Philly stadium owners don’t pay property taxes. Here’s what that means for the Sixers’ arena proposal.

Since it was unveiled almost two years ago, the 76ers’ proposal to build a new arena in Center City has generated debate over its potential impact on the future of Chinatown, the vitality of East Market Street, and the availability of downtown parking.

But one key aspect of the proposal that has flown under the radar is the team’s plan for the real estate that would lie under the arena, the block between 10th and 11th Streets and Market and Filbert Streets that is currently the western third of the Fashion District shopping mall.

The 76ers are proposing to give the land to the city and lease it back from the municipal government. That would make the property exempt from real estate taxes that fund city services and the School District of Philadelphia.

The Sixers’ development arm, 76 DevCo, and city officials for months have been working on a tentative agreement for the team to instead make annual “payments in lieu of taxes,” or PILOTs. The agreement would have to be approved by City Council, which may take up the arena proposal in the fall.

That’s a common arrangement for professional sports venues, including all three facilities in the South Philadelphia stadium complex, which are owned by the Eagles, Phillies, and Flyers or their parent companies. The Sixers touted benefits such as the city having more control over the project.

But stadium finance experts and critics of the arena say it would effectively result in a subsidy for the 76ers because the PILOTs would almost certainly be lower than what the team would pay in real estate taxes if it retained ownership of the land. One expert estimated that the subsidy could amount to $1.6 million to $6 million a year without adjusting for future inflation.

“The reason you do that is to provide that tax relief,” said J.C. Bradbury, an economist at Kennesaw State University in Georgia who studies arena finance. “Philadelphia taxpayers would be better off if they did nothing.”

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The team has centered much of its public promotion of the arena on a promise that it would not seek any support from city taxpayers, and it rejects the notion that the PILOTs arrangement qualifies as a subsidy. (The team has said that it is open to subsidies from the state and federal governments.)

76 DevCo spokesperson Mark Nicastre said the project would be built “without a city taxpayer subsidy” and noted that other cities are “providing hundreds of millions of dollars in subsidies and grants for new stadiums.”

“While nothing is finalized, the PILOT is just one part of an incredibly complex tax plan that will generate almost $1 billion in new tax revenues for the city and school district,” Nicastre said, referencing a team-commissioned study of the project’s potential economic impact that has been disputed by project opponents.

Here’s what you need to know about the 76ers’ arena plan and PILOTs.

PILOTs are payments that local governments collect from the owners of tax-exempt properties.

In Philadelphia, discussions about PILOTs usually focus on “eds and meds,” the universities and medical institutions that are exempt from paying property taxes because they are charitable nonprofits. In those circumstances, PILOTs are not required, and the city is essentially asking those organizations to pay voluntarily.

Stadium PILOTs are in some ways the opposite. They are structured to benefit the initial property owners, and once an agreement is in place, the payments are not optional.

Often, stadium PILOTs are used in deals that involve public financing, when the local government backs bonds that pay for construction. In those cases, including Lincoln Financial Field and Citizens Bank Park, the PILOTs cover the debt service payments.

The 76ers are not asking for city assistance with taking out loans for the project, and the PILOT money would all go to the city’s general fund. If the team, instead, paid property taxes, the revenue would be split between the city and school district.

In an interview last year with the sports news website Crossing Broad, 76ers co-owner and lead developer David Adelman framed the PILOT arrangement as a benefit to the city, which would get more control over design standards and community benefits agreements. He also said the PILOT structure was needed because it would not be possible for the city to appraise the value of an arena.

“When you buy your house, there’s a methodology for how your taxes are established, your property taxes,” Adelman said. “For stadiums and arenas, there’s no real methodology, so it has to be done within this construct.”

That is not true, said Geoffrey Propheter, a professor of public affairs at the University of Colorado-Denver and the author of Major League Sports and the Property Tax. While assessing the value of arenas is complex, it is not impossible, and 13 venues for American professional sports teams are on the tax rolls, he said.

He noted that the newest NBA arena — the Chase Center in San Francisco — was developed without any PILOTs or any other public subsidies, including none of the state and federal programs the 76ers remain open to. The Golden State Warriors own the real estate for the Chase Center, which opened in 2019, and their property tax bill this year is about $19.5 million, he said.

For Propheter, the real motivation for teams to donate their real estate to municipalities is to save money. In his book, Propheter found that while direct public subsidies for arenas — such as grants or bonds backed by local governments — are hotly debated and thoroughly studied, the common practice of removing arenas from the property tax rolls gets less attention despite providing millions in savings for team owners.

He described the arrangement as a sort of shell game in which the subsidy gets moved from the team’s construction costs, as with public financing, to its future operational costs, through annual savings on taxes. The average savings, he said, is about $6 million a year.

“The facility that you get — even though it’s 100% privately financed for construction — is made possible because of the subsidies you get on the operating side,” he said.

The story behind the state law that governs stadium PILOTs has a lot to do with the construction of the building that the 76ers are now trying to vacate: the Wells Fargo Center.

The saga unfolded from the late 1980s to the early 1990s, when Philadelphia was on the verge of bankruptcy. The late Flyers founder Ed Snider wanted a way to guarantee that the city wouldn’t jack up taxes on the new facility to deal with its fiscal issues, said Joseph P. McLaughlin Jr., a longtime lobbyist who represented Snider. So Snider asked McLaughlin to find a way to replicate the deal Snider had with the city when it contracted with him to manage the Spectrum arena.

“What he told me was, ‘I just want the same deal I had before. I don’t want to pay any taxes,’” said McLaughlin, a Temple University professor. “I said, ‘Ed, there’s no way you can get a deal today where you don’t have to pay any taxes.’ The PILOTs were created out of that controversy.”

McLaughlin worked on the issue during a wave of teams being poached by suburban municipalities. He said subsidizing stadiums to keep teams in their homes cities provides a public good.

“It’s important to cities to have these teams,” he said.

While state law allows for sports venues to be removed from the tax rolls, it does not require cities or teams to enter into these agreements.

The law is vague on the amount of the PILOT, saying that it should “amount annually equal to 2% of the costs of the project as are agreed to by the city and the facility developer prior to the commencement of construction of the facility, plus such other amount as agreed upon by the city and the facility developer.”

What counts as project costs is open to negotiation between the team and city, and Propheter said they will likely include only construction expenses such as steel while excluding other costs, such as architectural designs.

“The statewide PILOT law, which has guided the development of every stadium and arena in the commonwealth, protects both the local municipality and the teams by guaranteeing a regular payment, even if valuations go down, as we have seen with many Philadelphia buildings recently,” Nicastre said.

The 76ers and city declined to say what the team would pay in PILOTs, and the amount could still change in negotiations. But the team has said it would pay more than the PILOTs for the Wells Fargo Center, Linc, or Bank, and more than current property tax revenue for that portion of the Fashion District.

The tax bills for the two parcels that make up that block are just over $1 million this year, according to city property records.

The team does not plan to convey to the city the real estate for the adjacent $250 million apartment building that it added to the proposal last year. That land would be assessed and taxed as regular property.

Based on his research and the limited public information about the 76ers proposal, Propheter estimated that the arena’s real estate tax bill, without adjusting for future inflation, would be $6.6 million to $12.9 million.

Propheter said his “best guess” on what the team would pay in PILOTs was $3 million to $5 million a year. The PILOT agreement and the team’s lease with the city would last for 30 years.

Propheter’s guess aligns with the little information available. The 76ers have said their PILOT would be “more than double” the $2 million a year PILOTs for Lincoln Financial Field and the Wells Fargo Center, and “more than four times” the $1 million PILOT for Citizens Bank Park. Both statements indicate the PILOT would be somewhere north of $4 million.

If the PILOT were approved at $4 million, the team would be saving $2.6 million to $8.9 million a year, without adjusting for future inflation, under Propheter’s estimates of the arena’s potential property tax bill. The city, meanwhile, would also lose the $1 million it gets from the block’s current property tax payments.

Another factor is Philadelphia’s real estate tax abatement for new construction, which gives commercial property owners a 90% break on their taxes for 10 years. Because the abatement would reduce the amount the city could collect from the arena property if it were on the tax rolls, it also would reduce the value of the city subsidy the project would receive by paying PILOTs instead of taxes.

Over the 30-year deal, the value of the subsidy would be worth about 30% less than it would be without the abatement. But it would still amount to $48.8 million to $181 million over 30 years, according to Propheter’s analysis.

Nicastre, however, objected to Propheter’s projections of the arena’s potential tax bill, saying his estimates of the assessed value of the facility are so high as to be “unbelievable” and pointing to Philadelphia office buildings and stadiums that have lower assessments.

But Nicastre’s statement failed to take into account the different valuation methods for office buildings, which are assessed based on how much income they generate, and arenas, which are assessed based on the cost of their construction.

Propheter estimated that the arena’s assessment would fall between $472 million to $921 million. He based those figures on the $1.3 billion price tag the team has publicized for the arena, with the range depending on how much the 76ers will spend on nonconstruction “soft” costs like buying the property and architectural designs.

“If the team wants a tighter estimate range, they need to publicly release more details about their proposed construction and project budget complete with breakdown of what money is being proposed for what purposes,” Propheter noted.

The debate over the 76ers’ arena proposal has been stalled for months as all parties await the release of the city’s hotly anticipated impact studies that were commissioned by the city and paid for by the team.

The discussion will then shift to the elected officials in City Hall, who will have to give final approval to legislation enabling the arena, including the real estate transaction, lease, and PILOTs agreement.

The PILOTs arrangement could become a flashpoint in the debate.

“Unless 76 Place plans to pay 100% of their tax bill, they’re getting a taxpayer subsidy, something developers repeatedly said they wouldn’t do,” said the Rev. Michael Caine, pastor of Old First Reformed United Church of Christ and board chair of POWER Interfaith. “Any forgone tax revenue is a subsidy.”

Councilmember Jeffery “Jay” Young Jr. said he “absolutely” views the team’s proposed real estate deal to be a city subsidy and called PILOTs a “discount.”

“I do not support [the project] given what I’ve seen for a plan thus far, and that would mean anything that comes with it, including any type of PILOTs or any other tax incentives for that particular arena,” he said.

The team will have to convince Council members that the project will be a net benefit for the city.

“The 76ers are proud of the vision they have proposed and look forward to reaching an agreement that will create thousands of jobs, generate taxes and revitalize a portion of East Market Street that has struggled,” Nicastre said.