Philly construction permits soar ahead of tax abatement changes
Our note: The spike in applications and developer claims are strikingly similar to the pattern in other cities including KC. Many say they were giving away too much admitting it was a stimulus tool, not an end in itself.
Axios January 7, 2022. By Taylor Allen
Philadelphia could see a short spike in construction in 2022 after a record number of developers applied for permits ahead of the city's expiring property tax abatement.
Driving the news: A bill that took effect Jan. 1 shrinks the value of the 10-year abatement for new residential properties by 10% annually, starting after the first year, until it's completely phased out.
Before the change, developers didn't have to pay real estate taxes for 10 years.
By the numbers: The Philadelphia Department of Licenses and Inspections issued 900 new construction permits in December 2021. In a typical month, the department issues about 150.
At the end of 2021, more than 2,600 permits were issued, compared to the approximately 1,600 that are typically approved.
More than 1,800 new construction permits were residential in 2021. If all of those permits come to fruition, that could mean over 10,000 new housing units, according to Kevin Gillen, a senior research fellow at Drexel University.
Flashback: The city passed the tax abatement reduction in 2019, and it was originally supposed to take effect late 2020 before it got delayed.
2019 is also the year the L&I Department issued 2,115 permits — the record prior to 2021.
Between the lines: The two-decade-old tax abatement program has long been criticized as a giveaway to wealthy property owners.
Residents and advocacy groups have pushed for years to end the program, arguing that it promotes gentrification and takes funding away from schools.
The real estate industry considers the abatement program to be the catalyst for revitalization and growing the tax base.
Of note: The city's 1% development impact tax on residential construction also went into effect Jan. 1.
Developers will pay half of the tax when given the permit and the other half when it's due for final inspection.
What they're saying: Karen Guss, spokesperson for the L&I Department, said the surge in permit applications is "certainly" connected to both tax changes.
"We think the development will be somewhat staggered and don't expect ground to be broken for all these projects next week," she said.
Building Industry Association of Philadelphia vice president Mo Rushdy said he doesn't expect the application influx to last because of the high cost of construction, warning of slow development in the next few years.
"You're going to see a drop in applications because the math will not work without the incentive of the abatements," he said.
The other side: Ira Goldstein, the Reinvestment Fund's president of policy solutions, said the abatement did what was intended, which was to stimulate the market.
"By all measures, it had some positive effects and was probably greater than it needed to be," Goldstein said.
City Councilmember Helen Gym, a long-time critic of the abatement, told Axios, that "development cannot come at the expense of public school funding," and that "tax subsidies must evolve."
"They are not meant to stay the same for decades on end," Gym said. "They are tools, not ends in themselves."
What to watch: Expect to see a potential wave of new residential properties.