A rush to change Philadelphia’s 10-year tax abatement stuck real estate developers with a tough choice

Real estate developers in Philadelphia were alarmed last month when City Council members hatched a plan to quickly change the controversial 10-year tax abatement, long a cherished tax break for the industry.

Then they started viewing it as an opportunity.

Four new members are joining Council in January, and the city’s politics are expected to shift further left with their arrival. The rush to reform stuck developers with a difficult choice: agree to a compromise now, or risk more significant changes in 2020, including a potential push to repeal the abatement entirely.

For now, they’re betting on compromise.

Developers, real estate professionals, and lobbyists are scrambling to lock down a deal to limit the financial hit they would sustain under legislation by Council President Darrell L. Clarke. They’ve inundated Council members’ offices with a flurry of meetings, and two trade groups put forth amendments Monday that would water down Clarke’s proposal. It remains to be seen whether their arguments will gain traction: No Council member had agreed to introduce the amendments late Monday.

Clarke’s bill would cut the value of the abatement for residential construction almost in half. A hearing Tuesday is expected to be crowded with advocates on all sides.

The lobbying blitz marked a concession that changes to the abatement are almost inevitable and a shift from the industry’s stance of opposing any alteration to the tax break.

“It’s safe to say that, even though we disagree with this policy and are trying to make it better, there probably is a better chance to make it better under this Council vs. next," said Chris Somers, president of the Greater Philadelphia Association of Realtors (GPAR), one of the groups that has proposed an amendment to Clarke’s bill.

The tax abatement, adopted almost 20 years ago to spur growth after decades of decline in the city, has become a lightning rod in recent years. In its current form, the abatement eliminates all real estate taxes on the value of new construction or improvements for 10 years. Property owners still pay taxes on the value of the land underneath their buildings.

Proponents say the abatement pays for itself because it acts as a development incentive that brings more money into Philadelphia over time. Opponents decry it as a tax break for the wealthy that speeds up gentrification and takes sorely needed money away from city schools.

Developers have allies in leaders of the building trades unions, who also are working behind the scenes and have opposed changes to the tax break. John J. “Johnny Doc” Dougherty, who heads Local 98 of the International Brotherhood of Electrical Workers as well as the building trades, “understands as well as anyone the positive impact the abatement has had on the city’s economy,” spokesperson Frank Keel said. Dougherty is in “close communication” with City Council members and Mayor Jim Kenney, an ally who has also supported the abatement, Keel said.

Dougherty is under federal indictment for allegedly embezzling from the union and has denied all wrongdoing.

The real estate community’s eleventh-hour push has drawn ire from incoming Council members, who criticized developers for wanting to rush through a deal despite significant public opposition to the abatement.

“We’re people who have campaigned all year long and have listened to the concerns of Philadelphians, so wanting to rush that through and not listen to us is not a compromise,” said Jamie Gauthier, who ousted longtime West Philadelphia Councilwoman Jannie L. Blackwell in the May Democratic primary. Gauthier, who takes office in January, said on the campaign trail that she favored ending the abatement.

Gauthier’s position is supported by Kendra Brooks, who also campaigned on abolishing the abatement while running on the Working Families Party ticket. Brooks will join Council in January after her historic third-party win ousted abatement-friendly Republican Councilman Al Taubenberger. Brooks declined to comment Monday.

» READ MORE: Philly tax abatement debate: Here's everything you need to know

Clarke’s bill, which has 14 co-sponsors, is the first legislative effort that has gained significant traction in recent years. His proposal would phase down the abatement by 10 percentage points each year, meaning a property owner would receive a 100% abatement in the first year, 90% in the second, and so on.

The two amendments put forth by GPAR and the Building Industry Association (BIA) would delay and slow that phase-down, leaving the full abatement intact for four or five years before gradually reducing it. Both proposals would allow property owners to keep roughly 70% of the current tax break, compared with about 55% under Clarke’s bill as currently written.

Members of the development community argue that the amendments are necessary because they add more predictability for lenders who finance development projects or provide loans to homeowners. Both amendments also propose delaying the implementation of any changes to the abatement until 2021, giving developers with projects in the works more stability in the months ahead.

“It’s extremely difficult to bring these buildings out of the ground, to get them financed, to get them built,” said Jim Maransky, president of the BIA.

“We understand the position that Council is in — there’s a public outcry for changing the abatement,” Maransky added. “We believe the real estate market could continue [to survive] with a moderate change to the abatement. But what’s proposed right now would be too drastic.”

Lobbyists for developers and the building trades already killed a different proposal, which would have capped the amount of value that could be exempt from taxes, before it could be introduced in Council.

Still, efforts to alter Clarke’s bill may not be enough to sway Council, which must vote by Dec. 12, the final meeting of the session. Councilman Bill Greenlee, a Clarke ally who is retiring in January, said Monday that he prefers the current bill to the proposed amendments.

“I support the bill as introduced. I think it’s a reasonable compromise from many ideas that people had,” Greenlee said. “Knocking it down just 10 [percentage points] a year — I’m not a developer, but I find it hard to believe that that would have that negative an effect on development.”