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What Developers Need to Know About New Philadelphia Tax Legislation Affecting Development Projects

Posted: 12/04/2020
Industries: Real Estate

Responding to calls from Philadelphia’s housing advocates to generate tax revenue for affordable housing, Philadelphia City Council adopted a trio of ordinances on December 2, affecting most new construction projects throughout the City. Mayor Jim Kenney is expected to sign the legislative package before the end of the year.

New “Development Impact Tax” on Residential Developers

Most impactful among the new Philadelphia tax legislation is a new “Development Impact Tax,” which will be imposed on the construction of  “any structure for human occupancy for residential purposes, or making any improvements to any such structure, for which a building permit is required.” Though this new tax will affect many new construction projects in Philadelphia, it is a pared down tax from what had initially been proposed by Council leaders, which would have would have affected all new construction in Philadelphia.

The Development Impact Tax is a one percent (1%) tax levied against the total “construction or improvement costs,” which is further defined as “all material, labor, engineering and/or architectural fees, and the overhead and profit cost,” the same basis for calculating building permit fees. The ordinance contemplates future regulations to establish a methodology for computing those costs, which should be issued around April 2021.

Operationally, 50% of the tax (0.5% of total construction costs) will generally be due at the time the required building permit is issued, and the remainder of the tax will be due upon the issuance of the final inspection certificate. The new ordinance indicates that the tax for mixed-use projects will be applied only to those components used for residential purposes, including common space related to those uses, though the City will likely issue clarifying regulations in 2021.

There are narrow exemptions to the Development Impact Tax, including for projects that benefit from Keystone Opportunity Zones or purely public charity tax status, or improvements associated with “preparing an existing residential rental unit for turn-over to a new tenant.”

Due to the delayed implementation of the new Development Impact Tax until January 1, 2022, the tax will not apply to projects that complete their approval process and apply for building permits prior to the implementation date.

Reduction in Commercial Property Tax Abatement

Although commercial and industrial development projects were not included in last year’s abatement amendments, the new ordinance will reduce the property tax abatement program for those types of projects, as well.  Under the new legislations, construction projects for new non-residential projects which apply for a tax abatement after December 31, 2021, will receive only a 90% tax abatement on improvement costs for ten years, as opposed to the current 100% abatement.

Reductions in Residential Property Tax Abatement Delayed

A year ago, City Council passed legislation to reduce the lucrative tax abatement program afforded to residential real estate projects. Acknowledging the new burdens placed on developers by the Development Impact Tax as well as the continuing pandemic, City Council has now delayed the reductions to the residential property tax abatement program. Under the legislation adopted by City Council this year, the new residential property tax abatement reductions will not take effect until January 1,  2022, extending the original deadline by one year.

New residential development projects that apply for abatements on or after January 1, 2022, will receive a 100% real estate tax abatement in the first year, but the abatement will be reduced by 10% in each subsequent year (e.g., a 90% abatement in the second year, an 80% abatement in the third year, and so on),  until the abatement expires at the end of the tenth year.

These changes will have significant impact on projects in Philadelphia and many details are yet to be provided in the form of regulations and tax guidance from the City. If you have questions about how these ordinances will affect your projects, please reach out to the authors of this alert.