The Towers That Tax Breaks Built
by Brendan O’Connor
Earlier this week, the Independent Budget Office of New York City published a report examining tax breaks that Extell Development Company received for its mixed-use luxury condominium skyscraper at 157 West 57th Street, two blocks south of Central Park, between 6th and 7th Avenues, referred to in marketing materials as One57, and colloquially as “Fucking One57.” Between July 2014 and June 2015, thirty six units at One57 have been sold for a cumulative total of 1.09 billion dollars, the Real Deal recently reported; the budget office projects that the whole building will sell out for a total of 2.2 billion dollars. “The extraordinary sales prices of the building’s condo apartments, has led some observers to question whether the project needed a subsidy that IBO estimates will cost the city 65.6 dollars million in forgone property tax revenue over ten years,” the office’s report suggests, ever so gently. The city is forgoing that revenue because One57 — which, incidentally, is being marketed as a ninety-story building, but, according to Department of Building records, is only seventy-three stories — was granted tax abatements under a program known as 421-a.
The 421-a program was established in 1971 to stimulate the development of residential, multi-family buildings during a period when builders might otherwise have avoided New York City. In 1975, the city nearly declared itself bankrupt. The program has since been revised and amended several times over concerns that, as the overall economy grew and the real estate market improved, it was unduly incentivizing luxury development to the detriment of affordable housing. (The more things change…) Beginning in the mid-eighties, market-rate developers could avail themselves of tax breaks linked to affordable housing under 421-a in two ways: They could buy certificates from affordable housing developers, who would then put that revenue towards building affordable housing somewhere else in the city, or they could include on-site affordable units at a ratio of eighty percent market-rate housing to twenty percent affordable housing.
According to the IBO, after a series of extensive changes to the program were implemented in 2006, the city stopped issuing the certificates in 2008: “Despite these changes, state legislation in January 2013 allowed five specific projects to be grandfathered under pre-2008 rules, thereby allowing their developers to receive 421-a benefits in exchange for subsidizing affordable housing elsewhere in the city rather than on-site.” One of those was One57. (The others — all luxury buildings — were 99 Church Street, 520 Fifth Avenue, 113 Nassau Street, and 78–86 Trinity Place.)
“In the case of One57, the building’s developer purchased 421-a exemption certificates for 5.9 million dollars from a developer of affordable housing who used the proceeds to finance construction of 66 affordable apartments in the Bronx,” the IBO reports. In a nutshell, developers like Extell could buy tax abatements — which are really a government subsidy in disguise — on buildings like One57 by directly subsidizing affordable housing developers. One, however, is clearly more valuable than the other. “Had One57 not received 421-a benefits, its full tax liability could have spurred the construction of 367 affordable apartments in the Bronx instead of the 66 it received through the certificate program.”
Those five grandfathered projects and the abatements they received were once reportedly being investigated by the now-defunct Moreland Commission, which Governor Cuomo created in July 2013 to investigate corrupt elected officials. A month later, the New York Daily News broke the story that two companies that shared addresses with Extell Financial Services — a part of Extell Development — had each donated fifty thousand dollars to Cuomo’s campaign the day that the bill approving tax breaks for the five developments, including Extell’s super-luxury One57, passed in the Assembly. Three weeks after the bill became law, Gary Barnett, president of Extell, gave another hundred thousand dollars to a state Democratic Party account that Cuomo used to pay for advertising pushing his agenda. Cuomo disbanded the Moreland Commission, less than halfway through what was to have been its eighteen-month life, in April 2014. In January of this year, the New York Post reported that Preet Bharara, the U.S. Attorney for the Southern District of New York, who took over many of the Moreland Commission’s investigations a few weeks after it was disbanded and later subpoenaed its members, had opened an investigation into the tax breaks granted to One57.
The 421-a program was set to expire this year, and it did so, temporarily, on June 15th. (As did rent regulations.) Ahead of that, amid fears that Mayor Bill de Blasio might allow the program to lapse altogether — meaning they would lose untold millions in tax breaks — developers began filing for building permits at record levels. More than five-and-a-half thousand permits for apartments and houses were filed in April, the most for any month at least the last four years, the Wall Street Journal reported, rising further, in May, to more than twelve-and-a-half thousand; more permits were filed in the first five months of 2015 than in any full year since 2008. A spokesman for the Real Estate Board of New York, the largest real estate developer trade group, said the flurry of activity provoked by the threat of 421-a’s expiration “proves the importance of the program.” Sure it does!
The state legislature ultimately revised the 421-a program so that is more closely aligned with the mayor’s vision for it. Had the legislature extended the prior version, it would have produced twelve thousand new units of affordable housing over the next decade; the revised program will produce twenty-four thousand units. (There are still contingencies to be worked out, like over whether to include a provision requiring developers to pay a union wage to contractors. The real estate board and the contractors’ unions have six months to cut a deal, or 421-a will expire. Capital New York reports that the De Blasio administration has opposed a prevailing-wage requirement.)
Who knows, though — maybe 421-a gets a bad rap? The IBO found that the tax abatement program was not the primary source of the 25.4 million dollars in tax breaks condo owners at One57 received last year, its first on the tax roll. “In 2014, nearly two-thirds of the tax savings for owners of One57 condos resulted from the requirement that the condo apartments be assessed as if they were rental properties rather than as condos,” the report reads. “Much of the criticism leveled at One57 and its 421-a benefit — that the building’s wealthy condo owners enjoy lower taxes than property owners who are less well off — has in fact less to do with 421-a than with how the city is required to value condos and coops for tax purposes.” The so-called 581 discounts saved condo owners at One57 sixteen million dollars in tax breaks, the IBO found, while the 421-a tax abatement — which is passed on to owners — amounted to a mere 9.4 million dollars.
One57’s developer, Extell is very prolific. Actually, according to its website, it is “recognized as one of New York City’s most active real estate developers.” In addition to One57, Extell is responsible for the Intercontinental Hotel and Residences, One Riverside Park, and The International Gem Tower. (Amongst others.) Two weeks ago, the first crane arrived at the future site of the Central Park Tower (née Nordstorm Tower), which will have the highest roof in North America, at just over fifteen hundred feet. (It will also be the tallest residential building in the Western Hemisphere.)
Last week, Extell released renderings of a skyscraper — called, for some inscrutable reason, One Manhattan Square — that it received permits to build next to the Manhattan Bridge, on the Lower East Side. The hypothetical height of that building constantly seems to be fluctuating: Extell’s original permit was approved for fifty-six stories; last week, an amendment was filed (though not yet approved) to raise the height to sixty-eight stories; and DNAinfo reports that a sign at the construction site says the building will be seventy-one stories tall. Whatever the case may be, it’s sure to fit right in. The market-rate high-rise at 250 Cherry Street will be accompanied by a thirteen-story, two-hundred-and-five-unit building of affordable housing on the same parcel of land — with different address, though: 229 Cherry Street. Don’t call it a poor door!
In February of last year, at a town hall meeting held at the New York Public Library, Extell president Gary Barnett fielded complaints that One57 was casting a shadow over Central Park. There, he also expressed disappointment in populist rhetoric accusing the building’s residents of being tax-evading billionaires who are only interested in New York as a repository for capital. “I was a bit disappointed to hear all this talk about how these buildings are going to be occupied by rich foreigners, monarchs, and oligarchs,” Barnett said. “America has always been a very welcoming country. We welcome the poor and the downtrodden, but we also welcome the wealthy.” A month later, Governor Cuomo disbanded the Moreland Commission.
Rendering of One57 by Extell