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Reforms to New York’s 485-a real estate subsidy went into effect on January 1, 2021. Lawmakers gutted them six months later.

Issues:

Benderson Development’s One Canalside, which has received a 485-a subsidy worth $6 million, and the future site of Sinatra & Company’s Heritage Point, which will now qualify for a subsidy since reforms were undone (photo by Fortunate4now via Wikimedia)

Update: This article has been updated to note that the rollback to the reforms was a chapter amendment negotiated between the state legislature and former Governor Cuomo as a condition for Cuomo to sign the 2020 reform bill.

In July 2020, the New York State legislature passed a set of reforms to section 485-a of the New York property tax law after years of “egregious” abuse. The reforms came after LittleSis and journalists across the state documented how wealthy developers exploited the vaguely-worded provision at a cost of millions of dollars to homeowners and renters. The reforms to 485-a passed with the votes of more than two-thirds of the state senate and unanimously in the state assembly. Then-Governor Andrew Cuomo signed the bill into law in December 2020 and the reforms went into effect starting January 1, 2021.

But before any of the new requirements for the valuable subsidy could be applied, the legislature quietly gutted the law, passing a new amendment that erased the most significant reforms that was initiated by the very same legislators that sponsored the reforms in the first place.

The reforms to 485-a had been in effect for just over a month when the state senate passed a bill rolling them back on February 8, 2021. The assembly, after unanimously passing the reform bill in June 2020, voted nearly unanimously to gut it on May 4, and then-Governor Cuomo signed the rollback into law on June 11, less than a year after the reforms had passed in the legislature and less than six months after he signed them into law.

The rollback to the reforms was a “chapter amendment” to the reform law, negotiated between the houses of the legislature and then-Governor Cuomo as a condition for Cuomo’s signing the 2020 reform bill. Cuomo, like his successor Kathy Hochul, counted the real estate industry as a key financial and political supporter. It is possible that pressure from the real estate industry and allied corporate lobbying groups like the Buffalo Niagara Partnership, which staunchly opposed the reforms, influenced the legislature to agree to water them down at the last minute even though the reform bill passed with enough votes that, if Cuomo vetoed it, his veto could have been overridden.

In any event, by quietly rolling back the 2020 reforms, New York lawmakers have chosen to prioritize the profits of wealthy real estate developers over the original intent of the law and, more importantly, over homeowners and renters who are facing rapidly rising housing costs.

Background on 485-a and the 2020 reforms

The 485-a exemption was created in 2002 to incentivize the redevelopment of distressed vacant commercial and industrial buildings in upstate cities. Upstate and Western NY cities have long suffered from divestment; lawmakers claimed that 485-a would bring jobs, walkable neighborhoods, and high quality housing to struggling municipalities. The provision allows developers who convert vacant properties into mixed use (residential and commercial) buildings an as-of-right property tax exemption for 12 years.

However, due to the vague wording of the law creating the exemption, developers were able to obtain tax breaks worth millions of dollars for developments with little to no relation to the law’s initial intent.

Developers have come up with a wide variety of ways to subvert the intent of 485-a in order to avoid property taxes. Perhaps most famously, Benderson Development obtained a 485-a exemption worth more than $6 million by adding a single apartment to large otherwise commercial property that had already received millions of dollars in other subsidies. Exemptions have also been granted to developers of residential properties claiming that vending machines are a commercial use entitling them to get out of years of property tax payments. Other developers have been granted exemptions for new developments built on vacant lots and new buildings on properties where other buildings once stood but were demolished for the purposes of building a new structure eligible for a 485-a exemption.

In PAI’s most recent report on abuse of the 485-a subsidy in 2019, we found that exemptions that had been awarded in Buffalo would cost more than $66 million. As more exemptions were awarded through 2020 and 2021, the total cost of the subsidy has likely significantly increased.

Reporters in Syracuse and Albany have extensively documented abuses of the exemption in those cities as well.

Amid calls to reform or repeal 485-a from housing activists across the state as well as from news editorial boards, including the normally pro-real estate partisan Buffalo News, a bill to curb the worst abuses of the exemption passed the state assembly unanimously in 2019 but was never brought to a vote in the state senate. In 2020, after the 485-a reform bill unanimously passed the assembly again before passing in the senate by a vote of 44-16. The bill was sent to then-Governer Andrew Cuomo and signed into law in December 2020.

The reform bill closed several loopholes in the 485-a law allowing its rampant abuse. The law passed in 2020 explicitly prohibited developments on previously vacant land from being awarded 485-a exemptions. The reform required that at least 50% of the building’s square footage be used for commercial activity and that at least 15% of the building’s square footage be used for residential purposes, closing the “Benderson loophole” which allowed developers to get a valuable tax break by adding one apartment to a commercial building.

The reform also more specifically defined what kinds of activity qualify as commerce and, critically, introduced a requirement that developers submit certifications every year that their 485-a developments actually meet the subsidy’s criteria. If a property owner failed to submit a certification or if a tax assessor determined that a property with a 485-a exemption did not meet the criteria, the 2020 reforms required the property owner to pay back previously awarded benefits.

Sean Ryan, then an assembly member and now a state senator, who sponsored the reform bill in the assembly, announced the bill’s passage on July 24, 2020 at a press conference at which this writer also spoke. Ryan’s press conference was held at 301 Ohio Street where developer (and current congressional candidate) Carl Paladino had been awarded a 485-a subsidy worth more than $1 million for a new mixed-use building on a previously vacant lot.

“The program was designed to transform vacant properties. But here on Ohio Street, it’s a brand new building that received a tax break,” Ryan said.

Less than a year later, new buildings on vacant lots were eligible to receive exemptions again. Sean Ryan, serving his first term in the state senate, voted with the rest of the majority in February 2021 to eviscerate the reforms he had championed in the assembly just months before.

Reforms were gutted immediately after they went into effect

The reforms to the 485-a subsidy that passed the legislature in 2020 went into effect on January 1, 2021. A week later, on January 8, one of the three assembly sponsors of the 2020 reforms, Bill Magnarelli, introduced a bill to undo many of the reforms that had just been enacted. On January 11, Neil Breslin, one of two senate sponsors of the 2020 reforms, introduced a similar bill in the senate. The 2021 bills undoing the 485-a reforms passed the senate on February 8 and the assembly on May 4. They were delivered to then-Governor Andrew Cuomo and signed on June 11, 2021, less than six months after he signed the bill enacting the reforms.

The 485-a reforms lasted a total of 161 days.

As mentioned above, the bills to roll back the reforms were sponsored by the same legislators that had sponsored the reforms in the first place less than a year before. Every Democrat in both houses of the legislature voted to gut the 485-a reforms. Every vote against undoing the reforms came from Republicans in the legislature.

Curiously, the majority of the Republicans who opposed rolling back the reforms also voted against enacting them in the first place while every Democrat who voted for the reforms in 2020 also voted to undo them in 2021, including the legislature’s democratic socialist bloc which is normally critical of real estate subsidies, suggesting that lawmakers may not have even understood what they were supporting or opposing. Again, it is unclear why leaders in the legislature acceded to Cuomo’s demand to significantly water down the reforms as a condition for signing the bill since reform bills were passed unanimously in the state assembly and by more than two-thirds of the state senate, enough of a majority to overturn a veto.

The most significant reform undone in 2021 was the disqualification of buildings built on previously-vacant lots from receiving 485-a exemptions, one of the most egregious subversions of the original law’s intent which was highlighted in many reports and which was the reason Sean Ryan held his press conference about the reforms at 301 Ohio Street.

The 2021 bill also significantly weakened the provision allowing municipalities to claw back exempt taxes from properties that had been awarded subsidies but do not actually qualify. Under the 2020 bill, if an exemption was revoked for failure to submit an annual certification or because the property did not meet the requirements for the exemption, the owner would have to pay back all the taxes they had avoided. Now, municipalities seeking to claw back taxes from owners of exempt properties that do not comply with requirements have to provide 30 days notice of the revocation of the exemption and give non-compliant owners with subsidies an undefined “reasonable notice to cure the failure”. Property owners who have their exemptions revoked now only have to pay back taxes for the years their property did not qualify for the exemption.

Other reforms rolled back in 2021 made it easier for developers to obtain 485-a subsidies. The requirement that 50% of floor space be used for commercial activities was reduced to 40%. Also the requirement that developers prove that commercial space in the building was being used or that “such use is in good faith contemplated” before being awarded the subsidy was replaced with a requirement that developers provide this information after receiving the subsidy in their annual attestations that developments qualify for the tax break.

Smaller changes include reversing the requirement that commercial and residential uses be above-ground to count towards the minimum square footage and enumerating more commercial uses that can qualify for the exemption.

Not all of the 2020 reforms were undone. The 2021 rollback maintained the requirement that subsidy recipients annually certify that developments qualify for the tax break as well as defining minimum area requirements for residential and commercial uses to close the “Benderson loophole” allowing developers to obtain the subsidy by adding one apartment to an otherwise entirely commercial building.

Undoing reforms overwhelmingly benefits wealthy developers

Though the bills rolling back the 2020 reforms were sponsored by and voted for by the same lawmakers that sponsored and supported the reforms in the first place, these legislators did not convene any press conferences in front of valuable tax-exempt properties to publicly declare that the reforms that had passed the previous summer had been nullified at Cuomo’s request. Instead, the rollback was done quietly, with no fanfare or publicity.

While the state legislature’s intent in undoing the reforms is unknown, it is quite clear who benefits from their action: the wealthy real estate developers who wield extraordinary influence over New York State politics.

As PAI has extensively documented, benefits of the 485-a subsidy are overwhelmingly realized by large real estate developers while costs are borne by homeowners and renters. In Buffalo, where the tax exemption is the most used and abused, top beneficiaries include several of the city’s most prominent real estate magnates, such as Carl Paladino’s Ellicott Development, Signature Development’s Rocco Termini, and Benderson Development’s Randy Benderson.

In September 2021, the Buffalo News reported on a development at the former site of the Memorial Auditorium in the Canalside entertainment district by wealthy developer and major donor to Democratic and Republican politicians Nick Sinatra. Despite Sinatra’s failure to pay more than $1 million in property taxes to the City of Buffalo and Erie County in 2018 and previous years, Sinatra was sold the vacant land for the development for $1, and was given a $2 million construction grant by the Erie Canal Harbor Development Corporation, as well as $2.75 million in low-interest loans from Empire State Development and the Buffalo Urban Development Corporation.

According to the Buffalo News, however, the project’s most valuable subsidy will be its anticipated 485-a tax exemption, for which the new building on previously-vacant land will now qualify – all thanks to the legislature’s quiet reversal on reforms.