 0 0 0 8 0 0 49 0 0

Address 218 Myrtle Ave 306 Gold Street 343 Gold Street 109 Gold Street 309 Atlantic Ave 42-44 Duffield Street 107 Lawrence Street 235 Gold Street 277 Gold Street 236 Livingston 100 Gold Street 181 York Street 185 York Street 414 Hick Street 100 Congress St 73 Pineapple St 117 Court Street 205 Water Street 233 Pacific Street 384 Bridge Street 94 Prospect Place 340 Dean Street 392 Atlantic Ave 212 South Oxford Street 152 4th Avenue 695 Sackett Street 137 5th Ave 53 Lincoln Place 17 Bergen Street 200 Atlantic Ave

Benefit Amount $3,920,508 $13,900,00 $22,015,626 2,297,523 $1,686,977 $950,947 $16,304,403 $21,600,610 $8,840,810 $23,069,975 $720,000 $353,160 $640,101 $4,115,142 $1,579,839 $633,960 $562,655 $1,949,728 $11,747,219 $198, 614 $116,324 $41,130 $5,369,238 $1,625,540 $405,567 $42,336 $285,143 $1,043,080 $1,863,869

Other Subsidies

$20,020,000

86,000,000

$2,075,000

Number of Units 95 303 631 33 28 16 491 372 268 314 10 10 17 149 30 9 7 65 42 378 4 8 7 80 95 6 4 4 4 32

0 75 0 0 0 59 0 0 0 0

18

29 Flatbush 252 18th Street 433 3rd Ave 574 4 AVENUE 232 7 STREET, 1F 571 CARROLL STREET 580 CARROLL STREET, 628 10th Street 390 14 Street 20 Jackson Place 169 16 STREET 182 16th Street 572-576 5th Ave 593 6th Ave 406 15th Street 686 6th Ave 272 19th Street 251 7th Street 175 12th Street 309 2 Street 638 President St 515 5 Avenue 155 15 Street 226 15 Street 353 13 Street 360 12 Street 226, 228, 230 16 Street 224 16 Street 300 20 Street 282 21 Street 28 Garfield Place

$382,887 $981,879 $1,261,836 $3,094,974 $76,773 $467,251 $934,902 $640,023 $374,613 $4,513 $1,470,573 $1,582,112 $958,860 $1,949,268 $1,617,955 $353,511 $316,620 $1,981,776 $269,162 $540,519 $234,466 $324,824 $1,318,183 $399,339 $165,391 $438,036 $911,291 $181,190 $283,234 $459,662 $778,158 $2,598,937.56

$90,000,000

329 18 27 81 7 18 17 10 6 5 31 31 36 27 29 4 6 57 7 21 4 15 21 22 4 4 18 6 4 10 8 4395

66 0 0 0 0

0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 257

Total

$158,535,191

$3,247,459

Percentage of Units Affordable 6%

19