New York City is the poster city for rising rents. Given current trends, don’t expect that to change any time soon. New York’s municipal leaders, however, have not been idle in addressing this. The City and State are actively pursuing measures such as implementing city-wide rent freezes to slow rising rents. Yet, with so much money at stake in the rental and leasing sector, there are those who seek to create and exploit loopholes. New Yorkers are now fighting back against a bill that, due to such a loophole, not only failed to preserve and improve affordable housing but gave landlords and developers millions of dollars in tax breaks.
In 1995, the New York State legislature sought to revitalize Lower Manhattan, which was riddled with aging buildings and had few development projects on the horizon. A proposed bill gave developers tax incentives if they converted old office buildings into apartments. In exchange for these tax incentives, landlords would limit rent increases, therefore assuring reasonably affordable housing stock for the foreseeable future. It seemed like a win-win situation for developers and tenants alike.
Hours before the bill was set to pass, Republican lawmakers pulled it from the voting schedule, citing the need to consult Rudy Giuliani, New York City’s mayor. Giuliani wrote a letter to Republicans stating that an exemption should be granted to units that initially rent for greater than $2,000 per month. Republicans reinterpreted the rent-stabilization component of the bill by introducing a reading of Giuliani’s letter into the public record just before the final vote. The bill, 421-g, passed 53-1.
Between 1995 and 2006, before the law expired, 421-g helped create close to 10,000 new rental units in Lower Manhattan. However, nearly three-quarters of those units were not rent stabilized because they initially rented for more than $2,000 per month. So while 421-g accomplished its goal of sparking revitalization in Lower Manhattan, it did not protect tenants as intended. And even though the law expired in 2006, some buildings continue to benefit from tax breaks that totalled nearly $75 million in 2015.
Some legal experts believe that developers have misused the law at a large cost to the city and tenants. Lawyers claim that the intent of the state legislature was to encourage the creation of rent-stabilized housing units by offering tax incentives. Therefore, having 75% of units created under this program exempt from rent stabilization not only defies the spirit of the law but is costing the city tens of millions of dollars each year in lost tax revenue.
There is substantial debate regarding whether or not the law has been applied properly, and it is centered around one major issue–namely, the exemption. The bill was not officially amended before it was passed to stipulate exemptions to units that initially rent for greater than $2,000 per month. That policy was instated by the attachment of the letter from Rudy Giuliani recommending the exemption.
Multiple lawsuits have been filed against landlords by tenants alleging massive rent overcharging. Decisions from the bench have been varied. In one instance, a judge ordered Skyline Developers to re-instate rent stabilization status on a number of its rental units, citing the Giuliani interpretation of the law as invalid. Another judge came to the opposite ruling on a similar case with developer UDR.
A number of other lawsuits are working their way through the courts, and legal scholars are hopeful that clarity will finally be reached regarding proper interpretation of the law.
That said, there are better ways to promote the creation and preservation of affordable housing units. Common Ground NYC activist Scott Baker argues the following:
If the city wants to have affordable housing AND new building AND condos people can afford to buy AND a reliable and large revenue stream to replace many if not most taxes, there is only one proven way to do this: The Land Value Tax.
It works like this: over a period of time, phase out taxes on buildings and replace them with taxes on location. This discourages hoarding and inefficient use of location because there is an increasing tax on that, while it encourages building because there is no tax on that (eventually).
Every location is to be taxed at its full rental value. This means more apartments, which means lower rents and costs due to competition.
The idea for taxing land values originated with classical political economists like Adam Smith and were popularized globally in the 19th century by two-time New York City Mayoral candidate Henry George. Today, economists refer to Land Value Taxation (LVT) as the most efficient of taxes, meaning that it is difficult (if not impossible) to evade taxation or paying what is owed to society. That’s because land, unlike money, cannot be moved, hidden or tax-sheltered, a quality that would have made LVT succeed where 421-g failed.
In retrospect, 421-g was designed to legislate additional affordable housing into existence–contrary to the demands of the market and their underlying forces, and regardless of any shortages this may cause. Rent controls also have the pernicious effect of privileging older residents at the expense of younger residents.
By contrast, the function of land value taxation is to make the ownership of raw and underdeveloped land prohibitively expensive. This encourages landowners to make use of the space in order to accrue the rental income necessary to pay the land value tax.
Consistent with Baker’s statements, this would effectively turn the housing market into renters’ market due to the increased supply of housing and working space, leading to increased competition to attract renters. Thus,we could expect lower housing costs while realizing the improvement of the conditions of affordable housing. Ultimately, LVT achieves organically what 421-g was designed to accomplish artificially.