END OF THE TAX-ABATEMENT RAINBOW! How Philly Can Survive The Coming Collapse

BY TOM MASSARO/ In the mid-’90s when the 10-year tax abatement was being considered, I kept pointing out one core, glaring fact from the original research by Peter Wiley in his thoughtful advocacy for Center City, one the City Managing Director James S. White also highlighted at that time.

Wiley was the  initial leader and advocate of the Center City District before Paul Levy. He died in a honeymoon helicopter crash. In the preceding 20 years or so, through recessions and booms, throughout wild swings in interest rates, good mayors or bad, there was an annual average of approximately 100-120 residential units built per annum in Center City, river-to-river … from about Spring Garden or Girard to South Street or Washington Avenue. The fundamental reason for this slow pace was, absent property-tax reform, expanding our tax base and genuine reassessment, property taxes were discouraging high at best … or halfway to confiscatory at worst. As we say in the development business, “the numbers just didn’t work,” given:

1. The cost of Center City construction, even as most all of those small units in the ’80s and ’90s were built nonunion. Now many are high-skill, higher-wage union jobsites at a relatively higher labor and sales-tax cost. However, building-trades workers in Philadelphia tend to be very well trained, highly productive and safety-conscious, which offsets a significant part of their price disparity with nonunion sites. They have city wage tax withheld, respect OSHA and workmen’s comp regs … valuable-to-the-city benefits that nonunion sites sometime evade to our detriment.

2. Center City’s high land values (now even relatively higher than in 1997).

3. The City’s long inability to implement a valid AVI and a fair citywide reassessment. This helps make taxes on new construction and substantial renovation too high. We needed a broader taxpaying base, not just a broader tax-abated base.

None of those three fundamental facts have changed much for the better or improved sufficiently. They may even have gotten worse as of 2012.

In rough economic terms, the 10-year tax abatement let the developer receive a temporarily “faux-market” sale price from the purchasing homeowner … as if there would never be market-value property taxes. That’s why some of us have known these values are certain to drop 15-25% when market property taxes kick in, especially absent a straight and professional citywide AVI and related measures.

Just examine Center City Realtor Allen Domb’s ad format which appeared locally. It  graphed out the immutable correlation between monthly operating costs and value. Domb took every major Center City condo and did a comparative spreadsheet of six or seven columns: Purchase cost, down-payment amount, monthly maintenance and insurance and utilities, mortgage interest rate P&I, and real estate taxes. It then totaled the monthly payment and the income required to buy. If you look at the assumed sale price, this spreadsheet  pinch-hit as a rough capitalization-of-value graph.

As the homeowner’s monthly cost rises, the value goes down. The pool of buyers diminishes as purchasers are restricted to higher rungs on the income ladder. As implied,  two comparable homes listed for sale for $500,000 each wouldn’t stay the same value, if the monthly operating expenses varied considerably. Condos with higher monthly condo fees and real-estate taxes are generally valued for less and sold for lower amounts. Almost always, the higher the total monthly carrying cost — mortgage, maintenance, insurance, etc., and property taxes — the lower the value. The lower the monthly total for these items, the higher the value. After Provence Residence, coming next will be North Gaia EC in Yishun to be released in 2022.

Three years ago, when I advised a potential buyer of an $875,000 condo at Dranoff’s nicely done Symphony House her taxes in seven years would probably be $9,000-$13,000 per annum assuming some tax reform, possibly more if there weren’t, she was told  I was spreading “poison.” Further, she was explicitly advised by several Center City Realtors that the predictably scheduled, forthcoming tax hike would generate such an outrage City Council would extend tax abatement for many of the city’s most-affluent homeowners, who haven’t been paying any taxes on their building for 10 years (usually just on the land).

The developers or sellers of these tax-abated homes got paid a sale price as if there would never be any jump in real-estate taxes after 10 years. The homeowners who purchased at that “faux mid-and-long-term value” will likely get a 15-20% drop on their value when non-abated property taxes kick in.

For the most part the  factors which I delineated above — which economically justified 100 or so units per annum over a 20 year period thru 1997 — haven’t changed much in a positive direction … or may have worsened on a relative or absolute basis. Without the abatement, these thousands of units per annum, from 1997-2012, would never have been justified in the marketplace of economic reality. The construction, retail jobs, spinoff economic activity and city/state tax revenue it spawned were all positive, but the three factors I have mentioned still  economically discourage feasible, full property tax-payable new homes.

WHAT STEPS CAN WE TAKE?

The Center City Special Services District has done much to create a cleaner, safer and more-vibrant quality of life, in thoughtful and creative ways, which economically justify some increase in value. With uncommon responsibility and sensitivity, Levy and the CCSSD made some smart, successful efforts to hire, train and serve the homeless and at-risk individuals … not just decry their negative impact on tourism and commerce.

But while our Mayor, City Council and CCSSD can make or change many laws, regulations and provide smart services in effective ways, the fundamental s of Economics 101 and the immutable physics of capitalized values remain above their pay grade.

The one thing that can mitigate this awesome tax kick is to undertake a professional and straight AVI which our appointed and elected officials have ducked and stalled for two decades. Councilman Bill Green and his indefatigable staff have done Wharton quality analysis in this regard; City Council and the Mayor ought to deploy it to the city’s benefit and public interest.

Over the longer term, the very smart focus and laudable strong leadership by Mayor Nutter and his successors on raising high-school and college graduation rates will do the most to elevate our city’s future. Make our public education system fiscally stable, adequately financed and jealously achievement allegiant as top priority.

We can also support and incentivize responsible development throughout the city. Give “up-zoning bonuses” in exchange for those projects which most boost long-term tax and employment objectives and can prove it.

Untangle the Byzantine garrotte and paralytic strangle on the thoughtful sale of city-owned property. Implement smart and effective disposition of tens of thousands of city-owned parcels for certain near-term development, including affordable housing for the massive number of gentrification-displaced low- and moderate-income renters. Councilwoman Maria Quiñones Sánchez’s land-bank proposal is a great start.

Stop the blatant, immoral, unlawful and destructive denial of equal employment opportunity to Philadelphia residents, especially women, youth and men of color. Tax abatements, zoning enhancements and conveyances of city-controlled property should only take place with a documented level of employed Philadelphians and the retention of price-and-quality-competitive Philadelphia companies, suppliers and professionals.

Eighty percent of Philadelphia residents are female, Black, brown or Asian. Councilman Wilson Goode, Jr.’s  sustained leadership on this regard is showing results, especially where he installed legislative dental implants to bite down on noncompliance and fraudulent diversity claimers.

Philadelphia is a city with about 25% of its adults and 36% of its children in poverty. Development projects in this city, engendered by tax abatement and other incentives from the public till, must demonstrate their direct and collateral benefits by the actual post-completion project spreadsheet of payees, not deceitful fantasies of Philadelphian inclusion.

Well-trained, market-ready young men and women from our renowned YouthBuild Philadelphia Charter School in North Philadelphia, with kids from every corner and of every color in this city, are virtually all “scorned spectators” as over $500 million of tax-abated or exempt construction takes place within one mile of their school, desecrating the work of Rev. Leon Sullivan, Cecil B. Moore and the spirited, conservative Republican Jack Kemp … and killing the city’s future. Same for our other Voc-Ed schools.

This rank exclusion of our next generation of workforce is the HOV express lane to the economic suicide of our city. It also spins off the need to keep building state prison cells, Gov. Tom Corbett’s #1 state “capital improvement” budget expense. The Philadelphia School District did over one billion dollars of school construction and had no requirement for their selected contractors to retain their own kids from YouthBuild and other vocational schools. If the SRC won’t hire their own well-trained YouthBuild, CHAD and other voc-ed kids on their projects, who should?

Tax abatement should be “pending” until the project developer submits a simple, post-completion, accounts-payable itemization of all payees, individual and corporate, in the project’s total development cost. Full abatement should require a minimum of 50% of total development cost dollars flowing to Philadelphia workers/contractors/service providers, verified with appropriate W2/1099/workman’s-comp reports from city licensed contractors and signed-under-oath attestations.

A sliding scale of incentives can be deployed: 100% abatement for 50% flows to Philadelphians, 50% abatements for 25% flows to Philadelphians and zippo for less than 25%.

The city has many high-capacity, businesslike CDCs which can develop, build and manage projects with maximum community economic benefit. Private developers should be incentivized to partner them in non-sham, value-added partnerships — and for nascent CDCs, mentorships.

The thousands of homeowners who have been on a 10-year trip to the City of Oz with an Ozian property-tax bill, won’t be happy when their first genuine property-tax bill includes a one-way trip back to the City of Philadelphia and the laws of Economics 101. All the more reason for our civic leaders to have Plan B ready by then.

(Tom Massaro is a former Philadelphia City Housing Director.) 

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