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The Case For IDA Incentives For Housing Development
By Steven Porath
Earlier this year, at an annual conference of economic developers from throughout New York State, a speaker made a prophetic – yet obvious – statement…
“The lack of market rate housing is a looming tsunami that will ultimately cripple New York State’s business community.”
Overstatement? Perhaps. But it underscores the severity of the shortfall in housing.
It is certainly no secret that owning a single-family home – even in a slightly softer market – in the Greater Metro Area is becoming an almost unattainable goal for many singles and working couples faced with little housing inventory, rising interest rates and prohibitive property taxes. Compounding this issue is a shortage of entryway one- and two-bedroom leased housing units that enable our younger workforce to live and work in our community. If left unchecked, this situation will slowly, but inevitably drain the region of the next generation’s workforce population. In simplest terms – if the 20-to 40-year-old workforce cannot live here, they will live – and work – elsewhere.
While the solution may seem obvious – private developers building more housing at a leasing cost tenants can bear – this path has become all too elusive in the metro and Hudson Valley region. High lending interest rates, property tax costs and lenders’ aversion to lend in a volatile marketplace has stunted private investment housing. Include the looming threat of an eventual “bubble-burst” in housing market values and we have a recipe that provides a very high-risk climate for private developers. And finally, add unduly lengthy land use approval processes at the local level and you begin to better understand how our region all but discourages private, marketplace development while at the same time acknowledge’s its need.
For purposes of discussion, let us consider three possible solutions to this situation:
Option 1: Ignore the issues and simply hope everything will “straighten-out” over time.
Remember… “hope” is not a plan and a fingers-crossed strategy that counts on a jostling buyer/seller dynamic solution may come too late or not at all for next generation of workers and the community.
Option 2: Government-funded rent subsidies that allow developers to charge high lease rates to cover their financing/ROI conditions by placing that burden on taxpayers.
That works for traditional affordable housing that addresses the needs of the lower income families – but presents an expensive and slippery slope when market rate housing comes into play.
Or… Option 3: Utilizing local Industrial Development Agencies to help lower the investment costs for developers, who – in turn – can then be required to set manageable lease rates for tenants.
Through specific tax exemptions and abatements, IDAs can make a project financially viable for developers and attach conditions that protect tenants and the community.
In New York State, Industrial Development Agencies (IDAs) were established decades ago to promote the attraction, retention, and expansion of commercial and industrial businesses. Traditional IDA projects provide approved tax exemptions and abatements to incentivize employers to invest in both facilities and their employees. The simple rationale for providing these incentives is to “lock-in” business development and elevate the quality of life of the community by maintaining and expanding a vibrant business community. When implemented prudently, IDAs can play a strong role in reducing the residential property tax burden, growing, and maintaining local jobs, and providing the invaluable “economic churn” created by employers and employees making and spending money locally; and not to mention paying the local and state property taxes every business provides. And remember, IDA incentives are not upfront, taxpayer-funded loans or grants – but rather exemptions on taxes that would not be realized anyway if the project did not occur.
However, when it comes to providing incentives to market rate housing projects in Rockland County, the IDA has historically shied from doing so, except for projects in economically challenged parts of the county. But in today’s environment, the Rockland IDA has decided it cannot stand on the sidelines and allow Options 1 or 2 (see above) to dictate our future. Accordingly, the Rockland IDA has decided to review and evaluate housing development projects by doing the following:
- Utilize the tools it can bring into play to incent the type of housing development the community wants – where it wants it. These tools include exemption from the 8.375% sales tax on the project’s capital investment (which lowers the construction cost) and the mortgage recording tax on applicable financing.
- Typically, the most impactful incentive – and one that draws the most public attention – are property tax abatements – called PILOTs (Payment In Lieu of Tax agreements). PILOTs are typically 10- to 15-year agreements that phase in the new property taxes created by the projects. In Rockland, the terms of the PILOTs are each uniquely negotiated based on the particular circumstances of the project and – MOST IMPORTANTLY – require the active participation of the involved taxing jurisdictions (i.e., town, village, school district) to negotiate the terms and approve the agreement by full board resolution. Each taxing jurisdiction has the autonomy to participate or not. If they choose not to participate, there is no appeals process… their decision cannot be overturned.
If the IDA authorizes the incentives, the developer benefits by lower construction costs and lower initial property taxes, with those savings passed through to the tenants via lower rent. The result is a project financially feasible for the developer and investors while at the same time creating (affordable) market rate housing.
In fact, the benefit to the community is actually more impactful. An IDA housing project now:
- Gives the local community a tool to promote housing where it wants it (i.e., transit-oriented development near rail stations, downtowns to promote retail development and walkable communities, or even the selling of unneeded, municipal properties that can be placed on the tax rolls and generate property tax revenues.)
- Generates new tax dollars. In Rockland, the PILOTs do not lower existing taxes, but are negotiated agreements that schedule the timing when the fully assessed higher value of the developed properties (and the additional tax dollars) are realized.
- Requires the use of local labor in the construction of the project.
- Installs strong guardrails on the project that provide for stringent default and recapture of benefits provisions should the developer not meet the terms of the agreement. In short, the IDA on behalf of the community can recoup any benefits provided should the developer default. These provisions further ensure that the project cannot be resold to another entity without the specific consent of the IDA and that the project inherently be maintained as the type of project initially approved for incentives.
Combined with local planning and zoning requirements, using the IDA as a development tool and project watchdog can be a crucial vehicle in the County’s efforts to create a housing market that provides a pathway for our workforce to stay and work in Rockland.
Steven Porath is the Executive Director of the Rockland Industrial Development Agency and has been involved in the county’s economic development efforts for over 20 years.
