Postrecession Allentown rebuilt its downtown with a big tax break. The Sixers want a similar deal in Philly.

The Sixers may have to convince state and local leaders that the benefits of their megadevelopment on Penn’s Landing outweigh costs to taxpayers.

The Philadelphia 76ers want to build a commercial complex centered around a basketball arena at Penn's Landing.Read moreCHARLES FOX / Staff Photographer

by Jacob Adelman

Published Sept. 4, 2020, 5:01 a.m. ET

When Allentown used an unprecedented tax subsidy to begin redeveloping a 127-acre swath of its downtown — centered on a new sports arena — the Lehigh Valley city was reeling from the Great Recession, with poverty and unemployment rates that outpaced state and national averages.

The 76ers now want state and local lawmakers to give a similar tax infusion to the developers of a potential new basketball stadium district in central Philadelphia, an area that has been generating new jobs at record-breaking levels and often attracting new construction without public aid.

Their calls could be moot if the Delaware River Waterfront Corp., the agency in charge of selecting a developer for the 11 acres along Penn’s Lending where the arena and accompanying buildings would rise, opts for one of the other groups bidding for the site.

But if the Sixers are granted the development opportunity by the DRWC, the team’s owners will have to convince state and local leaders that the benefits of their mega-development, bordering some of Philadelphia’s most prosperous neighborhoods, outweigh costs to taxpayers.

Some are also questioning the fairness of a big public subsidy that would support the Sixers’ owners, sports-and-private-equity moguls Josh Harris and David Blitzer.

“A billionaire asking for a tax handout is unseemly and gross in normal times,” said City Councilmember Helen Gym, a Democrat in an at-large seat. “In the midst of a pandemic and record unemployment, it’s obscene.”

To build the project, the owners are seeking a massive tax subsidy — the creation of a special financing zone that one analyst said in a Planning Magazine article takes an already generous tax break and puts it “on steroids.”

The deal would permit the owners to keep the zone’s local and state taxes and spend the money on the project itself.

State Sen. Vincent Hughes, who has been briefed by the Sixers’ ownership on the plan, said it could well be worth the expense if it delivers promised jobs and business contracts to Black and other minority communities that have been hit especially hard by the coronavirus pandemic.

The Sixers’ project is said to include at least one office building, a hotel, museums, a supermarket, and a school in addition to the proposed arena.

“What entices me and makes me excited is the size and the scope and the job creation,” said Hughes, a Democrat who represents parts of Philadelphia and Montgomery Counties, though not Penn’s Landing. “Everything that we do has got to be transformational, and this seems to fit into that space.”

He said no other potential Penn’s Landing developer has spoken with him about seeking tax breaks.

Allentown got its tax break under a Neighborhood Improvement Zone, or NIZ, which was created by 2009 state legislation specifically to support what’s now known as PPL Center and surrounding development.

The Sixers hope to use Allentown’s NIZ as a model for their financial support package, portraying it in a list of talking points reviewed by The Inquirer as a remedy to the DRWC’s concerns about the financial feasibility of the project.

A DRWC spokesperson said the agency does not comment on pending real estate matters. A Sixers representative declined to share details of its plan for publication, citing the DRWC’s prohibition on applicants publicly discussing their proposals.

Under Allentown’s NIZ, public agencies and private developers use state and local tax dollars generated within the zone — which presumably would be enhanced by the new construction — to pay back the money borrowed to build a project.

A similar concept known as Tax Increment Financing — TIF — has been employed on a smaller scale in Philadelphia for such projects as the redevelopment of the former Gallery at Market East. But Allentown’s NIZ supercharged that.

TIFs only let developers repay their debts with local taxes, while the NIZ also makes state taxes available to pay for development, which is why both state legislators and City Council would have to approve a similar setup for Philadelphia.

Under Allentown’s NIZ, lenders on the stadium and other projects in the development zone get first dibs on taxes generated there. Public agencies then get to collect up to an amount equivalent to what they were getting before development — if there’s enough left over, as has not always been the case.

In 2018, for example, state and local agencies took home $1.5 million less than had been collected before development, even as developers were allocated a record $36.3 million to pay back their banks, the Allentown Morning Call reported.

State Sen. Pat Browne, a Republican from Allentown who penned the 2009 NIZ legislation and has been consulting with the Sixers on a plan for Penn’s Landing, said the Philadelphia version could be designed to guarantee that some level of taxes is collected, since the city is less needy of development.

The Sixers haven’t released a budget for their arena plan. But Hughes said it’s been described to him as a $4 billion proposal.

That would mean the project would cost more than $1 billion above what was spent between the late 1990s and 2019 to build downtown Los Angeles’ sports-and-entertainment complex that includes the Staples Center, a concert hall, a 54-story hotel tower, and a retail-and-restaurant arcade.

For context, the redevelopment of the Gallery, with a much smaller budget of $420 million, is resulting in the diversion of $127.5 million in local taxes over 20 years through its TIF tax break.

The selling point for such arrangements is that increased employment, nearby development, and other economic activity spurred by big projects more than compensates for any uncollected tax dollars.

Before the NIZ legislation was passed to aid development in Allentown, its city center had no hotels or high-end office buildings, said Brown.

There’s now a new hotel under Marriott International’s Renaissance brand, modern office buildings with tenants that include BB&T Bank, and a growing number of rental apartment projects, he said.

“Its primary function was to give back Allentown what it lost over 50 years, which was its commercial center,” said Brown. “It has resulted in significant new investment in our downtown.”

But those benefits have not been widespread, according to a paper this spring in the Georgetown Policy Review that looked at Allentown’s NIZ five years after developers began remaking its downtown in 2012.

It found that employment growth in low-income neighborhoods near the new development fared no better than those in other comparable Pennsylvania cities, while poverty rates actually decreased at a slower clip than elsewhere.

There are also big differences between Allentown circa 2012 and the Philadelphia of today.

Allentown, like many other industrial cities in the mid-Atlantic region, had been hit especially hard by the Great Recession of the late 2000s, with unemployment up more than 6% over prerecession levels, about twice the increase seen both nationally and statewide, according to U.S. census data cited in the Georgetown Policy Review paper.

Philadelphia, by comparison, has seen record-breaking jobs figures over the last few years and had — at least before the coronavirus hit — been on a trajectory to continue growing, according to data compiled by the Center City District in its State of Center City report for 2020.

“Core cities, like Philadelphia: they’re already built up,” said Adie Tomer, a fellow at the Brookings Institution think tank. “It’s not like you’ve got a frontier here where you need the anchor to bring the development to it.”