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Upending East Midtown’s progress: Gov. Cuomo’s new plans are threatening the office district’s growth

Midtown in New York City stands empty in December due to COVID. 
(Wes Parnell// New York Daily News)

Among the policy proposals contained in the governor’s Executive Budget is legislation to allow existing buildings in a wide swath of midtown Manhattan to be converted from hotels and office buildings to housing.

Although at first blush this seems a creative and flexible response to the dual problems of the pandemic-caused decline in office and hotel occupancy and the city’s persistent shortage of affordable housing, the proposal would result in a dramatic loss of the city’s control over its own land-use policies and tax revenue.

The area covered by the draft legislation overlaps substantially with Midtown East — the home, at least before COVID hit, to 250,000 jobs and more than 10% of the city’s property tax base. A comprehensive zoning plan to assure Midtown East remains a preeminent office center was adopted by the City Council in 2017 after a five-year review process. To incentivize older office buildings to renovate or rebuild into modern office space the plan created a new “as-of right” framework that allows owners to incorporate more density if they provide various transit and open-space benefits depending on where their site is located, with no tax incentives.

The zoning plan also maximizes the benefit of improved transit via the Second Ave. subway extension and East Side Access to the LIRR and creates a mechanism through which hundreds of millions of dollars will be provided by private developers toward those enhancements.

Before COVID hit, the take-up on this plan was beyond expectations. JPMorgan Chase’s new headquarters is under construction and a major new office/hotel development to replace the tired Hyatt hotel next to Grand Central Terminal is about to enter the public review process, to name just two modern office buildings triggered by the rezoning.

The governor’s bill would simply disregard this three-year-old blueprint, despite the benefits it is already delivering. Instead, hotels (of less than 150 rooms) and older office buildings (known as Class B and C buildings) could be converted, as-of-right, to residential use provided that 20% of the residential units are affordable and/or for supportive housing. According to REBNY, as many as 14,000 units could be created through conversion.

Yet under the governor’s plan, there is no requirement for community input or analysis of how the neighborhood surrounding the buildings would be impacted by an influx of residents. Worse, the requirement of 20% affordable units is less than the 25% required in the city’s Mandatory Inclusionary Housing and the state’s 421-a program, loosening affordability requirements adopted by the mayor, City Council and state Legislature.

Even more alarming, the proposed state law states that instead of making 20% of the converted units affordable — as defined by the state commissioner of housing — the owner of a converted building can “provide an amount necessary to support the creation or preservation of affordable housing or prevent homelessness.” Put another way, unlike MIH and 421-a, which require the actual production of affordable housing for residential projects of this size, this proposal allows for a cash payment to the state instead.

Also left unaddressed is how the conversions would be financed. In the 1990s, commercial-to-residential conversions in Lower Manhattan were enabled by the 421-g legislation, with buildings given significant incentives, including exemptions from most property tax for 14 years.

If the units in Midtown are to be anything other than luxury condos, they will inevitably require a deep tax subsidy. But it is the City of New York, not the state, that will be losing revenue from the most important segment of its commercial real estate tax base. This would be bad for the city and run counter to hard-fought policy changes made over the past decade to promote truly mixed-income buildings, and not over-subsidize private developers to do so. Giving owners a tax abatement and allowing them to pay into a state-controlled fund with no requirement that any affordable units be built anywhere in particular, much less in Midtown, is not a good deal for New Yorkers.

The stresses the NYC commercial real estate and hotel sectors are experiencing right now are very real. The vacancy rate for commercial and retail real estate in Manhattan is very high and occupancy rates at hotels are low. It may be the case that demand for office space will be permanently changed by the COVID work-from-home experience.

But we are all bullish on our city’s comeback, right? With vaccines beginning to happen and the workforce itching to get back to being with colleagues and doing their jobs in 3D, some economists are projecting the local economy will be back to pre-pandemic levels by 2023. It is simply too soon to abandon carefully thought out plans for the core of Manhattan’s central business district.

This post was written in collaboration with Alicia Glen, CEO of MSquared and former deputy mayor of New York and published on February 11, 2021 by the New York Daily News.