Jones proposes graduated tax abatements
By Patrick Kerkstra
The Philadelphia Inquirer, April 17, 2009
There has not been much middle ground in the debate over Philadelphia's 10-year property-tax abatements.
Supporters say the abatements - worth a decade of dramatically lowered taxes on new or renovated buildings - have encouraged development where little or none would have occurred.
Critics assail the discounts as a glaring case of welfare for big builders and rich homeowners. It is time, they say, to end the giveaway.
Now, however, with City Hall in the midst of a heated, wide-ranging argument over tax policy, some abatement compromises are being floated. Though most - including two bills introduced in City Council yesterday - seek to reduce the discounts, Councilman Curtis Jones Jr. has an alternative: Grant future abatements only to projects that meet strict green-building standards.
Doing so, he says, would preserve the tax break, advance Mayor Nutter's plan to turn Philadelphia into a hub of 'green-collar" jobs, and give developers a major inducement to construct buildings that are significantly better for the environment.
"I do not support the elimination of the tax abatement," Jones said in an interview, "but I do want it to evolve."
The abatement program has prominent support in the business and development communities, but populist sentiment is not moving in its favor. In town-hall budget meetings and at least one protest, some Philadelphians condemned the program as unfair to residents who do not live in new or renovated buildings.
Nutter's budget has fueled that opposition. To help close a $1.38 billion, five-year deficit, he has proposed a temporary 19 percent increase in property taxes. Most property owners would be hit hard, but the tax bills of those with abatements would rise minimally.
Jones' bill would grant tax breaks ranging from 10 percent to 100 percent for buildings that receive a certification known as LEED - Leadership in Energy and Environmental Design - from the nonprofit U.S. Green Building Council.
Buildings earning the highest certification, platinum, would get a 100 percent abatement on all taxable improvements, as in the current program. Those with lesser LEED certifications would get smaller discounts.
Properties that already have 10-year abatements would not be affected.
"Something like this would force most builders and developers . . . to go green to get the abatement," said developer Chad Ludeman, who is building LEED-certified homes in Kensington.
The Nutter administration maintains that now isn't the time to change the rules, given the weak economy and dearth of construction in the city.
"Restricting the abatement program . . . would likely have the effect of inhibiting development when we need it most," Andrew Altman, deputy mayor for planning and economic development, told Council this month.
Instead, the administration would support adding a green incentive to the 10-year abatement, Altman said. One possibility: abatements exceeding 10 years for green buildings.
Developers' chief objection to linking abatements to environmentally friendly construction is cost.
In theory, abatements spur development by increasing builders' profit margins. Because buyers pay reduced real estate taxes for up to a decade, builders can charge more for the properties. The city's high construction costs and relatively low home values make the discount necessary, advocates contend.
"We have New York construction costs but Baltimore home prices," said Kevin Gillen, a vice president of the economic-consulting firm Econsult Corp. and a Wharton School fellow.
Many developers argue that the city will have to offer an easy-to-get tax break even after the economy improves.
"Until Philadelphia addresses the underlying problems of prohibitively high construction costs, lack of predictable zoning, and excessive tax burdens to businesses and potential residents, modification of the abatement should not even be discussed," said developer John Westrum, who has built hundreds of abated homes in the city.
Developers are just as opposed to other abatement-limiting proposals before Council.
In December, Councilman Darrell Clarke proposed cutting the value of future abatements by 20 percent
Yesterday, he added two more bills to the mix. One would reduce the value of new 10-year abatements by 10 percentage points a year. The other would shrink the discount by 10 percentage points annually until the fifth year; that would leave the owner with a 50 percent discount on taxes until the abatement expired.
Builders argue that any of those changes would slow development in Philadelphia.
Jones' bill, they say, would be just as bad, even though it provides for 100 percent 10-year abatements for the greenest buildings.
Building green structures - with, say, pricey solar panels and advanced heating and cooling systems - is generally considered more expensive than erecting traditional homes and offices.
That could eat up the fatter profit margins and, in turn, make financing more difficult for developers of office and condo towers and other buildings.
"The unintended consequences of a bill like this, which begins to erode the 10-year tax abatement, is really not good for the city," real estate lawyer Michael Sklaroff said at the Council hearing this month.
It is not entirely clear, however, that building to LEED standards would cost so much that the value of 10-year abatements would be significantly diminished. Hard local data on the construction costs of green buildings are scarce, but anecdotal accounts suggest they can be built without much extra expense.
In his green projects, construction-cost increases have been "negligible at most," said Johnny McDonald of Onion Flats, a firm that has built LEED-certified duplexes in Northern Liberties.
Other green-focused Philadelphia builders, such as Ludeman, have shown that LEED certification is attainable even for relatively low-cost homes. He has nearly finished two prototypical "100k homes" - about $100,000 spent in hard construction costs - and expects to build similar homes that sell for $200,000 to $300,000.
McDonald and Ludeman are small-scale builders who do not use union labor. McDonald works in a family-run firm; Ludeman is something of a green evangelist.
Building to LEED standards on a larger scale and with union labor may be a more expensive proposition for developers.
Jones said he was open to changing his bill, and odds are it will have to be revised if it is to survive a potential mayoral veto.
One option could be to replace the LEED standard with less-stringent green guidelines. Jones could also exempt minor home renovations - a new kitchen or deck, for instance. There are no LEED standards for such remodeling projects; unless Jones amended his bill, they would no longer be eligible for abatements.
In the next few weeks, Jones will meet with members of the Nutter administration, developers, and green-building advocates. Clarke also plans to hold hearings on his bills.
"I need people to work with me," Jones said. "There are people who want to do away with abatements entirely. Builders should remember that."
Supporters say the abatements - worth a decade of dramatically lowered taxes on new or renovated buildings - have encouraged development where little or none would have occurred.
Critics assail the discounts as a glaring case of welfare for big builders and rich homeowners. It is time, they say, to end the giveaway.
Now, however, with City Hall in the midst of a heated, wide-ranging argument over tax policy, some abatement compromises are being floated. Though most - including two bills introduced in City Council yesterday - seek to reduce the discounts, Councilman Curtis Jones Jr. has an alternative: Grant future abatements only to projects that meet strict green-building standards.
Doing so, he says, would preserve the tax break, advance Mayor Nutter's plan to turn Philadelphia into a hub of 'green-collar" jobs, and give developers a major inducement to construct buildings that are significantly better for the environment.
"I do not support the elimination of the tax abatement," Jones said in an interview, "but I do want it to evolve."
The abatement program has prominent support in the business and development communities, but populist sentiment is not moving in its favor. In town-hall budget meetings and at least one protest, some Philadelphians condemned the program as unfair to residents who do not live in new or renovated buildings.
Nutter's budget has fueled that opposition. To help close a $1.38 billion, five-year deficit, he has proposed a temporary 19 percent increase in property taxes. Most property owners would be hit hard, but the tax bills of those with abatements would rise minimally.
Jones' bill would grant tax breaks ranging from 10 percent to 100 percent for buildings that receive a certification known as LEED - Leadership in Energy and Environmental Design - from the nonprofit U.S. Green Building Council.
Buildings earning the highest certification, platinum, would get a 100 percent abatement on all taxable improvements, as in the current program. Those with lesser LEED certifications would get smaller discounts.
Properties that already have 10-year abatements would not be affected.
"Something like this would force most builders and developers . . . to go green to get the abatement," said developer Chad Ludeman, who is building LEED-certified homes in Kensington.
The Nutter administration maintains that now isn't the time to change the rules, given the weak economy and dearth of construction in the city.
"Restricting the abatement program . . . would likely have the effect of inhibiting development when we need it most," Andrew Altman, deputy mayor for planning and economic development, told Council this month.
Instead, the administration would support adding a green incentive to the 10-year abatement, Altman said. One possibility: abatements exceeding 10 years for green buildings.
Developers' chief objection to linking abatements to environmentally friendly construction is cost.
In theory, abatements spur development by increasing builders' profit margins. Because buyers pay reduced real estate taxes for up to a decade, builders can charge more for the properties. The city's high construction costs and relatively low home values make the discount necessary, advocates contend.
"We have New York construction costs but Baltimore home prices," said Kevin Gillen, a vice president of the economic-consulting firm Econsult Corp. and a Wharton School fellow.
Many developers argue that the city will have to offer an easy-to-get tax break even after the economy improves.
"Until Philadelphia addresses the underlying problems of prohibitively high construction costs, lack of predictable zoning, and excessive tax burdens to businesses and potential residents, modification of the abatement should not even be discussed," said developer John Westrum, who has built hundreds of abated homes in the city.
Developers are just as opposed to other abatement-limiting proposals before Council.
In December, Councilman Darrell Clarke proposed cutting the value of future abatements by 20 percent
Yesterday, he added two more bills to the mix. One would reduce the value of new 10-year abatements by 10 percentage points a year. The other would shrink the discount by 10 percentage points annually until the fifth year; that would leave the owner with a 50 percent discount on taxes until the abatement expired.
Builders argue that any of those changes would slow development in Philadelphia.
Jones' bill, they say, would be just as bad, even though it provides for 100 percent 10-year abatements for the greenest buildings.
Building green structures - with, say, pricey solar panels and advanced heating and cooling systems - is generally considered more expensive than erecting traditional homes and offices.
That could eat up the fatter profit margins and, in turn, make financing more difficult for developers of office and condo towers and other buildings.
"The unintended consequences of a bill like this, which begins to erode the 10-year tax abatement, is really not good for the city," real estate lawyer Michael Sklaroff said at the Council hearing this month.
It is not entirely clear, however, that building to LEED standards would cost so much that the value of 10-year abatements would be significantly diminished. Hard local data on the construction costs of green buildings are scarce, but anecdotal accounts suggest they can be built without much extra expense.
In his green projects, construction-cost increases have been "negligible at most," said Johnny McDonald of Onion Flats, a firm that has built LEED-certified duplexes in Northern Liberties.
Other green-focused Philadelphia builders, such as Ludeman, have shown that LEED certification is attainable even for relatively low-cost homes. He has nearly finished two prototypical "100k homes" - about $100,000 spent in hard construction costs - and expects to build similar homes that sell for $200,000 to $300,000.
McDonald and Ludeman are small-scale builders who do not use union labor. McDonald works in a family-run firm; Ludeman is something of a green evangelist.
Building to LEED standards on a larger scale and with union labor may be a more expensive proposition for developers.
Jones said he was open to changing his bill, and odds are it will have to be revised if it is to survive a potential mayoral veto.
One option could be to replace the LEED standard with less-stringent green guidelines. Jones could also exempt minor home renovations - a new kitchen or deck, for instance. There are no LEED standards for such remodeling projects; unless Jones amended his bill, they would no longer be eligible for abatements.
In the next few weeks, Jones will meet with members of the Nutter administration, developers, and green-building advocates. Clarke also plans to hold hearings on his bills.
"I need people to work with me," Jones said. "There are people who want to do away with abatements entirely. Builders should remember that."