Study Cites the Perils of Expanding KOIZ Zones

Under any other scenario, however, the city and its existing office property owners lose money. Two Center City tenants have already preleased about half--354,000 sf--of Brandywine Realty Trust's Cira Centre, which will break ground this spring at 30th Street Station. Liberty Property Trust plans to develop One Pennsylvania Plaza at 17th St. and JFK Blvd.

If both buildings are designated KOIZ and completed as planned, "the city would lose between $14.3 million and $24 million in tax revenues, beginning in 2007, and experience cumulative losses from 2007 to 2009 ranging from $29 million to $66 million," according to the 12-page analysis. Variables depend on the type of tenants that occupy the buildings and where they come from.

Furthermore, "owners of existing downtown buildings could lose $14.4 million annually in rent, causing them to seek a reduction in their real estate tax assessments," the study warns.

Between 1994 and 2003, the CBD absorbed, on average, 116,000 sf of office space a year. Over the past decade, just 280,000 sf of office space has been leased to unsubsidized firms moving into Philadelphia. Tenants in taxable space generate $24.46 per sf in municipal tax revenues, according to the study.

If such existing Center City tenants fill both buildings, and the office absorption rate stays the same, "the city would experience a brief positive impact on tax revenues during construction, followed by significant losses," the report states. It places the cumulative loss to the city between 2004 and 2018 at $153 million. "If absorption of Center City office space improves to +282,000 sf annually, and both buildings are fully rented to 'major' firms, the city begins to recoup its losses only in year 2018."

Currently, if a tenant moves from a taxable space to a newly constructed building, it receives the 10-year tax abatement now available to developers. Such a move reduces the tenant's municipal taxes by 15%. By comparison, if the tenant moves into a new building with KOIZ status, its municipal taxes drop 47%.

The report urges a two-prong alternative to granting "preferential subsidies to individual downtown buildings." The first suggestion is to make affordable, across-the-board business and wage tax reductions that benefit all. The second is to support "Select Greater Philadelphia," which is the regional business marketing campaign aimed at attracting new corporations to the city.