What if they gave a LERTA and nobody came?
Just ask one would-be, first-time developer who wants to build a three-apartment, net-zero energy building in Midtown Harrisburg. This resident, who asked to remain anonymous as he works with the city to realize his dream, hasn’t even found his tract to develop. His extensive research is ongoing, but one big question lingers.
Can he afford the project?
The answer hinges, in part, on a tax abatement program called LERTA.
In mid-2016, Harrisburg’s Local Economic Revitalization Tax Abatement (LERTA), meant to encourage development, went into effect. Since then, the 10-year property tax break seems to have helped spur the rehab of small, existing residential properties. However, few developers have applied the abatement to new or commercial construction.
That’s because Harrisburg’s abatement scheme is two-tier, with stricter requirements for commercial and new-build projects than for residential renovations. These commercial projects come with certain prevailing wage, residency and minority ownership requirements that apply to the workforce and contractors.
Has the tradeoff been worth it? Some say no, but others argue for more time to let the magic work.
LERTA has been a Pennsylvania mainstay since 1977. Put simply, it allows counties, municipalities and school districts to waive taxes on the increased value of improved properties in distressed areas. It’s simple, really. If you significantly rehab a blighted house or build a new home or business in a city, you keep paying taxes on the property’s old assessed value—not the new, improved value—for the time period established in that city’s LERTA.
But why have a LERTA and give up all that extra tax revenue? LERTA is supposed to act as an incentive because, otherwise, development may not happen at all. That’s especially true in a city such as Harrisburg, which is forced to impose very high tax rates to compensate for low property values. Waive the taxes on improved value for a time, and LERTA may make a project financially feasible.
Until 2010, Harrisburg had a phased-in LERTA, giving tax abatements in increments that decreased by 10 percent annually for 10 years. The 2016 version awarded 100-percent tax abatement for 10 years for residential construction and improvements. Commercial construction and improvements, plus much mixed-use commercial/residential, qualify for abatements of 50 percent to 100 percent for 10 years, depending on the mix of uses and the number of jobs created.
Any new construction—residential or commercial—seeking to qualify must employ 15 percent minority businesses and a 15 percent city-resident workforce and pay the same prevailing wage rates set by the state for many construction projects. Depending on whom you ask, prevailing wage can add 2 percent to the cost of a project or 30 percent. Some even say 50 percent.
The ample, 10-year generosity of the 2016 LERTA is meant to offset those higher costs. Reviews are mixed. Dave Black, the Harrisburg Regional Chamber & CREDC executive director, pointed out that the state law is three pages, while the city’s ordinance is 18. But he gave city administration and City Council “a tip of the hat” for the attempt.
“It’s all about a balancing, which makes governing challenging,” Black said. “Under the circumstances, it’s a small step forward. Sometimes, you’ve got to take small steps.”
Harristown Enterprises has used the LERTA for three residential conversion projects on S. 3rd Street. More are in the works, especially since much of Harristown’s focus is on residential housing, said Harristown Enterprises President and CEO Brad Jones, who called LERTA “an attractive incentive.” Most developers would have preferred aggressive, 10-year abatements, but Jones said he understand the politics behind it.
“These were conditions that allowed the bill to pass,” he said. “I still believe we can work with the ordinance.”
Jones admits to being “a little more optimistic” than most others. For instance, some new condos have been slow to sell, but apply a LERTA to their development, and the price per square foot becomes more enticing to buyers.
Level the Field
Reinvestment may be on the urban revitalization agenda, but high tax rates plus increased assessment equals a tough development environment.
“Capital doesn’t want to come back in and rebuild and be taxed four times what they’d pay in the surrounding municipality,” said David Butcher, president of Harrisburg-based WCI Partners.
Plus, he added, LERTA doesn’t make taxes cheaper, as the city receives the same tax revenue as before the improvements were made. But, he said, LERTA allows the city to tax projects on a scale similar to other municipalities, where millage rates are lower.
“It’s leveling the playing field, but it’s not tilting it,” he said. “The playing field is so unlevel already.”
For developers, any money made goes into the next project, and returns are projected years into the future, said Jones.
“We don’t need to make grand returns, but we need to build capacity to bring in new investors, and, obviously, more investors are going to come if the returns are a little better,” he said. “As we build more capacity, as we do more with residential and more with commercial, the environment’s going to get better and better, the rates will get better and better, and they’re going to build the capacity to bring in new investors and new developers, and that’s our goal. We don’t want to do this all ourselves.”
Our friend who wants to construct a zero-energy building is very concerned about climate change and global warming.
One thing that’s really green, he said, is urban infill development—finding a lot and building where the infrastructure already exists. He believes the future belongs, at least in part, to micro-developers like him. But just like the big guys, he has costs for designing, planning and layers of municipal approvals.
A LERTA could help offset those costs. He thinks he “can survive” with the minority participation requirement, and the city-resident mandate is “another burden,” especially because net-zero construction requires specialized skills.
And then there’s “the part that’s a killer—prevailing wage,” he said. “That is the showstopper, I believe. I don’t know if I believe the 30-percent number. I don’t know if I believe the 2 percent, either. It’s probably something in the middle.”
So, are the conditions of Harrisburg’s LERTA a speed bump on the road to redevelopment? They “could very well be,” said Black. “Mega projects” in the city are rare, and small contractors or projects, especially, could struggle to fill their labor rolls with the requisite number of city residents.
For WCI, the city’s former, stepped-up LERTA “was critical” to completing an office building at 2nd and State streets, said Butcher. Any new restaurant or apartments in a slow-growth city seem like a demonstration of capital flowing in, but “what people are missing is everything going on outside the city,” he said.
In other words, the many developers who built in the suburbs could have located their projects in the city, but made a conscious decision not to.
“It’s what you don’t see,” he said. “What is excluded is the more powerful thing.”
The city of Lancaster didn’t consider prevailing wage or workforce conditions, a la Harrisburg, for its LERTA, said Director of Economic Development and Neighborhood Revitalization Randy Patterson.
“The challenge of ‘making the numbers work’ for redevelopment projects in cities is already challenging,” Patterson said via email. “One piece of that is the significantly higher total property tax rates for most cities compared to surrounding townships with greenfields available for development. Adding additional conditions to receive LERTA benefits that may impact total project costs may be counterproductive.”
Philadelphia, once in the same boat as Harrisburg with high millage rates and low property values, installed a condition-free LERTA, and the city is “booming,” said Butcher.
“It used to be dead,” he said. “Now, you walk down Walnut Street or Broad Street, and it’s hot. We asked around about the key ingredients, and the number-one thing was full abatement.”
City officials originally agreed to speak for this story but stopped responding to requests to schedule an interview. Nonetheless, developers give high marks to city officials, including Charlie White, the LERTA administrator, for outreach and communications.
“They called me to talk about projects,” said Harristown’s Jones. “I said, ‘You know what? You’re right. We should absolutely be in this program.’”
For other developers, help can arrive in the form of sitting down with White and realizing, as they explain their projects, that “there is a way to use this program to their advantage.” The provisions may be challenging, Jones said, but “the city’s working hard to try to get more applicants in the pool. I think the program can be successful.”
Lot of Energy
In Harrisburg, LERTA’s condition-free segment encouraging residential renovation “is really powerful,” said WCI’s Butcher. “We have used it. It will help drive renovation in the city, which is nothing but a good thing.”
But new construction and commercial projects are unlikely “unless they have some subsidy measure,” he said. Few expect amendments any time soon.
“I don’t think the mayor is ready for that yet—the political dynamics, the amount of arrows you have to take,” he said. “Taking that fight on takes a lot of energy.”
Perhaps a year or three of data will help City Council and the administration determine if the LERTA has delivered reinvestment, said the chamber’s Black. If not, “are there things we should tweak?”
“I’d like to see them monitor it and try to look and try to simplify it, if possible,” he said. “But there’s other considerations they have on their plate.”
Harrisburg’s LERTA administrator can be reached at 717-255-7268. Some information is available on the city’s website, www.harrisburgpa.gov.
Disclosure: Alex Hartzler, publisher of TheBurg, is a principal with WCI Partners.
Author: M. Diane McCormick