Amid the biggest real estate boom Philadelphia has ever experienced, developers seeking to get in on the action may soon be expected to pay a price for their impact: a 1 percent tax on construction costs — one that the city expects could add as much as $22 million annually for new affordable housing.
The new tax, expected to be introduced Thursday in City Council, is one piece of an affordable housing package that city officials announced at a Wednesday news conference, alongside residential developers and community organizations. The announcement by the groups — who only months ago disagreed on how privately developed affordable housing should be built and who should pay for it — represents a swift change in course after a nearly year-long dispute.
At the City Hall news conference, Council President Darrell L. Clarke, Councilwoman Maria Quiñones-Sánchez, and Councilman Mark Squilla — standing alongside four other Council members, the Philadelphia Building Industry Association, and community organizations — detailed the multi-pronged package. To start, they said, the 1 percent will be levied on the cost of any new construction or significant improvements by all developers, which must be paid when a building permit is issued. Developers will be taxed on anything from a rowhouse to a stadium.
The revenue from the impact tax will be set aside within the Housing Trust Fund and could then be accessed by both nonprofit and for-profit developers to build affordable housing. The money also could be used for a down-payment assistance program the city hopes to create. To be eligible, residents must have lived in Philadelphia for at least three years and have an annual household income of no more than $105,000.
"We want everyone on the same boat and everyone rising at the same time," Quiñones-Sánchez said. "We can be equitable, fair. and protect those core values around home ownership, which are hugely important, but at the same time preserve and redevelop in a more balanced way."
As part of the legislation, the group also announced an expansion of zoning bonuses, which would allow developers to construct significantly taller or denser buildings, for example, if they voluntarily designate 10 percent of rental and for-sale units as low-cost housing. The developers who voluntarily opt in would still be required to pay the 1 percent tax — and could be asked to pay as much as 2 percent depending on the scale of the zoning bonuses.
The most significant zoning bonus on the table is an extra seven feet in height for single-family homes and mixed residential-commercial properties, which would typically mean the option of a fourth story.
If the legislation passes as it stands, the changes would take effect in July.
The legislation marks a sudden departure from the inclusionary zoning bill that Quiñones-Sánchez had been pushing since last June. That version, which would have required residential developers to set aside 10 percent of units for affordable housing in new multifamily buildings in exchange for zoning bonuses, was largely abandoned earlier this year after blowback from developers, neighborhood groups, and Council members.
At the time, the BIA, the trade association representing nearly 300 builders and related professionals, argued that Quiñones-Sánchez's bill could upend the real estate boom that Philadelphia has enjoyed in the last decade. At a time when the cost of land, labor, and materials has skyrocketed, the BIA argued, requiring developers to include affordable units would further stress razor-thin profit margins and potentially stall development.
Neighborhood groups also pushed back, arguing that the zoning bonuses in Quiñones-Sánchez's bill would disrupt neighborhoods that would be unable to accommodate tall or highly dense buildings.
City Council members and developers began negotiating an alternative to Quiñones-Sánchez's bill in January, according to one person familiar with the discussions. The result was the 1 percent levy and the optional zoning bonuses — a plan that was fully backed by the BIA, in part because it shifts the burden from exclusively residential developers to any builder in the city.
"At the end of the day we view this as a much more equitable way to bring money into the affordable housing world," said Leo Addimando, vice president of the BIA. "Any construction, any development, takes resources, and it also, to some extent, has the potential to create some displacement. … That's part of the problem we're trying to solve here."
Still, there is no guarantee that the legislation will not face resistance similar to Quiñones-Sánchez's first bill. The 1 percent levy requires all developers — including commercial and even nonprofit builders — to pay, despite its revenues being used exclusively for residential housing.
The change also comes at a time when industry observers have warned that Philadelphia's development renaissance could be more fragile than many think. With both construction costs and tax bills high — commercial and residential property assessments have jumped significantly in the last two years — many commercial developers have expressed fear that yet another tax could curtail the growth Philadelphia has enjoyed.
"Philadelphia has a tendency to tax things that are portable and not sustainable — what happens when the economy goes south and this revenue stream dries up?" said a commercial real estate professional, who said he was not authorized to speak on the record because he had not seen the legislation. "If construction stops, can we commit to sustainable programs based on this revenue?
"At every opportunity, Philadelphia is treating us like an ATM," he continued.
David Feldman, president of the real-estate development firm Right-Sized-Homes, added he is wary of what he calls a rash of recently introduced Council bills that he believes target developers. One pending bill would require periodic smoke and fire damper inspections, which can cost tens of thousands of dollars in high-rises, he said. Another would double the parking requirements for some multi-family buildings.
"There's a lot of bills that impact the cost of construction," Feldman said. "We need to talk comprehensively about the whole slate."
Feldman also questioned what input private developers would have into how the Housing Trust Fund money is spent, given how much they would be putting into its coffers.
Still, the legislation found some support beyond the BIA.
Maria Nixa Gonzalez, who heads HACE, a nonprofit community development organization, said she sees families every day who are in need of housing.