In an attempt to encourage development of low and medium income housing, local governments will often turn to tax abatements. Since 1971, New York City has had a tax abatement called 421-A that exemplifies both the good and the bad for of this strategy.
In general, the tax abatement freezes the taxes on a piece of property for 30 years, if the new development has a certain number of affordable units. Theoretically, the city doesn’t lose any tax revenue in this system and the city gets some affordable housing for 50 years. After the 30 years is up, the taxes revert back to their current prevailing rate. The 421-A tax is widely used and it does provide affordable housing, but there are some issues with it.
Firstly, the market has adjusted to include this abatement. Since the value of land is a function of what you can build on it or even more specifically, the value of land is a function of the revenue stream of what you can build on it will produce, the 421-A abatement program has increased the value of land considerably. In some of the transactions I am seeing in New York, the value generated by the 421-A abatement is 30% of the total project value. The real winners in this situation are the land holders that have sold. If you are a developer of housing, the 421-A probably comes out as a wash once the market reacted to the abatement, and the real losers are developers that don’t want to build affordable rental housing.
The other question is if New York really needs this any more. There is plenty of demand to build in New York. In fact, the real limiter in New York is the cost of land vs. the maximum achievable rents. When a developer is trying to buy land, the person who can pay the most will get to buy the land and that usually means luxury housing. The 421-A doesn’t address this issue and I would surmise that it has not made a long term impact on the affordability of housing in New York.