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Could Residential Development In Philly Dry Up When The New 10-Year Tax Abatement Takes Effect?

At the end of the year, the 10-year tax abatement that has been treasured by Philadelphia developers for two decades will lose much of its value.

The Philadelphia skyline, seen in 2018

On Jan. 1, an abatement that exempted new residential construction from its first 10 years of property taxes will be replaced by one that exempts such properties from 100% of property taxes in the first year and goes down 10% annually thereafter — from 90% in year two down to 10% by year 10. The change comes from a suite of laws passed by the Philadelphia City Council on Dec. 1, 2020, including a new 1% Development Impact Tax on all residential construction.

The abatement applies to all new construction on single-family homes and multifamily buildings, whether an entirely new building or improvements to an existing structure. In the latter case, the assessed value of improvements is what qualifies for the abatement.

For commercial construction, the abatement has been reduced to a flat 90% over the first 10 years from the previous 100% abatement.

Any qualifying project that receives a building permit from the Department of Licenses & Inspections by Dec. 31 will benefit from the full abatement, leading to what some developers claim has been a rush on permit applications to get in under the wire. 

“Everyone that is able to get something through is putting it through,” Riverwards Group CEO and Building Industry Association treasurer Mo Rushdy told Bisnow.

The number of new construction permits issued by L&I actually decreased in September and October over July and August and remains below the pace set before the coronavirus pandemic, according to city data. Though some qualifying projects would be categorized otherwise in L&I’s records, new construction represents the bulk of permits that qualify properties for the tax abatement, according to an L&I spokesperson.

There is a chance a spike in permit issuance could still occur before year’s end. Since a building permit is only issued once a developer secures other permits for construction, such as for street closures and water main changes, some applications may be on their way — especially with many related departments still grappling with delays related to the pandemic or the tough labor market, multiple sources told Bisnow. For an application with all the prerequisites filled, L&I is issuing building permits on time, a department spokesperson said.

Duane Morris partner Brad Molotsky, OCF Realty President Ori Feibush and Post Brothers President Matt Pestronk

Rushdy and OCF Realty President Ori Feibush both said applications are way up among their own companies and their peers.

“I’ve seen data showing eight times what we would normally have at this time of the year in terms of permit applications,” Feibush said. “There’s no question that there’s an enormous increase. We just pulled 1,200 units worth of building permits now because we had approvals and the billing statement, and the last thing we wanted to do was get stuck by the city being slow to pull permits.”

Regardless of whether a spike in building permits happens, a spike in construction starts would be unlikely to follow, Feibush and Rushdy said. Projects will still qualify for the current abatement even if their applicants file for extensions, which many will to keep their pipelines at reasonable levels.

Still, the beginning of the new year will be a moment the real estate industry has dreaded and has some claiming multifamily development in the city could fall off precipitously due to the increased tax expense.

“Compared to 2021, if I were to project, next year will see more than a 50% drop in applications in terms of the number of units, if not more,” Rushdy said. “There’s going to be a huge drop.”

Even Councilmember Helen Gym, one of the legislators who worked to enact the changes to the abatement, credited the tax program with spurring the development boom that started at the turn of the millennium in a Friday interview with Bisnow, though she disagrees with the notion that it still serves the same purpose. 

“The 10-year tax abatement has run its course,” Gym said. “It was created 20 years ago at a very different time in the city and created as a crisis response. Twenty years in, the evidence is very clear that the benefits are hyper-concentrated in areas that do not need incentives. They are already very well-developed, have a strong tax base and are even beginning to stratify.”

Those well-developed, stratifying neighborhoods are the only places where development will happen starting in 2022, Feibush said. The planned units in OCF’s development applications this year were 65% multifamily and 35% for-sale, single-family homes and townhomes. Of the projects he plans to apply for next year, 95% are single-family homes in affluent areas, Feibush told Bisnow.

“We’ve shouted from every bully pulpit we had a year and two years ago that this wouldn’t grind all development to a halt, but would very much steer developments into the most affluent parts of Philadelphia where the margin is higher, and more toward townhome or single-family home product rather than entry-level apartment buildings,” he said.

Philadelphia City Hall

Since the change to the tax abatement and the 1% construction tax were passed at the end of last year, city council has made several attempts to exert more control over the development process. Most recently, a bill rezoning a key University City affordable housing complex to block redevelopment was advanced out of committee, and both Council President Darrell Clarke and Councilmember Cindy Bass have proposed bills that would place council appointees on the Zoning Board of Adjustment and allow council members to make their own appeals to the ZBA.

The changes already happening and those being considered make for an intolerably unpredictable situation for the long-term planning the real estate industry requires, Rushdy and Feibush said. Both asserted some of their friends in the industry have decided to take their business out of Philly and bring it to either the suburbs or other markets this year, though neither of them are doing so personally.

“They’re screwing with developers across the board,” Rushdy said. “I can’t believe what’s happening. There is capital that is leaving the city; this is a true thing. A lot of developers are ready to start operations outside Philadelphia. And thank you to the city for making development in the city unpredictable.”

But with the incredible strength of the current housing market and Philly’s post-pandemic recovery trending upward, Gym is not convinced that development will slump as a result of the new abatement.

“The housing market in Philadelphia has not fallen, bottomed out or anything,” Gym said. “So stories of the demise are a bit much. That being said, I do think there’s an important conversation to have right now, that we need to have a sense of where we’re going. I think there are a number of communities and council members that are trying to figure a path through. And the development community should be partners in a long-term strategy, not just in short-term gain.”

One such long-term strategy that has the support of both city government and the private sector is a nearly two-year-old law that would allow developers to buy city land on the cheap in exchange for commitments to build affordable housing on that land. Rushdy held up the law as proof that the city does not need to change the 10-year tax abatement or use zoning overlays to encourage housing affordability in testimony at a hearing for the University City zoning bill and in an interview.

“There are 647 vacant, city-owned properties in the third district,” Rushdy said of the district encompassing the controversial affordable housing project. “How many of those have been disposed of?”

Gym did not comment directly on how much the land use policy Rushdy promoted has been used.

“This is a wider-ranging conversation,” Gym said. “There are clearly needs. Growth and equity need to go hand in hand, and developers are not going to be the only ones to solve affordable housing in the city.”