TESTIMONY OF THE NEW YORK CITY DEPARTMENT OF HOUSING PRESERVATION AND DEVELOPMENT TO THE NEW YORK CITY COUNCIL COMMITTEE ON HOUSING AND BUILDINGS JOINTLY WITH THE COMMITTEE ON FINANCE ON INTRODUCTIONS NOS. 1009, 1359, 1366 TUESDAY, NOVEMBER 22, 2016 – 10AM Good morning, Chair Williams and Chair Ferreras-Copeland and members of the Finance and Housing and Buildings Committees. My name is Louise Carroll, and I am the Associate Commissioner for Housing Incentives for the New York City Department of Housing Preservation & Development (“HPD”). Here with me today is Deputy Commissioner for Strategy, Research, and Communications David Quart, and AnnMarie Santiago, Assistant Deputy Commissioner for the Office of Enforcement and Neighborhood Services. Thank you for the opportunity to testify today on Intros. 1359 and 1366, which would require HPD to audit buildings receiving the 421-a exemption for compliance with rent stabilization and affordability requirements, and Intro. 1009, which proposes that HPD create a centralized database of owners and specific information for the buildings they own such as violations and outstanding tax liens. This administration has taken significant steps to go after landlords who are flaunting the program’s requirements. Everyone receiving the benefit needs to abide by the rules; it’s the law and it’s the right thing to do. HPD is strongly committed to ensuring continued enforcement and we appreciate the Council’s interest in making sure that our enforcement efforts are effective. We believe it is feasible to create an ongoing 421-a audit regime and are confident we can work with the Council on the details of such a program. The 421-a real property tax exemption program began in the early 1970s to spur New York’s weak real estate market, which at that time was suffering from disinvestment and declining property values. As the real estate market strengthened in the following decades, the program was amended to require owners benefitting from the exemption in central Manhattan neighborhoods to provide affordable housing. Despite subsequent reforms to expand the geography in which affordable housing was required, it became clear that stronger affordability requirements were needed. In 2014 and early 2015, this Administration fought hard to reshape the program to:  end wasteful giveaways to developers, including benefits to luxury condos;  increase the amount of affordable housing required of every developer receiving the subsidy; 1  require that homes be provided for people with lower incomes than ever before; and  demand affordable housing everywhere in the City. We achieved those reforms in the State legislature’s reauthorization of the program in Chapter 20 of 2015. That law also included a provision that suspended the reauthorization unless the Real Estate Board of New York and the construction trade unions agreed on the wages that would be paid to construction workers hired to build projects receiving the tax exemption. While those parties are reported to have reached an agreement, their agreement would change the terms of the program and therefore requires that the State legislature consider amendments to the law. The program remains suspended until the legislature takes up those amendments and re-enacts the program, or until REBNY and the unions reach an agreement that does not require legislative action. While seeking to secure substantial reforms to the 421-a program, the Administration also has been working to make building owners who receive benefits comply with the law. Before delving into the efforts we’ve undertaken, it is important to take a step back and explain how this very complex program is administered. Under the 421-a program in effect prior to the 2015 reforms, benefits were split into two periods. This resulted in a two-stage application process. Because the only applications we are currently processing were begun under the old program, that process is still the one we use. The process allows a developer to apply for a Preliminary Certificate of Eligibility (PCE) after the developer commences the construction of a new multiple dwelling and before the building is completed. The PCE entitles a project to receive a tax exemption for up to three years of the construction period. Applicants have to deliver PCEs approved by HPD to the Department of Finance (DOF) in order to receive the exemption. Once construction is complete, applicants must apply for a Final Certificate of Eligibility (FCE) from HPD and file such FCE with DOF to be entitled to post-completion real property tax exemption benefits. During review of an FCE application for a rental building, HPD confirms that the units are registered as rent stabilized with the New York State Housing and Community Renewal (HCR). HPD also confirms that the initial total aggregate rent roll registered for the building with HCR, does not exceed the maximum gross statutory rent, and that the rent initially charged for each 421-a affordable unit does not exceed 30% of the income limits imposed upon the affordable units. Once the FCE is approved and the units are subject to rent stabilization, HPD continues to administer the 421-a program and HCR monitors compliance with the rent stabilization laws. Therefore, HPD and HCR work together on compliance issues concerning rent stabilization in buildings receiving 421-a benefits. Early in 2014, this Administration recognized that this two-stage application process created difficulties in transitioning from the construction period exemption to the post-completion exemption while at the same time ensuring that the owner had registered units with HCR. Owners often failed to complete the applications for FCEs, but terminating the benefits, only to then have to reinstate them once the FCE was filed, was terribly inefficient. To address the 2 problem, which had existed for many years, the de Blasio Administration included in its reform proposals a provision to require a single application for 421-a tax exemption benefits that would be filed no later than one year after the completion of construction. Buildings determined to be eligible for benefits would then get up to three years of retroactive construction period benefits along with their post-completion benefits. This would eliminate the problem of getting owners to file and finish their FCE applications and also would ensure that compliance with rent registration would be established before any benefits were enjoyed by an eligible property. The de Blasio Administration’s reforms were codified in Chapter 20, which has unfortunately been suspended, as mentioned earlier. In addition, this Administration is taking significant steps to ensure that properties now applying for or already receiving benefits under the old 421-a program file their FCEs and are found to be in compliance with the rent registration requirement in order to continue receiving 421-a benefits. There are a number of buildings that are not in compliance, which as I’ve described is an unfortunate legacy of the two-stage application system that was required under the old program. We are working to bring them all into compliance. Our goal is two-fold to (1) preserve rent stabilization protections for 421-a units as required by the program, and (2) crackdown on abuse of public subsidy. Different types of buildings require different approaches, so let me explain what we are doing for each type of building. First, since 2014, HPD has been working with the Office of the State Attorney General (AG) and HCR’s Tenant Protection Unit (TPU) to address the problem of projects that had originally applied for 421-a benefits as cooperatives and condominiums but later decided to operate as rentals without amending their 421-a applications. Coops and condos are exempt from the rent stabilization requirements that apply to 421-a rental units. Compiling the target list of buildings that applied as coops or condos but are instead operating as rentals required the AG’s investigation of condo documents, along with extensive analysis of records from HPD, DOF, the Department of Buildings (DOB), and HCR’s Office of Rent Administration. In August 2015, letters went to the targets (285 buildings) requiring them to submit compliance affidavits indicating that they would meet all of the requirements for rental buildings receiving 421-a benefits, including HPD’s approval of an initial aggregate rent roll and registration of the rent stabilized units with HCR. Of the 285 targets, 178 submitted such compliance affidavits. For those targets that failed to respond to the August 2015 letter, the interagency initiative engaged in further investigation to ensure we were revoking benefits for the right properties. On January 26, 2016, HPD issued notices of impending revocation of their 421-a benefits to 54 buildings. Owners and others affected by revocation are entitled to due process before benefits are revoked, which required us to send notices to the taxpayer, the fee owner, the mortgagee and the agent of each building and provide an opportunity for a response. This required checks of three different databases. After receiving a notice of impending revocation, the tax exemption beneficiaries are given an opportunity to propose a cure. The agencies then had to evaluate responses to these notices, which required continuous conversations with the current owners, many of whom were not the original owners. Because some of the buildings had changed hands, the current owners were sometimes unaware that the original owner had not met the 421-a 3 requirements, and sometimes were not in possession of the relevant documentation needed to implement a cure. On September 14, 2016, after completing this process, HPD instructed DOF to retroactively revoke benefits for 35 of the 54 buildings that had received the January 2016 notice. The other 19 were dropped from the target list after further investigation showed that they either were in compliance or had cured their violations. We also have now sent notices of impending revocation to 178 targets that submitted compliance affidavits, but failed to meet the deadlines for bringing their properties into compliance. As part of the same enforcement action, the city and state recouped $5million in settlement money from buildings that applied as condos but were renting units without complying with the rent stabilization requirements of 421-a. This money will be used to provide affordable housing for seniors, homeless, and other low income New Yorkers. Second, we are now working to bring all rental buildings into compliance with their obligations under the program. We have completed the extensive and time-consuming analysis that was needed to identify which properties have complied or failed to comply with each element of our requirements. Using that analysis, we are focusing first on all rental projects that have been receiving 421-a benefits for at least 5 years, but have not yet filed an FCE with DOF. HPD and DOF, working with the Law Department, are giving those owners notice that their 421-a benefits will be suspended unless they submit the FCE to DOF by a prescribed deadline. We will then follow a procedure similar to what I just described for the properties that applied as coops or condos but operated as rentals – after providing the requisite due process for owners that fail to meet the deadlines, we will, where appropriate, revoke benefits. Of course, in approving FCEs we will ensure that all units are properly registered with HCR. Our research shows that, of all rental projects currently receiving 421-a benefits (except 3 family homes, because those are not the owners that are the highest priority for enforcement), 77 percent of those units have been in full compliance every year with rent registration requirements, and only 3 percent have never registered their rents with HCR. Of the remainder, 13 percent have missed the rent registration requirements for one year only, and the other 7 percent have some years of compliance and some years of non-compliance. Under this Administration, investigations to ensure that buildings are in compliance, and revocation of benefits for any that fail to comply after appropriate due process will be an ongoing part of the program, because any owner receiving benefits should be forced to live up to all the obligations of the 421-a program. HPD has to increase the size of its staff in order to ensure a robust compliance program. We have already received approval for a director of the enforcement unit and are currently searching for the best person to fill that role. As we’ve discussed in previous hearings, HPD is investing unprecedented resources to build state of the art technology to track all projects receiving any benefits from the City. We also have increased our strategic planning and research staffs in order to analyze that data to identify any lapses in compliance. 4 In addition to increasing our own staff capacity, we are working more closely than ever with HCR to coordinate our enforcement efforts. Our 421-a staff is in touch regularly with HCR concerning rent overcharge claims on market rate units. The two bills before us today regarding HPD’s role in the 421-a application process, Intros. 1359 and 1366, would mandate that HPD conduct an annual audit of 20% of buildings receiving 421-a benefits to verify compliance with rent registration and affordability requirements. Both bills include a requirement that HPD provide a report to the Council and DOF on building owners in violation and that DOF thereafter provide a timeline and a plan for revoking benefits. HPD and DOF share the Council’s concern about 421-a non-compliance and welcome the opportunity to work with the Council on ways to ensure that buildings receiving 421-a benefits register their rental units, at the right rent levels, as mandated by the statute. As described previously, HPD is already working with our local and state partner agencies to identify noncompliant buildings and take action against them. HPD believes it is feasible to implement an ongoing audit to determine if properties are in compliance with 421-a affordability requirements, as required in Intro 1359. We can also create an audit program that verifies compliance with the annual rent registration filing requirements in 421-a, which we believe is the Council’s intent in Intro 1366. In addition, we will provide the Council with information, annually, on the number of revocations we’ve issued – we welcome this as an opportunity to highlight our recent enforcement efforts. Both Intro. 1366 and Intro. 1359 should be revised to reflect that: (1) HPD, not DOF, has the statutory authority to revoke 421-a benefits, and (2) HPD must follow due process requirements for revoking a tax exemption, which must include notice and an opportunity for response. Permitting owners to cure deficiencies in rent registration helps to protect tenants in the units that should have been registered, because rent stabilization provides them with the right to a renewal lease and eviction protection. Finally, we would like to discuss Intro. 1009, which would require HPD to maintain an online database of owners of dwellings and information regarding the properties they own, such as violation information, outstanding tax liens, and complaints filed against the owner for tenant harassment. HPD was one of the first agencies to provide its data on the Open Data Portal back in 2012. Since then, we have continually tried to ensure that our enforcement data is accessible and useful to the public. Much of the information required under Intro. 1009 is already publicly available from HPD, DOB and DOF in the City’s Open Data Portal resources. In addition, the City’s Open Data portal includes a feature to request additional raw data that is not already published. New York City’s Open Data regime is based on widely accepted industry principles, such as ensuring that data is published as collected, as granular as possible, and not in aggregate or modified forms. We believe that the potential of Open Data is fully realized through partnerships with local nonprofits, think tanks and research institutions that can aggregate, match and compile data to meet specific community needs. For example, as part of their work to preserve affordable housing, the University Neighborhood Housing Program (UNHP) developed the Building 5 Indicator Project (BIP), a database that leverages publicly available data to gauge physical and/or financial distress of multifamily properties in New York City. They track thousands of buildings across the city using multiple sources, including much of the data discussed in the proposed legislation and available on Open Data, to create a scoring system to indicate distress. It's a powerful and useful tool for communities and advocates, as well as the City, to identify distressed buildings with the goal of improving them. We believe that working with these third parties is a better use of resources than aggregating specific data combinations of data ourselves, and we look forward to discussing with the Public Advocate and with the Council how we can be most helpful to consumers of the data. As you know, the Housing Maintenance Code requires owners of buildings of 3 units or more, and of non-owner occupied 1-2 unit buildings, to register with HPD on an annual basis. The registration includes information related to the property owner, the managing agent and shareholders who hold more than a 25% interest in the property. This registration process supports the agency’s enforcement of the Housing Maintenance Code by providing the necessary contact information of owners and building managers if a violation needs to be issued. Registration information is available on HPD’s website. We agree with the Council that more information about property owners, given the complex ownership structures in New York City’s real estate market, would be very helpful. To this end, we recommend that the Council work with the State legislature to require owners to make additional disclosures whenever they incorporate as a limited liability corporation and register at the Department of State. We would like to continue to work with the Council to refine Intros. 1359 and 1366 in light of all that we are already doing, and look forward to further conversations about these bills. We are happy to answer your questions. 6