Officials push awareness of Harrisburg’s little-used tax abatement

//June 9, 2017

Officials push awareness of Harrisburg’s little-used tax abatement

//June 9, 2017

The incentive — a 10-year tax-abatement available under the state’s Local Economic Revitalization Tax Assistance Act program, known as LERTA — has attracted less than three dozen applications for residential improvement projects. Only two have received final approval for 100 percent abatement. There have been no applications for commercial development.

And with the exception Harristown Enterprises, large city developers so far have avoided the tax incentive because they say there are too many strings attached to new construction projects, including mandates for prevailing-wage rates and for hiring minorities and city residents.

The conditions, which apply only to new construction projects would likely offset any tax benefit from the LERTA program, developers say.

But city officials remain optimistic that more investors will start to take advantage of the temporary tax breaks, especially if they can buy blighted properties cheaply and make extensive renovations in cases where the conditions would not apply.

Owners may choose to resell the properties or hold them as rentals. Either way, it should improve the city’s housing stock and increase the tax base, which is the primary goal of the tax incentive, said Jackie Parker, the city’s director of community and economic development.

That said, the program isn’t for every property, she said. The tax benefits, which are based on the value of the property after it is fixed up, are for people making substantial structural changes or building something new.

“These are more than just a coat of paint,” Parker said. “It has to be the right property.”

Cost consideration

Parker said she understands that larger developers are concerned about the conditions placed on new construction projects, especially the prevailing-wage requirement.

Critics argue that prevailing-wage rates make public construction projects more expensive, while labor unions contend that blue-collar wages and job quality would suffer in their absence.

“It does add to labor costs, but many large developers using public funds are required to use prevailing wage,” she said.

On the other hand, participants in the Harrisburg program could enjoy greater tax relief than is available under other LERTA programs.

Tax-abatement programs often award tax relief on a sliding scale for a period of up to 10 years. Under that structure, an owner typically pays no taxes on the value of the improvement the first year, pays 10 percent the second year, then steadily ratchets up to 90 percent by the final year. After 10 years, the full taxes are due. The structure allows property owners to slowly adjust to the abatement’s expiration.

Harrisburg’s previous LERTA program, which expired at the end of 2010, was set up that way.

At a glance: Harrisburg’s LERTA

Harrisburg’s latest tax-abatement ordinance was finalized last June after Dauphin County commissioners signed off on it. The citywide tax breaks, which also needed approval from the city school district and city council, started last summer.

The tax-relief program is allowed under the state’s Local Economic Revitalization Tax Assistance Act, or LERTA.

In Harrisburg, the LERTA provides 100-percent tax breaks for 10 years on the value of residential improvements and new residential construction. The city’s LERTA also calls for 50-percent tax breaks for improvements to or new construction of commercial and industrial properties — an abatement that can go up to 100 percent based on the number of permanent jobs created.

To add another layer, the developer of a new construction project, whether residential, commercial or industrial, must hire a workforce composed of at least 15 percent city residents and 15 percent from minority groups, as well as pay prevailing wage for construction services.

New construction is defined as erecting a structure on vacant land. Rehabilitation is repair, construction or reconstruction, including alterations and additions, to a property which would add value to the property.

In addition, 100-percent tax breaks are available for mixed-use projects. However, those properties must have a residential use of at least 70 percent to qualify.

Tax abatements don’t take effect until after property improvements are completed, occupancy permits are issued and the county reassesses the property.

The city’s previous abatement program expired in 2010. The earlier program phased in higher tax rates at increments of 10 percent each year for 10 years for owners who added value to properties within the city.

Under the city’s new program, property taxes on improvements are forgiven for the entire 10-year period. The relief is calculated during a property reassessment when Dauphin County assigns the property a presumably higher value, and a potentially higher tax bill.

Residential projects are eligible for 100 percent abatement. But for commercial and industrial projects, relief depends on the number of jobs created after construction.

The abatement starts at 50 percent and jumps to 70 percent if at least 10 jobs are created. Developers earn full relief if they create more than 80 jobs.

Mixed-use projects, meanwhile, must dedicate at least 70 percent of their space to residential in order to qualify for the 100 percent abatement. However, if those projects don’t hit that threshold, they are still eligible for 50 percent abatement.

Lancaster’s current LERTA, which runs through 2019 and has successfully sparked ongoing development, is structured on a sliding scale.

The city’s 10-year program sees several abatements approved every month, said Randy Patterson, director of economic development and neighborhood revitalization.

That’s because the tax relief on improvements is nearly automatic if owners increase their properties’ assessed value by at least $25,000.

At that level of investment, most of the applications are commercial properties, Patterson said. “It’s an extensively used economic development tool.”

It’s also really the only incentive that many cities can offer to entice increased property investment, he said.

‘Still difficult’

Developers agree. The cost of buying and redeveloping vacant and blighted properties often exceeds market value in many cases, said J. Alex Hartzler, managing principal at Harrisburg-based WCI Partners LP. Incentives such as tax abatement can help offset development costs and keep rental rates in line with what the market can bear.

WCI also has used federal tax credits and state grant programs to overcome the local tax burden.

Hartzler said Harrisburg’s new LERTA program will help attract investment, but it doesn’t go far enough.

Hartzler has been advocating for a Philadelphia-style tax abatement, where the city exempts all new construction and improvements to real estate for 10 years without the conditions Harrisburg has in place.

“When I go to a new city, I look for cranes in the air,” Hartzler said. “That’s a sign of growth and progress. We don’t have cranes in the air because of local real estate taxes.”

Other developers are in the same boat as they look at undertaking new residential projects to keep up with strong demand in downtown and Midtown, especially for rentals.

Brad Jones, president and CEO of Harristown, said the LERTA conditions, which didn’t exist under the city’s previous program, have given developers pause.

Harristown, which owns Strawberry Square and other real estate surrounding the mixed-use complex in downtown Harrisburg, was among those sitting on the sidelines.

Moving into Midtown

While there may not be widespread awareness of Harrisburg’s tax-abatement ordinance, the city’s housing market, at least in Midtown, has not suffered from a lack of investment.

Realtor Wendell Hoover of Re/Max Realty Associates Inc., who handles a lot of listings in Harrisburg, said tax abatement is not a factor for most new homebuyers because they are looking for move-in ready homes. Those properties don’t require significant renovation costs needed to qualify for abatements.

“Most are fully renovated (in Midtown). That is the largest segment of houses being sold,” he said.

Through May, 58 homes were sold this year in Midtown. Another 29 sales were pending. In all of 2016, there were 121 homes sold in Midtown.

“For the average person who is not a big developer and flipping a house, (tax abatement is) not their consideration for buying,” Hoover added.

Residential activity is on the rise, namely in Midtown, because of the positive momentum that has been building in the city over the last few years, he said. There has been a steady resurgence after the near financial ruin of the city following the crisis spurred by its incinerator debt.

Midtown has been drawing heavier foot traffic thanks to new establishments such as Zeroday Brewing Co., Susquehanna Art Museum and The Millworks restaurant and art gallery. That has helped attract new residents, including many renters who are taking advantage of housing redevelopment projects in downtown and Midtown.

“The negatives are no longer there, at least the perception,” Hoover said.

He believes tax abatement could play a role in spurring new residential construction in the city, but that hasn’t happened yet. He also sees the temporary tax breaks playing a bigger role in other parts of the city where there aren’t as many fully renovated homes.

“It’s just getting them in the right people’s hands who are capable and willing to do the work,” he said.

But Jones said last week that Harristown is now moving forward with a LERTA application for its renovation of properties at 11, 13 and 15 S. Third streets. The renovations, expected to be done by September, will create a mix of one- and two-bedroom apartments, plus some first-floor retail.

Several of Harristown’s other apartment conversion projects over the last two years were already approved or underway before the ordinance was finalized.

“From our perspective, it has a lot of potential and I’m glad the city passed it,” Jones said.

Jones said Harristown has a couple of other projects, mostly commercial office and some mixed-use concepts, in early development where the LERTA could come into play.

City officials believe other investors will soon follow. So far, most of the LERTA applications have been for properties along North Third, North Sixth and Green streets.

Harrisburg hired a LERTA administrator earlier this year, hoping to raise citywide awareness of the tax benefit. The city has held several LERTA seminars for developers and lenders and the codes department offers flyers with more information.

Parker said it also helps that projects such as the MulDer Square revitalization project in South Allison Hill, a project being supported by the state’s Redevelopment Assistance Capital Program, or RACP, are moving forward. Other building activity in that area could follow and the LERTA may become more widespread.

“Every time people pull a building permit, they have the application,” Parker said. “It doesn’t hurt to apply.”