PHILADELPHIA’S TEN-YEAR TAX ABATEMENT · PHILADELPHIA’S TEN-YEAR PROPERTY TAX ABATEMENT Updated statistics on the size and distribution of tax-abated properties in Philadelphia

Kevin Gillen is an economist who holds a Ph.D. in Applied Economics, concentrating in urban economics and real estate finance. Although he currently holds a position as a Senior Research Consultant with the Fels Institute of Government at the University of Pennsylvania, the views presented in this report do not necessarily represent those of either Fels or Penn.

PHILADELPHIA’S TEN-YEAR PROPERTY TAX ABATEMENT

Updated statistics on the size and distribution of tax-abated

properties in Philadelphia.

Author:

Kevin C. Gillen, Ph.D.

April 2013

PHILADELPHIA’S TEN-YEAR PROPERTY TAX ABATEMENT Updated statistics on the size and distribution of tax-abated properties in Philadelphia.

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EXECUTIVE SUMMARY: Impact of the Abatement:

When the abatement was implemented in the early 2000s, this was followed by an immediate surge in new construction of 263% in Philadelphia county.

From 2002-2004, new construction increased 417% in Philadelphia county, while only growing 1.2% in Philadelphia’s suburbs.

Why the Abatement is Necessary:

Philadelphia has the 4th highest cost of construction of any city in the country, which is also 25% above the average national cost.

However, Philadelphia’s median household income is 34% below that of other high-cost cities, and 26% below the U.S. average.

Utilization of the Abatement:

Approximately 40% of abatements are for improvements to existing properties, rather than new construction.

The single largest user of Philadelphia’s abatement program is the Philadelphia Housing Authority.

Benefits of the Abatement:

Under AVI, previously abated properties will immediately begin contributing an additional $10.5 million per year to property tax revenue collections.

Within 5 years after implementation of AVI, previously abated properties will be contributing an additional $70 million in property tax revenues.

Without the existence of the abatement and the real estate development it has encouraged, the revenue-neutral millage rate under AVI would need to be 1.44%.


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In an effort to encourage real estate development, the City of Philadelphia offers a comprehensive ten-year abatement of property taxes for documented improvements to real estate. In essence, the value of all improvements to real estate go untaxed for ten years, following completion of the improvements. In the case of new construction, the amount of abated taxes can be substantial, as the new building represents the improvement, and hence the owner pays taxes only on the value of the land for the ten years following construction and subsequent occupancy of the project. The abatement covers both commercial and residential development, thus supporting both jobs and an expansion of Philadelphia’s tax base as this development occurs. The City’s current tax abatement program initially took shape in 1997, and applied only to conversions of previously non-residential properties to residential properties. Such conversions did not have the value of their improvements taxed for ten years, following completion. In 2000, the program was further expanded to cover all improvements to all categories of real estate. The abatement is available by right to anyone who can present a building permit to the City’s Office of Property Assessment (OPA). The owner must apply for an abatement after receiving a building permit from the City. Following completion of the improvements, the amount that is abated is determined by OPA, and is limited to either the assessed value of the improvements in the case of rehabs of and/or improvements to existing structures, or the assessed value of the entire structure in the case of new construction. The abatement takes effect in the tax year following the certification of the improvements. The abatement’s proponents have credited the program with spurring considerable investment in the City’s commercial and residential infrastructure, especially after decades of disinvestment. However, the program’s critics assert that it is an unnecessary tax windfall to developers and owners who do not need it, and that its benefits have been disproportionately confined to the upper end of the city’s real estate stock, with little impact on promoting the development of affordable housing or the revitalization of low-income neighborhoods. Moreover, there is additional uncertainty over the future revenue implications of these abated properties. Now that the program is a little more than ten years old, many abatements have begun to expire or are soon scheduled to do so. As the City moves towards a new regime of property assessments, known as the “Actual Value Initiative” (or “AVI”), there is the outstanding question of how much additional revenue the City can expect to receive. This briefing paper hopes to help inform the debate over the future of the Ten-Year Tax Abatement by providing some basic numbers and statistics on the program and the properties affected by it. The size and distribution of the dollar amount abated will be presented, along with the location of abated properties and their breakdown by type and owner. The likely revenues that will be generated under AVI as abatements continue to expire will also be presented. The paper will conclude with a summary of the results and their broader implications for both Philadelphia’s real estate sector and its fiscal outlook.


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Defining Abated Properties: Because Philadelphia’s tax code offers a number of both exemptions and abatements for owners of real property, it is first necessary to identify which properties are specifically designated by the ten-year abatement program. Table 1 lists the six City ordinances that define the extent and eligibility of the property tax abatement: Table 1 Philadelphia Property Tax Abatement Ordinances

Ordinance Number

BRT Exemption Code

Description

9611

M 10-year abatement for existing residential rehabilitation, capped at $50,000 of total value.

1 10-year abatement for existing residential rehabilitation, uncapped.

1456 N 10-year abatement for new residential construction, uncapped.

970274 6 10-year abatement for conversion of existing buildings to commercial residential use.

1130 8 10-year abatement for either improvements or new construction of commercial, industrial or other business properties.

175 2 30-month abatement granted to developer of residential property until properties are sold or otherwise transferred.

For the purposes of this analysis, only properties for which the OPA has assigned an exemption code of “M”, “1”,”N”,”6” or “8” are analyzed, since the ordinance governing exemption code “2” is only for thirty months, and has since been replaced by the other ordinances.

Data: The OPA’s property file contains detailed property-level information of the city’s property tax roll. The file used in this analysis is as of March 2013. All properties with the aforementioned exemption codes were extracted from the file and classified as follows:

1 Note: Ordinance number 961 covers both exemption codes “M” and “1”. This is because this ordinance was more recently amended to remove the cap on the abatement.


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Exemption code “M”, “1” or “6”: Residential Improvements or Conversion

Exemption code “N”: Residential New Construction

Exemption code “8”: Commercial, Industrial and all other Non-Residential, both Improvements and New Construction.

o Exemption Code is “8” and the tax assessment on the structure is “0”: Commercial, Industrial and all other Non-Residential New Construction

o Exemption Code is “8” and the tax assessment on the structure is greater than “0”: Commercial, Industrial and all other Non-Residential Improvements or Conversions

Some notes on the terminology used in this report:

1) “Property” is defined to be a taxable parcel of real estate in Philadelphia. If a parcel has a unique tax ID, as defined by OPA, is referred to in this analysis as a “property”. Note that this can often be different than a “home” or “dwelling”. For example, a 100-unit rental apartment building has one tax ID, so it is referred to as one property. If that same building is condo-ized so that each unit has a separate owner, then that structure is now referred to as 100 properties.

2) “Market Value” is defined as OPA’s estimate of what a given property would transact for in the market; e.g. an appraised value. This is the value used to determine a property’s tax bill, and hence, the dollar amount that is abated for a property with an abatement designation. Note that this is usually a different number than the most recently recorded transaction price of a property.

3) “Improved/Converted” is defined as a property with an existing structure located on it that was either, upgraded, added to, converted to another use, or some combination of the aforementioned. For properties receiving abatements under this designation, the value of the new additions or upgrades, and/or the value created by converting the structure to another use, are not taxed.

4) “New Construction” is defined as a property for which the structure occupying the site is 100% new. Since this represents a 100% improvement to the site, then for the purposes of the abatement program, only the land is taxed for the ten years the property is abated.

From the OPA’s March 2013 property file, all properties with the aforementioned exemption codes were extracted with the assistance of SAS software, and classified as either “Improved/Converted” or “New Construction”, according to the aforementioned definitions. The results are given in the following pages.


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The following chart compares the number of building permits issued for housing in each year from 1990 through 2011, in both Philadelphia county and its suburbs2. The number of permits for Philadelphia are enumerated on the left-hand axis while the number of permits for its suburbs are on the right-hand axis.

Source: U.S. Census, Building Permits issued for residential development.

Prior to the enactment of the current abatement in 2000, Philadelphia county averaged approximately 500 new housing starts per year, while its suburban counterparts averaged approximately 9,500 new housing starts per year; a nearly 1,800 percent difference.

In 2000, the year that saw passage of the current abatement, new housing permits immediately surged 263 percent in Philadelphia, while actually falling 9 percent in the suburbs.

2 Philadelphia’s suburbs” are defined as the four southeast PA counties of Bucks, Montgomery, Chester and Delaware.

0

2,000

4,000

6,000

8,000

10,000

12,000

0

500

1,000

1,500

2,000

2,500

3,000

19

90

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91

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92

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93

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Ph

ilad

elp

hia

Housing Starts 1990-2011

Philadelphia

Suburbs

pre-abatement post-abatement


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From 2002 to 2004, after falling in both jurisdictions following the 2001 recession, housing starts increased by a whopping 417 percent in Philadelphia while growing just a scant 1.2 percent in its suburbs.

Even during the recent recession and housing downturn from 2009-2011, housing starts actually increased by 64 percent Philadelphia while falling 8.2 percent in its suburbs.

These contrary movements in new housing construction occurred despite these two jurisdictions sharing the same basic regional economy, labor force and climate, and being subject to the same national macroeconomic conditions; e.g. interest rates, credit availability, GDP growth, etc.

Since these other factors affecting housing demand impact both the City and its suburbs in essentially the same way, the data strongly indicate that the passage of the abatement played a primary and significant role in the surge of new housing construction in Philadelphia.


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The following chart shows the aggregate percent change in the construction of new housing units between the 1990s and 2000s, by county, for the five counties in the Pennsylvania portion of the Philadelphia metro area:

Source: U.S. Census, Building Permits issued for residential development.

In order to be sure that the previous results were not due to any one county in the suburbs, the above chart breaks out the percent change in building permits issues for new housing by county and by decade.

From the 1990s to the 2000s the average level of new housing construction fell in all four of Philadelphia’s suburban counties by an average of 28 percent.

During the same period, the average level of new housing construction increased in Philadelphia County by 177 percent.

-39%

-13% -20%

-33%

177%

-50%

0%

50%

100%

150%

200%

Bucks Chester Delaware Montgomery Philadelphia

Percent Change in Construction of New Housing Units: 1990s v. 2000s


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This is especially notable in light of the fact that most of the latter decade saw one of the largest housing booms in the post-WWII era.

o Although housing starts remained positive in Philadelphia’s suburbs, they were still

down from the levels of the previous decade.

o And, while housing starts in all counties declined from their mid-decade peak following the housing bust and recession, Philadelphia still remained above its levels of the 1990s.

The data thus indicate that not only has the abatement helped increase the level of new housing construction during the boom years, but has also appears to have made Philadelphia more resistant to declines in building activity during the bust years.


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The following chart compares homebuilding costs in large U.S. cities, as measured by the average dollar cost per square foot3.

Source: Marshal & Swift Construction Cost Calculator.

The average cost to build a home in Philadelphia is $128 per foot, making homebuilding costs here 25% above the national average of $102 per foot.

Philadelphia is the 4th most expensive city in the U.S. for homebuilding costs, behind New York, San Francisco and Boston, and tied with Chicago. However, average house prices and rents in Philadelphia are well below average prices and rents in those cities. The abatement helps Philadelphia bridge the gap between its high construction cost and low sales prices by increasing the amount a buyer is both willing and able to pay for a home.

3 Computed using the Marshall & Swift Construction Cost Calculator for the average-sized home in each city. The resulting cost/sqft is inclusive of hard and soft costs only; i.e. excludes land costs.

$90 $91

$93 $97

$99 $100

$102 $102

$106 $109 $109

$114 $114

$116 $117

$120 $121

$124 $128 $128

$131 $141

$144

$0 $20 $40 $60 $80 $100 $120 $140 $160

Houston, TX

Dallas, TX

Atlanta, GA

Phoenix, AZ

Denver, CO

Miami, FL

U.S. Avg.

Baltimore, MD

Washington, DC

Pittsburgh, PA

Cleveland, OH

St. Louis, MO

Milwaukee, WI

Las Vegas, NV

Detroit, MI

Minneapolis, MN

Seattle, WA

Los Angeles, CA

Chicago, IL

Philadelphia

Boston, MA

San Francisco, CA

NYC

Average Homebuilding Costs ($/SqFt) in U.S. Cities


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The following chart compares median household incomes for the five cities with the highest construction costs to the U.S. median household income.

Source: 2007-2011 American Community Survey 5-Year Estimate, U.S. Census

The median household in Philadelphia is just under $37,000, well below the U.S. median of just over $50,000 and below all four of Philadelphia’s high-cost peer cities.

Philadelphia’s household income level is 26 percent below that of the U.S. as a whole, and 34 percent below the average of the high-cost cities of San Francisco, Boston, New York and Chicago.

Thus, while Philadelphia has the same high cost of construction as these four cities, it does not have nearly the same high level of income that can cover the high cost of construction in these same four cities.

$36,957

$47,371

$50,054

$51,270

$51,739

$72,947

$30,000 $40,000 $50,000 $60,000 $70,000 $80,000

Philadelphia

Chicago

U.S.

New York City

Boston

San Francisco

Median Household Income by City


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The following chart compares the number of abated properties in Philadelphia by New Construction v. Improvements/Conversions.

Of the 15,191 abated properties in Philadelphia, there are currently 6,306 abated properties in Philadelphia classified as “Improvements/Conversions”, which implies that only part of the value of the structure is abated, and that the owners currently pay taxes on both the land and the structure.

There are 8,885 abated properties in Philadelphia classified as “New Construction”, which implies that the entire value of the structure is abated, and that the owners currently pay taxes only on the land.

This represents an approximately 60/40 split between “New Construction” and “Improvements/Conversions”.

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4,000

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6,000

7,000

8,000

9,000

Improvements/ConversionsNew Construction

6,306

8,885

Number of Abated Properties in Philadelphia March 2013


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The following chart compares the total market value (i.e. assessed value) of abated properties under current assessments v. AVI assessments

Under current assessments set by OPA, the aggregate market value of tax-abated properties in Philadelphia is reported to be approximately $4.7bn.

Under the new assessments that are part of AVI, the aggregate market value of abated properties will be just over $8bn.

Thus, under the implementation of AVI, the assessed value of tax-abated properties will increase by $3.3bn, or 70%.

$0

$1,000

$2,000

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Current MV AVI MV

$4,712

$8,026

Total Market Value ($m) of Abated Properties


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The following chart shows total property tax revenue receivables4 with and without the current

stock of abated properties.

Under AVI assessments, a $15,000 homestead exemption and a 1.3204% tax rate, the total amount of property tax revenue that would be realizable if the stock of abated properties didn’t exist is $1.256bn.

When the stock of abated properties is factored in, the amount of receivables increases to $1.344bn; an $88.1m increase.

Another interpretation of these numbers would be: but for the existence of the abatement, if these properties were never built/converted/improved, property tax revenue receivables under AVI would be $88.1m less than they would be otherwise.

4 We say “revenue receivables” rather than “revenues” because this computes the total potential revenues if there is complete compliance; i.e. no delinquencies.

$1,256.10

$1,344.2

$1,200.00

$1,220.00

$1,240.00

$1,260.00

$1,280.00

$1,300.00

$1,320.00

$1,340.00

$1,360.00

Without Abatement With Abatement

Total AVI Property Tax Receivables ($m)


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The following table compares market (i.e. assessed) values and tax revenues from abated properties, under both current assessments and AVI assessments. This analysis assumes the currently proposed new tax rate of 1.3204%, but no homestead exemption5:

Without Homestead Exemption

Variable Definition Current AVI

MV ($m) Total $Market Value of Abated Properties (from OPA) $4,712.2 $8,026.1

Xmpt ($m) Total $Exempt Market Value of Abated Properties $3,567.6 $5,952.5

%Abated Percent of $Market Value Abated 75.7% 74.2%

Tax Rate Property Tax Rate 9.7710% 1.3204%

Hyp. Tax ($m) Hypothetical $Tax Bill (i.e. tax bill if no abatement) $147.3 $106.0

Actl. Tax ($m) Actual $Tax Bill (i.e. tax bill with abatement) $35.8 $27.4

Abated Tax ($m) Abated $Taxes (i.e. foregone tax revenue due to abatement) $111.5 $78.6

Although the assessed value of abated properties increases under AVI, so too does the tax-exempt value of abated properties, by $2.4bn. This is an increase of 67% in the value exempted from taxes by the abatement, compared to an increase of 70% in their total value.

So, the increase in both assessed value and tax-exempt value is roughly the same from current assessments to the AVI assessments. While 75.7% of the value of these properties is tax-exempt under current assessments, this will decline very slightly to 74.2% under AVI assessments.

The total amount in foregone tax revenue due to abatements will decline by $33m per year, from $111.5m to $78.6m, as a consequence of their increase in assessed value. However, the total taxes that abated properties will continue to pay also falls under AVI, by $8.4m, from $35.8m per year to $27.4m per year6.

Since foregone revenue declines by 30% while actual revenue declines by just 24%, this could be interpreted as a relative improvement in the equity of the property tax burden’s distribution between abated v. non-abated properties. Although owners of abated

5 The source of each input and assumption is available from the author upon request, as well as the details of the calculations: [email protected] 6 This is due to the revenue-neutrality condition of AVI and the relative “newness” of abated properties. Since the improvements to abated properties are less than ten years old, their current assessed values are, on average, relatively close to their AVI assessed values. So, the upward adjustment in their assessed values under AVI are likely to be modest, compared to larger adjustments that will occur to nearby unabated properties. Consequently, even though their assessed values may rise under AVI, the tax bills of abated properties may actually fall.


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properties may see their absolute tax bill decline, the percent amount that they are abated will also decline.

The fact that the aggregate tax bill of abated properties declines under AVI is partially due to the fact that many of these properties are new, and hence their current assessments are likely closer to their new AVI assessments. However, an equally likely explanation is that, since only the value of the structure is abated, the percent increase in the land value component of abated properties under AVI is less than the percent increase in the structure component, and this may represent an imbalance in the land/structure apportionment of the total value of abated properties. The City should investigate if such an imbalance exists, and address it in the next round of assessments. Such a rebalancing would likely result in an absolute, and not just relative, increase in the level of tax revenues from abated properties.


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The following table compares market (i.e. assessed) values and tax revenues from abated properties, under both current assessments and AVI assessments, but also assumes a homestead exemption of $15,000.

With $15,000 Homestead Exemption

Variable Definition Current AVI

MV ($m) Total $Market Value of Abated Properties (from OPA) $4,712.2 $8,026.1

Xmpt ($m) Total $Exempt Market Value of Abated Properties $3,567.6 $6,016.5

%Abated Percent of $Market Value Abated 75.7% 75.0%

Tax Rate Property Tax Rate 9.7710% 1.3204%

Hyp. Tax ($m) Hypothetical $Tax Bill (i.e. tax bill if no abatement) $147.3 $105.1

Actl. Tax ($m) Actual $Tax Bill (i.e. tax bill with abatement) $35.8 $26.6

Abated Tax ($m) Abated $Taxes (i.e. foregone tax revenue due to abatement) $111.5 $78.6

With a $15,000 homestead exemption, the total amount of the value of abated properties that are exempt from taxation increases slightly from $5,952.5bn to $6.016.5bn; or a mere 1.1% increase.

As a consequence, the revenue numbers remain barely unchanged. The foregone tax revenues from abated properties will decline by a mere $0.8m if they are granted a homestead exemption of $15,000 under AVI7.

This is likely due to the result that the value of these properties is quite high relative to the amount of the proposed exemption. A $15,000 reduction in the taxable value of a home assessed at $50,000 results in a significantly higher reduction in that property’s tax bill than a $15,000 deduction in the taxable value of a home assessed at $500,000.

But, while the revenue implications of granting a modest homestead exemption to the stock of abated properties may be negligible, an analysis of the affected properties revealed some additional information:

o Of the 15,191 abated properties in Philadelphia, 331 are estimated to receive a property tax bill of $0 under AVI, if a $15,000 homestead exemption is also granted.

o Of the 15,191 abated properties in Philadelphia, 2,120 are estimated to receive a property tax bill less than $100 under AVI, if a $15,000 homestead exemption is also granted.

7 Note: this analysis assumes only those that have already applied and received approval for a homestead exemption will receive one. This number may increase if more households become motivated to apply.


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This result is due to a likely combination of two things:

o In the language of the previous bill that granted a homestead exemption which City Council considered last year, the exemption was to be applied to the “taxable” value of a property, rather than its total market value. As a consequence, the exemption is applied on the back end of a property’s tax calculation (its market value minus its abated value), rather than on the front end (its total market value before abatement). Since the data indicate that abatements reduce the taxable value of these properties by 75%, further reducing that number by $15,000 results in another significant reduction for several thousand of these properties.

o As previously mentioned, the land/structure apportionment of value for abated properties appears too low. This results in assessed values for land being lower than they should be otherwise, and structure values being higher than they should be otherwise, even if the total assessed value is reasonably correct. Since many abated properties are new construction, they only pay taxes based upon the value of their land. Mathematically, if the land value of an abated new dwelling with a homestead exemption is assessed for less than $15,000, this results in property tax bill of $0. More generally, the problem of the land/structure apportionment is exacerbated by the homestead exemption, and results in tax bills being lower than they should be otherwise for abated properties.

These results point up the need to address this issue as AVI is implemented and updated in future years. Although the fiscal implications (at least as they pertain to abated properties) may be minimal, the political implications are less likely to be so, given criticisms of the abatement as a tax giveaway for relatively affluent homeowners. In the short run, the City should either reconsider granting a homestead exemption until the apportionment issue is corrected, or it should modify the calculation of the exemption. Possibilities include applying the exemption to only the first X% of a property’s value, and/or setting a floor for some minimum tax bill for those whose calculated taxes are below $Y. In the long run, this data supplies further impetus for addressing the apportionment issue and getting the split between land and structure values correctly balanced.


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The following chart shows the additional revenue that will be collected in each year as abatements expire. It was computed using AVI assessments, a $15,000 exemption, a 1.3204% tax rate, and assuming 0% delinquency.

To date, 1,253 abated properties have returned to the tax rolls at their full value. Under AVI, this currently adds an additional $9.5m to property tax revenue collections.

Beginning in 2015, the number of properties that will see their abatements expire will begin to grow quickly, reflecting the housing construction boom that occurred in the mid-2000s. An additional $9.0m will be collected in 2015, with incremental revenues peaking at $13.6m in 2018.

Property tax revenues will continue to increase as a result of expiring abatement after 2015, but will do so at a declining rate, reflecting the slowdown in new construction that occurred as a consequence of the housing bust in the latter part of the previous decade.

However, it should be noted that this analysis likely underestimates additional future revenues, as it implicitly holds AVI assessments constant, when in fact they will likely continue to increase, even if only at the rate of general inflation, going forward.

$1.4

$3.3

$4.7

$0.0 $1.0

$9.0 $9.8

$12.4

$13.6

$12.6

$7.5

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2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Incremental Tax Revenues ($m) from Expiring Abatements


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Because the incremental revenues from expiring abatements are not a one-time event, but exist in

perpetuity, it is actually more representative to depict them as cumulative rather than

incremental, in each year going forward. The following chart shows the cumulative additional

revenues from expiring abatements, which is computed as the sum of incremental revenues in

prior years, plus the incremental revenues in the subject year.

Under AVI, previously abated properties will immediately contribute an additional $10.5 per year to property tax revenue collections.

This will begin to grow to $19.5m in 2015, and continue to grow sharply thereafter, doubling to $41.7m in 2017, and doubling again to $83.9 by 2021.

By 2022, these properties will be yielding an additional $88.1m per year in property tax revenue collections. While this analysis does assume 100% collection, it is still likely to be an underestimate since assessed values ten to increase over time and additional new construction and improvements in the future will likely occur, thus adding to the stock of abated properties

$1.4 $4.7

$9.5 $9.5 $10.5

$19.5

$29.3

$41.7

$55.2

$67.8

$75.3

$83.9 $88.1

$0.0

$10.0

$20.0

$30.0

$40.0

$50.0

$60.0

$70.0

$80.0

$90.0

$100.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022

Cumulative Tax Revenues ($m) from Expiring Abatements


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The following map shows the location of tax-abated properties in Philadelphia, color-coded by the type of abatement assigned to each property. Yellow dots are properties with an abatement for an improvement and/or conversion, and thus pay taxes on the value of the land and part of the value of the structure. Red dots are properties with an abatement for new construction, and thus pay taxes only on the value of the land.

While the overall density of abated properties across the City’s landscape is not uniform, there are very few areas (mostly industrial) that have no abated properties. This may be contrary to some perceptions of the abatement, which have perceived it as being overwhelmingly concentrated in and around Center City.

While the highest concentration of abated properties does appear to be within a two-mile radius around Center City, it should be noted that this area also has the highest density of any type of real estate, abated or not. A map that normalized for this by dividing the


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number of abated properties by the total number of a neighborhood’s properties would likely show a relatively more spatially uniform distribution.

Perhaps also surprisingly, improved/converted properties appear to be quite spatially commingled with newly constructed properties. This again may be contrary to some perceptions that not only is the abatement skewed towards new construction, but is also skewed towards new construction in high-income neighborhoods; i.e. in and around Center City. To the contrary, not only are there significant numbers of new construction properties in many of the City’s neighborhoods, but also many existing properties which have experienced improvements in these same neighborhoods.


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To obtain further insight into the relative equity of distribution of tax abatements, the following table shows the top fifteen largest owners of tax-abated properties in Philadelphia.

Top 15 Owners of Abated Properties in Philadelphia

Owner # Abated Properties

PHILADELPHIA HOUSING AUTHORITY 531 J&M OLD CITY PARK LLC (parking) 205

AGC PARTNERS LP 157

VENICE LOFTS ASSOCIATES 126

NEIGHBORHOOD RESTORATIONS 125

1352 LOFTS PROPERTY HOLDINGS 95

TPG P A 2101 MARKET LP 60

NEW LIFE AFFORDABLE 48

MEMPHIS ST LP 47

BROWN ST AT AMERICAN 40

125 NORTH FOURTH STREET 33

WPRE II LP 30

BELMONT AFFORDABLE HOUSING 28

SUSQUEHANNA VILLAGE LP 24

W N PARTNERS LP 24

1734 CHESTNUT PLACE 23

Most of the largest owners of tax-abated properties are landlords of residential properties, which were identified by examining their category code in the data. However, a significant number of these large landlords are known to be owner/developers of affordable and low-income housing, with the largest one being the Philadelphia Housing Authority. They are highlighted in yellow8.

There are 786 such units, which collectively compose just over 5% of the total stock of abated properties9. This again, may be contrary to some perceptions that the abatement

8 Although all PHA properties are tax-exempt, only those units which PHA has sold to individual households are exempt under the abatement program, and hence are the only ones included in this analysis. 9 While it may be surprising that no large condo properties or developers appear here, that is because condo units are owned by their individual owners, not their developers.


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program is limited to only high-price housing in high-income neighborhoods. Moreover, there are certainly many individually-owned properties occupied by relatively lower-income households which also have abatements, but are not included in the aforementioned number. While affordable housing targeted to and occupied by low- and moderate-income households may be a minority of tax-abated properties, the single largest developer of abated properties in Philadelphia is actually the Philadelphia Housing Authority.


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The following map shows the location of the tax-abated properties from these top owner-developers of affordable housing, color-coded by the name of the owner-developer.

As can be visually discerned from the map, the properties are overwhelmingly concentrated in the relatively low-income neighborhoods of North and West Philadelphia, and to a lesser extent, South Philadelphia.

This again, may be counter to perceptions that the abatement does not promote any development of affordable housing for low- and moderate-income households.

While affordable housing may constitute a minority of tax-abated homes, one policy implication of this is that the abatement, in its current form, appears to be insufficient to spur the development of such housing. Extending the abatement to twenty years and including the value of the land may be one such solution worth exploring.


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Lastly, we attempt to determine what the new property tax rate would have to be under AVI if these abated properties were never improved or constructed. The following spreadsheet model was set up using data and input from various City agencies and officials10.

Inputs and Assumptions: Item Name Value

(1) Total Property Tax Revenue Collected by City (excl. school dist.) $535,149,000 (2) Prior Year Property Tax Collections $36,000,000 (3) Total Property Tax Revenue Collected for School District (excl. City) $588,740,000 (4) Tax Collection Rate (=1-delinquency rate) 90.5% (5) Total Market Value of City Real Estate $133,381,231,924 (6) Total Exempted Value of City Real Estate $34,828,637,924 (7) Homestead Exemption $15,000 (8) # of Properties with Homestead Exemption 182,089 (9) % Reduction in Taxable Amount Due to Assessment Appeals 5.0%

Calculations and Outcomes: These are automatically computed from the Inputs and Assumptions

Item Name Value

(10) Current Property Tax Revenue Collection $1,087,889,000

(11) Total Taxable Value of City Real Estate $98,552,594,000 (12) Total Taxable Value of City Real Estate, Adjusted for Homestead Ex. $95,821,259,000 (13) Total Taxable Value of City Real Estate, Adjusted for Assessment Appeals $91,030,196,050 (14) New Total Mill Rate 1.32%

As the model clearly identifies, a revenue-neutral mill rate of 1.32% is possible with a $15,000 homestead exemption if the City can improve its property tax collection rate to 90.5% and limit reductions in market values due to assessment appeals to no more than 5%. It also uses the number of properties that have obtained homestead exemptions, as reported by OPA, which implicitly assumes that the number of households receiving exemptions will remain constant for FY13.

The 1.32% rate is very close to the rate of 1.3204% that the Administration is targeting.

10 The source of each input and assumption is available from the author upon request, as well as the details of the calculations: [email protected]


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Next we reduce the market value of the City’s stock of real estate by the total market value of abated properties, as reported by OPA:

Inputs and Assumptions: Item Name Value

(1) Total Property Tax Revenue Collected by City (excl. school dist.) $535,149,000 (2) Prior Year Property Tax Collections $36,000,000 (3) Total Property Tax Revenue Collected for School District (excl. City) $588,740,000 (4) Tax Collection Rate (=1-delinquency rate) 90.5% (5) Total Market Value of City Real Estate $125,355,147,324 (6) Total Exempted Value of City Real Estate $34,828,637,924 (7) Homestead Exemption $15,000 (8) # of Properties with Homestead Exemption 182,089 (9) % Reduction in Taxable Amount Due to Assessment Appeals 5.0%

Calculations and Outcomes: These are automatically computed from the Inputs and Assumptions

Item Name Value

(10) Current Property Tax Revenue Collection $1,087,889,000 (11) Total Taxable Value of City Real Estate $90,526,509,400 (12) Total Taxable Value of City Real Estate, Adjusted for Homestead Ex. $87,795,174,400

(13) Total Taxable Value of City Real Estate, Adjusted for Assessment Appeals $83,405,415,680 (14) New Total Mill Rate 1.44%

OPA reports that the aggregate value of abated properties is $8.026bn. Assuming that the existence of the abatement was critical in getting these properties developed, then removing this amount from the tax base is analogous to simulating what the implementation of AVI would be like without the existence of the abatement.

Deducting $8.026bn from the $133.4bn that is aggregate market value of Philadelphia’s total real estate stock of yields a smaller tax base of approximately $125.4bn.

With this smaller tax base, the new mill rate would have to increase from 1.32% to 1.44%; a nearly ten percent increase.


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Summary:

Critics of the abatement who claim that it is just a tax giveaway and that Philadelphia would have gotten all the new development that it received since the program’s implementation are strongly at odds with the data. The massive surge in new development that Philadelphia experienced occurred immediately after the abatement was passed. Moreover, no such surge occurred in Philadelphia’s suburbs.

Further, the abatement appears to have helped Philadelphia weather the housing bust as well. Construction here may be down from its peak, but still remains relatively strong compared to the suburbs.

Due to both the high cost of development and the low income levels in Philadelphia, the abatement is still very much needed to make real estate development economically viable in all areas of the city. Philadelphia’s cost of construction is 25% above the national average, and is the fourth highest in the nation. But both its real estate prices and its incomes are well below those of other high-cost cities. The abatement is critical in bridging the gap between what it costs to build here and what you can feasibly sell or rent property for.

Under AVI, the abated properties will contribute $88.1m in additional property tax revenue to the city. Moreover, this is likely an undercount, as the assessed value of these properties will rise over time, and this number doesn’t include other taxes paid by new residents who purchased abated properties.

If the abatement program did not exist, and the current stock of abated properties were never improved or constructed, the new revenue-neutral mill rate under AVI would have to be 1.44% instead of 1.32%.

The abatement is certainly not limited to high-priced housing in high-income neighborhoods. Almost all neighborhoods have some abatements, and some of the largest owner-developers of abated properties specialize in affordable housing. The single largest developer of abated properties is the PHA.

Policy implications:

o Eliminating or restricting the abatement will almost certainly increase the cost of development in Philadelphia, and this will occur at a time when the local real estate market is starting to recover. The result will be less development, fewer jobs and a smaller tax base.


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o Passing a homestead exemption under AVI is highly problematic for abated

properties. Many of them will have tax bills of $0-$100, further supporting claims by abatement critics that the program is inequitable. Council should reconsider passing an exemption or limit it to non-abated properties, while OPA should endeavor to rebalance the land/structure apportionment in the next round of assessments. In other words, abated properties should not also receive a homestead exemption and land near Rittenhouse Square should not be valued at the same or lesser extent as land in Point Breeze, for example.

o The abatement in its current form is insufficient to promote substantial amounts of new housing for low-/moderate-income households. Extending the abatement’s duration to 20 years and including the value of the land in the abated amount may be worth exploring.


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Appendix

Total Number of Housing Units For Which Building Permits Were Issued Year Bucks Chester Delaware Montgomery Philadelphia Suburbs

1990 2,225 1,819 641 2,567 747 7,252

1991 2,573 1,967 585 2,282 366 7,407

1992 2,715 2,271 666 3,130 250 8,782

1993 3,096 2,345 747 3,654 426 9,842

1994 3,134 2,223 806 3,275 435 9,438

1995 2,670 2,657 937 2,827 487 9,091

1996 2,477 2,290 1,083 3,371 674 9,221

1997 2,683 3,420 1,364 3,417 863 10,884

1998 2,742 3,489 1,278 3,800 457 11,309

1999 2,904 3,308 1,108 3,675 367 10,995

2000 2,768 3,051 1,142 3,058 1,333 10,019

2001 2,171 2,900 1,567 2,874 772 9,512

2002 2,815 3,304 935 2,653 554 9,707

2003 3,215 2,961 1,149 2,598 1,754 9,923

2004 2,560 3,661 911 2,687 2,864 9,819

2005 2,104 3,081 836 3,668 2,506 9,689

2006 1,552 2,527 818 2,612 2,164 7,509

2007 1,359 2,092 550 2,323 1,972 6,324

2008 1,110 1,658 492 1,334 1,701 4,594

2009 459 957 494 800 947 2,710

2010 474 1,112 363 1,061 984 3,010

2011 454 934 190 909 1,552 2,487

Total 48,260 54,027 18,662 58,575 24,175 179,524

1990-2000 29,987 28,840 10,357 35,056 6,405 104,240

2001-2011 18,273 25,187 8,305 23,519 17,770 75,284

Pct. Ch. -39% -13% -20% -33% 177% -28%

%Ch. 1999-2003 11% -10% 4% -29% 378% -10%

Documents

PHILADELPHIA’S TEN-YEAR TAX ABATEMENT · PHILADELPHIA’S TEN-YEAR PROPERTY TAX ABATEMENT Updated statistics on the size and distribution of tax-abated properties in Philadelphia