CORE COMMITMENT: Harrisburg investors have a unified vision of a thriving urban center
Real estate investors outside Central Pennsylvania are not exactly knocking down the door to get into Harrisburg.
The city's financial saga — $340 million of incinerator debt and lingering structural issues that threaten to continue driving up the cost of business — has helped put the brakes on that.
But that doesn't mean the city is not open for business or that committed investors with an interest in neighborhood development and community revitalization have gone away.
Far from it.
Despite the fiscal distractions, a group of long-term, city-focused visionaries have continued to tackle real estate opportunities piece by piece with the premise that Harrisburg's best days are ahead.
Incentives such as tax abatement and other state funding programs have helped make those projects a reality. But, on the flip side, conditions might be worse in the capital city without that assistance and those who have dared to dream.
Tens of millions of dollars have been spent in the city — mostly in Midtown — on high-rise developments such the 1500 Condominium, neighborhood redevelopments such as Olde Uptown and other historic retrofits, including the COBA Apartments.
There has been new office construction at Second and State streets, student housing projects for Harrisburg Area Community College and Harrisburg University of Science and Technology, and mansion rehabilitation for a high-end restaurant that could drive commercial and residential uses along Front Street.
Meanwhile, efforts to expand the arts and cultural side of the city are ongoing, with the Susquehanna Art Museum's building project in Midtown. Other residential reuses are in the works at the former Glass Factory building on North Third and Muench streets and the Barto Building condos near the state Capitol.
"I think residential is the missing component to return the city to its glory days," said H. Ralph Vartan, chairman and CEO of Susquehanna Township-based Vartan Group Inc., which opened the mixed-use 1500 at Sixth and Reily streets last year.
With its Art Deco style, the 1500 added 43 residential condos and first-floor retail to an up-and-coming area that is expected to house a new federal courthouse in the coming years.
Unlike some of his peers, Vartan's strategy to grow the city's population base is predicated on new construction. He is one of the city's largest private landholders, with many holdings near the 1500.
"This is a proud moment for the city," he said of the recently completed widening project along Seventh Street between Reily and Maclay streets, an area known as the northern gateway. "It is an extension of the downtown. It has the perfect environment for a great mixed-use neighborhood."
With its four lanes, the newly improved Seventh Street corridor could draw traffic from Interstate 81 and routes 22 and 322, diverting it from the heavily traveled Front Street and Second Street corridors. That could spur a lot of new construction.
"I like what we're doing, because it's combining new construction with building neighborhoods from scratch," said Vartan, adding it's important for the city to have a good mix.
By comparison, many of his counterparts — Harrisburg-based GreenWorks Development LLC and WCI Partners LP, as well as Lower Allen Township-based Brickbox Enterprises Ltd. — have focused much of their energy on redevelopment.
"It's a slow process. It's pecking at it one little piece at a time," said Dan Deitchman, owner of Brickbox, who sees a lot of opportunity in creating attractive rental properties to meet the needs of a growing urban audience.
Since about 2005, WCI has been buying and renovating mostly residential properties in the Olde Uptown neighborhood, which is near the Governor's Residence. The area is bordered by Muench, Maclay, Second and Third streets.
The firm has sold about 50 homes and rented another 75, President David Butcher said.
There are about 300 taxable parcels in that neighborhood, which was known for its abandoned and decaying homes after Hurricane Agnes in 1972 and, later, for drug dealers and violence.
WCI's work in that neighborhood has helped add $30 million to property values, he said.
"There is a perception in the community of enormous problems and people fleeing," said Alex Hartzler, the firm's managing partner.
But that's not the case, he said. Leasing rates are extremely high, and demand continues for attractive housing stock in Harrisburg.
"We have proven there is demand for quality housing in Harrisburg," he said.
Of course, that took about $12 million of company investment and millions in state grants to help cover the gap between the cost and final value of the properties, Butcher said. Much of the state aid helped cover blight remediation costs.
Tax abatements and other aid
The reality in Harrisburg is that incentives such as tax abatements and Keystone Opportunity Zones are critical to a project idea becoming reality, developers said.
"If you get the costs in line, the sky is the limit," Hartzler said.
Tax abatement levels the playing field in cities like Harrisburg, where taxes, parking and utilities generally are higher than suburban areas, they said. The cost of buying and redeveloping vacant and blighted properties also exceeds market value in many cases.
"We should not be hurt to the point where we can't make improvements," Deitchman said.
Critics have said local governments give up valuable tax dollars for an extended period of time.
The COBA Apartments, which is in a KOZ, took four years to complete. COBA refers to the building's original name: Commercial Bank. Redevelopment of the building, abandoned for decades, also needed funding from the state's Redevelopment Assistance Capital Program to become financially feasible for GreenWorks and Brickbox to take on.
During the last seven years, GreenWorks has invested more than $50 million in Midtown redevelopment. The firm is responsible for about 300,000 square feet of real estate, including 75,000 at the Campus Square Building, a mixed-use commercial building on North Third Street.
"If you don't have a healthy city, you don't have a healthy region," GreenWorks CEO Doug Neidich said in November at the kickoff of the public phase on the Susquehanna Art Museum's capital campaign. "If you don't have a healthy region, you don't have a healthy community."
GreenWorks is hoping to reach 750,000 square feet of development space within the next five to seven years, Neidich said.
It's been more than two years since the city's tax abatement ordinance expired (see "Abatement on the back burner," page 7). Other pots of money have dwindled.
"We could build new residential (with no subsidy), but the taxes are so high," Hartzler said. "We need at least a 10-year phased-in abatement."
There is concern among the city's core investors — the majority of them meet regularly through Harrisburg 2020 (see "Moving into the capital city," page 6) — that, without funding tools, development will dry up.
"Our group would love to see something enacted in 2013," said Brad Jones, chairman of Harrisburg 2020 and vice president of Harristown Enterprises Inc., which owns Strawberry Square. "The reality is maybe 2014."
There were several ribbon-cutting events in 2012, but most of those projects were approved under the previous abatement ordinance.
"I can tell you there is going to be a slowdown," said Deitchman, who had just two projects under way to start the year. "If there was a 10-year abatement in place, we would already been planning our next two, three, four projects."
The whole idea of tax abatement is to unlock that next set of projects, said Vartan, who also has projects on the drawing board.
"The city definitely has an underinvestment issue," he said.
Without the abatement, most projects just won't happen, he added.
"The premise has to be: What can we do to make the city attractive and be affordable?" he said.
A competitive tax structure — at least one that doesn't make it unaffordable to build — has to be part of the equation, Vartan said.
"The next best option is not working on the supply side," he said. "And so demand is going to neighboring municipalities in the suburbs."
A new abatement ordinance would help drive more residential volumes into the city, which builds critical mass to support other types of development, said Matt Tunnell, senior vice president at GreenWorks.
"Make it clear and easy, and it will perform," Tunnell said of a new abatement. "It's a gulp, it's a swallow the city has to take."
Abatement on the back burner
Harrisburg's last tax abatement ordinance expired at the end of 2010. It phased in property taxes on improvements at increments of 10 percent annually for 10 years.
Last year, Mayor Linda Thompson drafted a seven-year proposal that calls for 100 percent abatement for three years, followed by 80 percent in the fourth year. Each year thereafter would decrease by 20 percent until the exemption terminates after the seventh year, according to the draft.
The incentive is sanctioned under the state's Local Economic Revitalization Tax Assistance Act, also known as Lerta.
There has been no movement on the bill by the City Council. A tax-abatement strategy is part of Harrisburg's court-approved debt recovery plan.
Tax abatement in Philadelphia
In 1997, Philadelphia passed a 10-year tax abatement ordinance, which tapped into a growing demand for downtown living.
Between 2001 and 2011, 28 commercial office buildings with a total of 2.76 million square feet were converted to residential use, according to a recent publication of the Central Philadelphia Development Corp. and the Center City District.
The expansion of the abatement in 2000 to include new construction prompted both new high-rises and townhomes throughout Center City, as well as the development of thousands of housing units across the rest of the city.
As of November, there were 49 condominium buildings containing 3,871 units and another 165 apartment buildings with 15,630 units, according to the report.
"The argument was simple: Residential development is not happening, and this will cause it to happen, attract residents and create construction jobs," said Paul Levy, president and CEO of the Center City District, referring to the abatement.
Tax abatement helps the pro forma work for some building projects, he said.
"Properties are not tax free. They continue to pay the taxes on the unimproved value before renovation," Levy said of common misconceptions about tax abatement. "We are at the point with significant volumes coming off of abatement. The city is getting new tax revenues it would never have gotten before."
The original 1997 bill was made citywide, and a significant volume of units abated in Philadelphia are in working class and low- and moderate-income neighborhoods, including all publicly subsidized homeownership programs, he added.
"So the abatement has benefitted all areas of the city," he said.
The only drawback of abatement he said he hears regularly is resentment from some existing long-term homeowners who are not benefitting from the abatement. They are seeing their real estate taxes go up because of the significant volume of new construction, he said.