John Catsimatidis, the Greece-born billionaire who founded the New York City grocery store chain Gristedes Supermarkets and whose Red Apple Group raked in $3 billion in revenue last year, is not a man who backs down.
He started his first grocery store chain named Red Apple—now called Gristedes—from scratch in the early 1970s, and built it into an empire. His Red Apple Group was ranked one of the top 200 largest privately held companies by Forbes last year, and his company’s real estate arm just finished constructing a huge multi-building residential development project in Brooklyn. But instead of celebrating the completion of his Myrtle Avenue Development project, Catsimatidis uttered a phrase unheard of in New York City’s cutthroat real estate development world: he was not thinking about constructing any more projects in New York City.
What is scaring him off is not his bloodthirsty competitors, or fear of failure in the City’s unforgiving real estate market. It’s a tax break.
Castimaditis said his group “hasn’t even considered building anything” in New York without 421a.
The 421a tax break is not even a tax rule, but an amendment buried deep inside New York’s tax code. Little-known outside of real estate circles, 421a has caused the explosion of skyscrapers in New York City. But it also has supported affordable housing. It allows developers to write off expenses when they build large residential buildings as long as they make at least 20 percent of the units affordable, according to the New York City Housing Preservation and Development website.
City Point Tower One, a recently constructed skyscraper in Downtown Brooklyn, for example, used the tax break and reserved 200 units for affordable housing, according to the building’s website. Someone who qualifies for affordable housing can rent a studio that typically goes for $1,621 a month for $500-$651.
The 421a tax break is at the heart of Mayor Bill DeBlasio’s pledge to bring 200,000 units of affordable housing to New York by 2024.
But the tax break was killed this past January.
Now New York’s two biggest heavyweights, Governor Andrew Cuomo and DeBlasio, are scrambling to resurrect 421a without caving in too much to the other’s demands, according to news sources. The 421a tax break incited a heated battle between Cuomo and DeBlasio last year where both refused to back down, even as the clock ticked this past January closer and closer to New York’s budget deadline. Cuomo wanted developers to pay union construction workers higher wages to qualify for the tax break. DeBlasio disagreed. Neither side would bend even with the budget deadline rapidly approaching, even in the final minutes. Without any compromise the state government could not renew 421a for this year, leaving the Governor, the Mayor, and real estate developers at a loss for what to do.
Some developers, like Catsimatidis, whose fortune was made in New York, are looking out of state because, he says, they cannot afford to construct these large residential complexes without the relief 421a provides. “If NYC is not a friendly place to do business in, we’ll do more in Florida,” Catsimatidis said.
Last week Cuomo’s administration showed the first sign of trying to strike a deal.
Now the ball is in the Mayor’s and Real Estate Board of New York’s court, and the future of tens of thousands homes for lower income New Yorkers is at stake.
Taxes are not sexy. The national tax court in Washington D.C. is so bleak that all the pictures on its walls are in black and white. But hidden in the wonky tax policy fights on the Hill and in state government buildings, and buried under mounds of paperwork, is the undeniable fact that tax breaks make a big difference in the way communities develop.
For instance, 421a is responsible for massive residential structures such as the 55-75 West End Avenue towers in Manhattan and The Brittany at 1775 York Avenue on the Upper East Side. If you have ever walked down the city’s streets and were awestruck by the massive skyscrapers, it’s because of 421a. If you have had to shield your eyes from the sun just to see the upper half of a building it’s because of 421a. If you have heard of tourists cluttering up the streets complaining about how the city is too big, too loud, and my god, how could anyone live in such a place? You guessed it: 421a.
The tax break was created in 1971 by former New York City Mayor John Lindsay, according a New York City Housing Preservation and Development spokeswoman. Construction of new residential buildings in the city had stagnated as residents migrated to the suburbs.
Lindsay wanted to stop the flight. He wanted more residential buildings to be built whose units were so enticing that the city’s surrounding suburbs would pale in comparison, according to news sources. Thus, 421a was born. At first, it was a developers’ free-for-all, giving a tax break to developers merely to build on vacant properties. There were no zoning restrictions and no requirement that the new buildings had to have affordable housing units, according to the New York City Housing Preservation and Development spokeswoman.
This changed in the 1980s, when zoning rules were imposed to help build up Manhattan saying developers could only qualify for the tax break if they built between 98th street and Houston. In the 1990s when residents started being priced out of the island the 20 percent affordable housing unit requirement was imposed. Then, in the wake of the 2008 financial crisis, the zoned areas were expanded to parts of Queens and Brooklyn— including Downtown Brooklyn where Catsimatidis was building his Myrtle Avenue complex.
Today, more than 50 percent of the affordable housing projects in New York City use the 421a tax break, according to a report The Real Estate Board of New York released in April. Approximately 78 percent of the affordable housing projects in Manhattan and 55 percent of the ones in Brooklyn use the tax credit.
It’s one of the reasons current New York City Mayor Bill DeBlasio’s affordable housing plan to create 200,000 units of affordable housing is on track with 52,936 homes created as of July 26.
Despite its popularity with developers, not everyone wants even a modified 421a tax exemption renewed. Residents of neighborhoods like Downtown Brooklyn and areas of Brooklyn Heights point to the tax break and the new constructed residential skyscrapers that relied on it as the reason their area has gentrified to the point they do not recognize it anymore, why it’s become so expensive many residents feel as though they are being pushed out.
Catsimatidis’ newly constructed building that used the 421a tax break is called “The Refinery.” It sits on the border of Downtown Brooklyn and Clinton Hill at 490 Myrtle Avenue, one of three buildings that comprise the Myrtle Avenue Developments. The exterior is all dark burgundy brick and pale beige stone. Apartments boast of the white oak flooring throughout the units, Caesarstone countertops, and stainless steel appliances by Bosch and Fisher & Paykel, according the building’s website. Each unit has its own washer and dryer (Bosch). The roof deck has a reflecting pool, fireplaces, and televisions. There’s even a gym.
The Refinery is modest compared to other new residential complexes erected around Downtown Brooklyn in the past couple of years. City Point Tower One—the one building of the City Point Tower complex that used the 421a tax break and offers 200 units of affordable housing—is a massive skyscraper sitting on top of a newly constructed Target, Century 21, and a cinema. It gives its residents direct access to the Dekalb Avenue subway station, and is within walking distance of the Barclays center.
But rather than celebrate these new buildings or champion the affordable housing units, many Brooklyn residents consider them blights. They think 421a is simply a tool developers are using to build massive residential complexes on the cheap.
The City Point project “was approved at the height of the real estate recession, making me question whether the developers were in anyway reaching into their own pocket to provide that [affordable] housing or if the city was paying for it twice to give these developers enormous breaks,” said Peter Bray, executive director of the Brooklyn Heights Association.
Other residents argued that these big residential complexes have changed the identity of the neighborhood. Ben Hansen, for example, is an architect who himself is designing a group of townhouses in Brooklyn Heights called the State + Bond buildings. Hansen and his family live in Brooklyn Heights on a brownstone street, but said the massive residential buildings have changed the feel of the neighborhood.
“We live kind of at this delineation between low constructional architecture and then out-of-control architecture on a massive scale,” he said. “There’s no transition, there’s four-story buildings going to [huge skyscrapers].”
The impact can really be felt at 333 Schermerhorn Street, where a planned 53-story project is nearing completion. Nearby, “There’s a park that’s a nice park with beautiful sycamore trees across the street; the building has affected the whole park scene which is kind of disappointing,” said Hansen. “You get these weird reflections off the windows and buildings.”
The transformation of Downtown Brooklyn and the surrounding regions began when the area was rezoned in 2004, according to the report published by the Downtown Brooklyn Partnership earlier this year. The rezoning was supposed to prompt the creation of more office space in the area, turning the region into a new commercial hub. However, only 1 million square feet of office space was created, compared to the intended 4.5 million square feet.
Instead, residential developments boomed, largely financed by the 421a tax break. And its development has its downsides.
The lower income community in Downtown Brooklyn prior to 2004 “has been almost entirely displaced by a larger population of new emigrants, most of whom reside in newly-built or newly-renovated apartments that rent or sell at much higher prices,” Robert Parris, district manager for Brooklyn Community Board 2, wrote in an email.
The median income for Downtown Brooklyn was $99,629 in 2013, according to City-data.com. It was $107,969 for Brooklyn Heights. This is around double the median income of residents living in nearby Brooklyn neighborhoods the same year. Bushwick residents’ median income was $42,369, and it was $48,720 for Bedford-Stuyvesant.
Other than forcing out lower-income residents who previously lived in the Downtown Brooklyn area, the biggest impact of the residential complex boom can be seen in the schools.
All the units brought in so many new families the local elementary school, PS 8, experienced overcrowding—to the point where there was an approximately 50-student-long wait list to get into kindergarten classes last year, according to a report published by the PS 8 PTA in February 2015. The problem became severe enough the school district was rezoned moving families that lived in Dumbo to a different elementary school.
The new buildings complete with parking spaces for their residents has also congested the streets.
“There has been a tremendous increase in the car ownership in the Downtown area, there’s nowhere to put cars on the street,” the Brooklyn Heights Association’s Peter Bray said. “This has consequences for everyone who has to pass through.”
Anger over the 421a tax break came to a head two years ago when the 75-foot-tall One57 skyscraper towering over Central Park opened. The building was expensive, with apartments on the market currently going for up to $58.5 million, according to Streeteasy.com. The penthouse was one of the most expensive sales in New York City history, selling for $100 million, according to a report from New York City’s Independent Budget Office published last year.
One57 qualified for 421a, and got a $65.6 million tax break from New York City. But, controversially, its developer, Extell Development Company, did not include the affordable units the tax break mandated within the same building. Instead they placed them in the Bronx.
Other negative news related to the 421a tax break has come out in the last year. The City Point Tower One, which created the 200 units of affordable housing inside, constructed a separate entrance for those residents to enter the building, dubbed the “poor door” by the NY Post.
Then there was the issue of hiring construction union workers, the issue argued about in the heated Albany debate. Gov. Cuomo wanted to create a mandatory prevailing wage developers had to pay construction workers who worked on projects that got a 421a tax break to encourage them to hire more union construction workers instead of cheaper private contractors. Mayor DeBlasio and real estate developers do not support it, with developers claiming it would increase the cost of a project by 30%.
“What 421a did was give you a chance at success,” Catsimatidis said.
The tax break was set to expire last summer, but was extended until January, but even so the two sides are still bickering. Gov. Cuomo’s one-page memo sent out last Tuesday is the first sign either side may be willing to compromise.
Cuomo wrote in the memo that he’s no longer trying to get developers to pay construction workers a prevailing wage. Instead, he’s creating a two-tiered minimum wage based on location. Projects using 421a in Manhattan south of 96th Street would have to pay a minimum wage of $65 per hour and benefits. Projects on the waterfront in Brooklyn and Queens would pay $50 an hour and benefits, but $30 of that would be reimbursed by New York State.
And the developers would have to allocate between 25 and 30 percent of the units to affordable housing. Union leaders have publicly said they back the proposal, but the New York Real Estate Board has not uttered a peep in support or against it.