If you are, will, or may be involved in a new commercial construction project in Philadelphia, either as a developer or bank issuing construction financing, you should be aware of a dramatic change in the City of Philadelphia’s practice of reassessing such projects mid-construction that could cost (literally) tens of millions of dollars in taxes that were not anticipated when the project began.
Say you have a certain development project that has been under construction in Philadelphia for a couple years. If the land underneath this (incomplete) project was previously valued at around $7 million, that would produce a tax bill of around $100,000 (for tax years 2016-2019). Say the project is still incomplete, but an application for an abatement was submitted. So it won’t make a difference even if the project is reassessed, right?
Wrong. Under the Local Economic Tax Revitalization Assistance Act (the “LERTA,” 72 P.S. §§ 4722, et seq.), which authorizes the abatement, it doesn’t kick in until construction is complete. 72 P.S. § 4727. Nevertheless, the City takes the approach- as it is now doing for quite a few projects- that it can reassess this project mid-construction, because it is now a “new improvement” that, presumably, the City believes should be added to the tax rolls. This means that the reassessed project is fully taxable until it is finished, even though there is a pending abatement application.
By way of example, take our unfinished development project. If the City reassessed the shell that is currently under construction as 50% of what the overall project is projected to be worth (maybe, $100 million) when complete, that would means that the new assessment for the land and the partial shell is now set at $50 million. The new tax bill on this reassessment would be around $800,000. That is $700,000 over what the developer (and construction loan issuer) perhaps originally factored into the total cost of the project.
Moreover, that is a hefty tax increase on a shell that hasn’t begun generating revenue. You may think that these numbers are exaggerated for shock value, but actual projects in Philadelphia that have been reassessed mid-construction have actually resulted in higher assessments and higher tax bills.
It is unclear what authority the City is invoking that would authorize this sort of mid-construction reassessment. However, and more importantly, even if the City is relying on some provision in the General County Assessment Law (72 P.S. §§ 5020-101, et seq., "GCAL”) or First Class County Assessment Law (72 P.S. §§ 5341, et seq., “FFCAL”) to reassess construction projects, it is unclear that the City still has authority under either the GCAL or FCCAL to do so.
The GCAL and FCCAL were both enacted in the 1930s. The LERTA was enacted in 1977, so it is the most recent and most on-point statute, with respect to new improvements subject to an abatement. The LERTA does not authorize the City to reassess a new commercial improvement on real property until “after completion of the new construction or improvement.” 72 P.S. § 4727. The LERTA also does not authorize the City to reassess the land underlying that project, which means that the land would need to be the subject of a countywide reassessment in order to be valid and not a “spot assessment.”
This issue is still an open question, legally, but if you are a developer or involved in construction financing, you will want to have a plan to address any potential tax increase before you commence construction. Certainly this is something anyone desiring to take advantage of the new Qualified Opportunity Zones should be thinking about, and there are ways to creatively address this local tax issue without sacrificing the breadth of any planned development project.
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