Vacant Land Management in Philadelphia: The Costs of the Current System and the Benefits of Reform

The current system of managing vacant land in Philadelphia is fragmented and inefficient, leading to substantial economic and social costs. The study estimates that vacant parcels reduce property values by an aggregate of $3.6 billion, cost the city over $20 million annually in maintenance, and result in at least $2 million in uncollected property taxes each year. A reformed approach to vacant land management could transform these liabilities into assets, generating significant benefits for the city and its residents. The proposed reforms include creating a centralized inventory management system, streamlining the tax foreclosure process, and fostering collaboration among public, private, and community stakeholders. By implementing these changes, Philadelphia could see the development of approximately 3,400 new housing units within five years, generating over $35 million in tax revenues and supporting job creation and economic growth. The study emphasizes the importance of strategic and coordinated efforts to reclaim vacant land and reinvest in neighborhoods, ultimately enhancing the quality of life for all residents.

Vacant land has a devastating impact on the neighborhoods and the finances of the City of Philadelphia. Vacancy results in blighted blocks, high maintenance costs, and uncollected taxes. City-owned vacant parcels are owned by different agencies with different rules and agendas. Historically, the City has rarely used its tax foreclosure power to put privately-owned vacant parcels into more responsible hands. As a result, neighborhoods bear undue distress, the City and its taxpayers pay dearly, and those seeking to improve properties and reclaim blocks are discouraged.

Though they are most concentrated in North and West Philadelphia, vacant parcels are scattered throughout the City, affecting virtually every neighborhood. Of 40,000 vacant parcels in the City, over three-quarters are privately controlled (see Figure ES.1).

In this study, commissioned by the Redevelopment Authority of the City of Philadelphia (RDA) and the Philadelphia Association of Community Development Corporations (PACDC), Econsult Corporation, the Penn Institute for Urban Research, and May 8 Consulting estimated that vacant parcels cost the City and its residents in the following ways:

1. $3.6 Billion in Lost Household Wealth. Vacant parcels have a blighting effect on nearby properties, reducing values by 6.5 percent citywide and by up to 20 percent in some neighborhoods (see Figure ES.2). This results in an estimated $3.6 billion reduction in property values, an average of $8,000 for each household in the City.
2. Over $20 Million in City Maintenance Costs Each Year. Though the City controls only a fraction of the vacant parcels within the city, it has to bear significant costs to maintain all of them – waste clean-up, pest control, police and fire – totaling over $20 million per year.
3. At least $2 Million in Uncollected Property Taxes Each Year. 17,000 vacant parcels are tax delinquent, most by over a decade, owing a total of $70 million to the City and School District in back property taxes. This number increases by at least $2 million a year.

The City’s historic approach to vacant land management contributed to the problem and prevented a comprehensive solution. Management has been fragmented because ownership and services are spread out across multiple agencies. No single entity is responsible for acquiring, assembling, and disposing of vacant parcels, or for thinking about the entire inventory of parcels and making strategic land use decisions, although recently Mayor Nutter has convened a working committee of City agencies and other stakeholders to this end. As a result, further vacancies occur, and the cost of vacant land continues to be borne by every resident and every neighborhood. Even the most committed of individuals are discouraged from reclaiming blighted properties and turning around declining blocks.

A strategic and coordinated response by the City could substantially reduce the negative effect of vacant parcels, and transform them from liabilities to assets through redevelopment, with significant gains in neighborhood stability, job creation, and tax revenue generation. This study estimated that reformed vacant land management would activate new construction in neighborhoods in which there exists more potential for development (as defined as prices exceeding costs by 10 percent or more), which would lead to the addition of about 3,400 new housing units within the city within the next five years (see Figure ES.3).

In addition, having a more efficient and predictable system minimizes barriers and costs for non-profit developers as well, stretching scarce public funds and enabling the City to better leverage available resources at the state and federal level, enabling the development of additional affordable homes and commercial development.

It is conservatively estimated that adding that many units would generate a number of benefits to the City and its neighborhoods:

1. The construction activity would generate $180 million in economic impact each year, supporting 800 jobs and $30 million in earnings, and producing $1.9 million in taxes to the City. Selling those new units would generate about $4.1 million in real estate transfer tax revenues per year.
2. Adding those new units would add $43.5 million in property tax base (i.e. assessed value) and $3.6 million in property tax revenues to the City and School District per year; it would also add about 800 new residents and 340 new wage earners, translating into $500,000 in wage tax revenues and $25,000 in sales tax revenues per year.

Adding up all of these gains, the City and School District could gain well over $35 million or more in tax revenues within five years. This is over and above the gains from reducing $3.6 billion in property value loss, over $20 million per year in maintenance costs for vacant parcels, and at least $2 million in uncollected property taxes each year from delinquent vacant parcels (see Figure ES.4).

Vacant parcels can become building blocks for neighborhood development. If the City can replace its present approach to vacant land management with one that aggressively deals with problem properties and that works with residents and for-profit and not-for-profit developers in a coordinated and organized manner, millions of dollars in annual costs can be reduced or eliminated, and significant reinvestment in neighborhoods can occur, resulting in construction activity, job creation, vibrant blocks, and an increase in residents and tax base.

Context

Vacant land in post-industrial cities like Philadelphia can represent a significant impediment to neighborhood stability, a drag on property tax revenue generation potential, and a logistical challenge to manage. Within the city of Philadelphia, over three-quarters of the estimated 40,000 vacant parcels are not controlled by the City (see Figure 1.1), and the majority of them are tax delinquent.¹ The one-quarter that are owned by the City are controlled by several different agencies, with little coordination and few efficiencies in tracking, marketing, or disposition.

1. _{Throughout the report, a difference is made between the geography of Philadelphia (“city”) and the government of Philadelphia (“City”). 2 Vacant parcel data is based on a Philadelphia Water Department data set, which is further described in Section} 
2. _{Tax delinquency data is based a City Revenue Department data set. “Privately controlled” refers to all parcels not owned by the City, and includes governmental entities such as Amtrak, Commonwealth of Pennsylvania, and SEPTA.}

It is difficult, in the current fiscal environment, for the City and its residents to have to bear the significant expenses associated with maintaining vacant parcels as well as losses associated with tax delinquency and with the blighting effect on neighborhoods. Recent local media coverage has highlighted the cost of vacant land and of the uncoordinated and inefficient process by which it is managed, shining a spotlight not only on the financial cost to the City and its taxpayers but also on the distress borne by neighboring residents and on the discouraging effect of the broken system on the efforts of residents and for-profit and not-for-profit developers to reclaim blighted properties and turn around declining blocks (see Figure 1.2 and 1.3).

3. _{Philadelphia Inquirer (April 8, 2010). See also: “40,000 City Properties. Now What?” Philadelphia Daily News (July 28, 2010); “In the Fight vs. Blight: A Lot of Frustration,” Philadelphia Daily News (July 28, 2010); “Renovator Stymied by Power Struggle of Agency, Council,” Philadelphia Inquirer (June 25, 2010); “City Hall Drives a Couple toward Ruin,” Philadelphia Inquirer (June 9, 2010).}

Scope of Work

The Redevelopment Authority of the City of Philadelphia and the Philadelphia Association of Community Development Corporations, with support from the Oak Foundation, the Office of Housing and Community Development, and the William Penn Foundation, engaged Econsult Corporation, the Penn Institute for Urban Research, and May 8 Consulting to identify and calculate the costs imposed by vacant land on the City, and to articulate and estimate the benefits of a reformed approach. This initial exploration provides preliminary answers and guidance for further analysis in the following categories:

1. What is the current vacant land management system costing the City? A statistical model was developed to isolate the blighting impact of vacant parcels on the property values of neighboring properties. Collection of financial statements from and interviews with relevant City agencies was combined with per-unit estimates from comparable localities to arrive at a total amount being spent to manage vacant parcels within the city. Finally, data from the City’s Revenue Department enabled an estimate of the distribution of tax delinquency status and thus a sense of what the City is unable to collect in property tax revenues as a result of vacancy.
2. What would a reformed approach yield? While providing specific recommendations on the programmatic, administrative, and legal actions the City could take is outside the scope of this report, the characteristics of those preferred reform methods are identified. Reform would likely have to integrate the management of vacant parcels, streamline the process for disposition of parcels, and enable the City to more efficiently assume ownership of tax delinquent properties. Assuming successful implementation, the City would then have an array of options for managing its inventory of vacant parcels, including continued ownership, redeployment for other public purposes, and disposition for private for-profit and not-for-profit development, as well as a set of criteria by which those alternatives could be weighed. 
3. What would be the benefits of a reformed system? Reform would lower direct costs associated with vacant parcels through improved efficiency and lower vacancy levels. It would reduce neighborhood blight that accompanies vacancy, thereby increasing household wealth. And, it would spur development of vacant parcels by assuring clear title and reducing investment risk. Gains from development of previously unproductive parcels include upfront construction activity and jobs, upfront real estate transfer tax revenues, a growing property tax base, and net new residents and workers, with attendant increases in wage and other tax revenues.

By expressing and estimating these impacts, this report intends to inform the weighing of current costs, the costs of continued inaction and inefficiency, and the benefits of a reformed approach.

Overview_⁴

There are significant current costs to the City of Philadelphia stemming from 31,000 vacant privately-owned parcels and 9,000 vacant City-owned parcels, and from the inefficient ways in which those vacant parcels are managed. These negative impacts have wider geographic and functional impact than may be popularly understood. Though by count they are most densely situated in low-income neighborhoods in North and West Philadelphia, vacant parcels can be found all over the City of Philadelphia. They adversely impact the City as a whole in at least three ways:

1. They represent an aggregate $3.6 billion in reduced household wealth because of the blighting effect they have on nearby properties.
2. They represent over $20 million spent by the City on maintenance each year, and
3. They represent $70 million in delinquent property tax revenues for the City and School District, a figure that likely increases by at least $2 million each year in uncollected property taxes.

Data on Vacant Parcels

The City does not presently have a centralized inventory management system that tracks the number, characteristics, and status of vacant parcels. The best available data set for understanding the number and spatial distribution of vacant parcels within the city is maintained by the Philadelphia Water Department (PWD), which defines as vacant those parcels for which they have shut off water service. It is therefore not a perfect data set, but it serves as a fairly good proxy.

Of the 40,000 parcels PWD classifies as vacant based on this definition, the vast majority, some 37,000, are classified as structureless vacant lots.⁵ It is likely that there are additional vacant parcels containing structures that exist within the city, over and above the current number of 40,000, that do not yet appear in the PWD data set.⁶

In fact, this data set probably underestimates the number of vacant parcels in the city, as estimates from previous studies range up to 60,000 parcels. The use of this data set from PWD as a proxy for the inventory of vacant parcels therefore likely understates the impacts discussed in this report.

Blighting Effect on Nearby Parcels

Vacant parcels have a blighting effect on the neighborhoods in which they are located, resulting in the loss of wealth for private owners via property value reductions. This blighting effect can be isolated and estimated through hedonic regression analysis, a longstanding and accepted form of property value impact analysis that is used by Econsult for a variety of real estate analyses within the city and across the US. Hedonic regression analyses understand the price of a housing unit to be the sum of that housing unit’s positive and negative characteristics – structural traits (square footage, lot size, number of bedrooms and bathrooms), the package of tax and service levels for the jurisdictions in which it lies, and locational amenities and disamenities (i.e. whether it is near attractive things like parks and playgrounds and/or whether it is near unattractive things like landfills and highways).

Through statistical and econometric techniques, the incremental effect of each of those characteristics – in this case, distance to the nearest vacant parcel – can be isolated. This hedonic regression analysis considered the 22,743 home sales that took place between the first quarter of 2009 and the first quarter of 2010.⁷ Based on this analysis, it is conservatively estimated that the existence of 40,000 vacant parcels within the city costs homeowners 6.5 percent in property value, for an aggregate $3.6 billion in property value loss.⁸ For the average household, this magnitude of loss is about $8,000 in property value (see Figure 2.1).

_{4. The cost calculations in this section are based on the best available data and statistical techniques, but because of the imprecise nature of this exercise, they are merely intended to be rough estimates for the purposes of understanding the relative orders of magnitude of impact involved. Where possible, conservative assumptions were used, so resulting figures should be considered as lower bound estimates.}

_{5. See Appendix A for additional detail on the characteristics of vacant parcels within the City.}

_{6. Also, it is likely that some of the parcels classified as “Vacant Lot” actually have structures on them; looking up on Google Earth a random sample of 100 parcels classified “Vacant Lot” by PWD yielded 15 that actually had structures on them. Therefore, while structureless vacant lots represent the vast majority of vacant parcels within the city as per the PWD data set, in reality they likely represent a smaller percentage, although probably still the vast majority, of vacant parcels within the city.} 

_{7. See Appendix B for additional detail on the methodology and results of Econsult’s property value impact model.} 

_{8. Only occupied single-family units were included in this analysis, so the magnitude of the blighting effect is even larger than this, since the property values of multi-family structures and unoccupied structures would also be affected.}

There is obviously a wide disparity within the city of house values as well as of the blighting impact of vacant parcels. In some neighborhoods, the loss of value was estimated to be zero, while in other neighborhoods, the loss of value was estimated to be as high as 20 percent (see Figure 2.2). Lower valued neighborhoods tend to have more vacant parcels and therefore a higher negative impact in percentage terms, but not as high of a negative impact in absolute dollar terms; while higher valued neighborhoods tend to have fewer vacant parcels and therefore a lower negative impact in percentage terms, but a relatively high negative impact in absolute dollar terms.

Cost to Maintain Vacant Parcels

Even though the City only controls one-quarter of the 40,000 vacant parcels within the city, it bears considerable expense providing some level of maintenance and oversight for all 40,000 vacant parcels. A number of different City agencies bear costs associated with the maintenance of vacant parcels, some because they directly control vacant parcels and some because their functions intersect with the maintenance of vacant parcels.

Based on interviews conducted with department representatives, a review of available financial statements, and research on equivalent per-capita costs from similar nearby localities, it is conservatively estimated that the aggregate costs are over $20 million each year (see Figure 2.3).⁹ Furthermore, this is despite the fact that data for some entities was not available, some entities that own vacant parcels spend little or nothing to maintain them, and there does not currently exist a standardized baseline level of condition to which City agencies seek to maintain the vacant parcels they control.

_{9. Aggregate costs do not include those for departments for which no information was available at the time. They also do not include costs borne by the Philadelphia Housing Authority, since it uses federal funds and therefore its expenditures have no impact on City finances. See Appendix C for additional information on cost estimate sources, methodology, and detail by agency.}

Lost Revenues from Uncollected Property Taxes

The vast majority of vacant parcels are privately held. And, the majority of those privately held vacant parcels that are not tax exempt are also tax delinquent, with little to no prospect for collection. By merging information on the 40,000 vacant parcels within the city with information from the City’s Revenue Department on some 100,000 delinquent tax accounts within the city, it is estimated that about 17,000 vacant parcels within the city are also tax delinquent (see Figure 2.4).¹⁰ Some 11,000, or two-thirds of those parcels, have been tax delinquent for over 10 years, and the aggregate amount of tax delinquency represented by all delinquent vacant parcels is, including interest and penalty, about $70 million to the City and School District, the bulk of which can be considered uncollectible.¹¹ It is conservatively estimated that these delinquent accounts add at least an additional $2.0 million in uncollected property tax revenues to the City and School District each year (see Figure 2.5).¹²

_{10. The universe of 40,000 vacant parcels within the city also includes 9,000 City-owned parcels as well as thousands of additional tax exempt parcels controlled by non-profit organizations.} 

_{11. Out of this amount, roughly $28 million is to the City and an additional $42 million is to the School District. See Appendix D for additional detail on the distribution by amount owed and years delinquent for vacant parcels that are tax delinquent.}

_{12. If principal amounts only are considered (i.e. no interest, penalties, or other charges), and outstanding amounts for each tax delinquent vacant parcel are divided by the number of years the parcel is delinquent (i.e. a parcel that owes $30,000 in principal and is three years delinquent is estimated to have an average annual bill of $10,000), that calculation yields an estimate of about $5 million per year in uncollected property taxes, of which about $2 million is to the City and an additional $3 million is to the School District. See Appendix E for more detail on how this figure was calculated.} 

_{It is assumed that any accounts that are more than three years delinquent are essentially uncollectible, so the aggregate sum of the principal amounts owed by accounts that are three or fewer years delinquent is about $2 million. This is therefore taken to represent the amount that is added to the balance each year that is potentially collectible, and represents about $0.8 million is to the City and about $1.2 million is to the School District.} 

_{In fact, it is very likely that lost revenues from uncollected property taxes from vacant parcels that are tax delinquent is far higher. First, the $5 million figure does not include tax-exempt properties such as all of the ones controlled by a City agency, which if disposed of to a private entity would generate property tax revenues. Second, the figure does not include properties that become newly vacant each year, which thus add to the uncollected amount.}

Current Costs Compared to Estimated Values

The magnitude of these current costs, in light of present fiscal challenges, argues for action: $3.6 billion in lost household wealth, over $20 million per year in maintenance costs, and at least $2 million lost each year in delinquent property taxes. Furthermore, these costs must be compared against the relatively low market values of the vast majority of the parcels in question. Econsult estimated, via a statistical analysis of land sales within the city,¹⁴ that the aggregate value of all 40,000 parcels, totaling 3,555 acres, is $1.9 billion,¹⁵ and that the aggregate value of the 9,000 City-controlled parcels, totaling 823 acres, is $410 million. Most of the value of City-controlled vacant parcels is concentrated within a relatively small proportion of those parcels: in aggregate, the top 1 percent of City-controlled vacant parcels, by value, is worth more than half of the estimated aggregate value of City-controlled parcels (see Figure 2.6 and Figure 2.7).

_{13. All amounts 10 or more years delinquent are considered 10 years delinquent and thus are divided by 10 to arrive at an annualized amount.}

_{14. The value of the current inventory of vacant parcels is estimated by conducting a hedonic regression analysis of the 1,540 land sales that took place between the first quarter of 2008 and the first quarter of 2010. See also Appendix G for a listing of addresses and characteristics for all 40,000 vacant parcels, as well as values estimated by Econsult’s hedonic regression model. This listing was also submitted to the City in spreadsheet format.}

_{15. As a point of reference, it is estimated that the city’s 449,000 occupied single-family units have an aggregate value of $565 billion. Therefore, the inventory of all vacant parcels within the city represents about 9 percent of the total number of occupied single-family units but only 3 percent of the aggregate value of those units.}

It is beyond the scope of this engagement to evaluate the specific programmatic, legislative, and other actions that can be taken to reform the way in which vacant land is managed by the City of Philadelphia. However, it is useful to describe what is characteristic of a reformed system, what choices that yields for decision-makers for individual vacant parcels as well as for the entire inventory of parcels, and what the costs, benefits, and decision criteria are for each of those choices. The aim of this section is to cover that ground, and to lay the foundation for a more detailed and numeric exploration of the benefits of reform in the ensuing section.

The City’s historic inability to tackle vacant land in a coordinated, strategic, and proactive manner represents a lost opportunity for redeployment and redevelopment. This lost opportunity holds consequences for the City’s capacity to pursue neighborhood stabilization, economic growth, and revenue generation.

Characteristic of the land management systems deployed by localities that are recognized for their effectiveness in this arena is the existence of a comprehensive system of maintaining that locality’s inventory of vacant parcels. Places like Baltimore, Cleveland, Genesee County (Flint, MI), and Portland (OR) are comprehensive not only in their accounting for the existence and characteristics of their vacant parcel holdings, but also in their ability to strategize across holdings towards land retention and disposition actions that maximize a number of objectives.¹⁶ In Philadelphia, no single entity is responsible for acquiring, assembling, and disposing of vacant parcels, or for thinking about the entire inventory of parcels and making strategic land use decisions, although recently Mayor Nutter has convened a working committee of City agencies and other stakeholders to this end.

A comprehensive land management system enables the leveraging of proceeds from higher market properties for efforts intended to assist neighborhoods in which lower market properties exist. Even accounting for vast differences in prices, there will be fundamental differences among parcels in terms of attractiveness to developers for acquisition, assemblage, and development; and, there will also be fundamental differences among parcels in terms of the extent to which they impose negative effects on nearby parcels. Therefore, it is paramount to be able to look across land holdings to make strategic decisions as to which parcels to hold for a higher price, which parcels to aggressively price for disposition and development, which parcels to develop for public purposes such as affordable housing, and which parcels to better maintain so as to minimize their blighting effect on nearby properties.

On a related note, a more coordinated approach can better position the City to be aware of adjoining vacant parcels that are held by different City agencies, and to be able to assemble those parcels towards larger and more attractive development opportunities. Similarly, it can be positioned to more efficiently redeploy parcels from development proposal agreements in which plans have ceased, to new opportunities that are more likely to occur.

Finally, successful approaches are also mindful that the circumstances by which parcels become vacant and stay vacant can be influenced by good policy and programming. Notably, by accelerating and streamlining the tax foreclosure process, by becoming more aggressive concerning delinquent tax collection, and by implementing effective forbearance policies, successful localities have found that time and administrative costs can be saved, fewer properties need to be deemed effectively unavailable due to their tax delinquent and unclear title status, parcels can redeployed more quickly, and collection of current accounts can improve.

A reformed process for managing and disposing of vacant parcels creates choices for policymakers, enabling more effective and strategic decision-making as it relates to individual vacant parcels as well as the entire inventory of parcels. Each choice has its pros and cons; in the next section, an estimate is made of the overall economic and fiscal benefits associated with the development of some vacant parcels into housing units by for-profit and not-for-profit developers.¹⁷

_{16. These approaches also enable a coordinated response to private controlled vacant parcels, in terms of custody and maintenance.}

_{17. See Appendix H for a summary of the specific choices that may emerge from a reformed process, and the relative pros and cons of each choice.}

Reduction or Elimination of Current Costs¹⁸

Reform, as described previously, is intended to lead to an accelerated rate of transforming vacant parcels from liabilities to assets. The first step of this transformation leads to the reduction or elimination of the current costs associated with vacant parcels.

To illustrate the magnitude of the impact of such a transformation, consider that if reform led to the complete elimination of vacant parcels within the city of Philadelphia, vacant parcels would no longer contribute $3.6 billion in property value loss to nearby parcels. The City would also no longer have to bear over $20 million per year in costs associated with maintaining vacant parcels.

Finally, the City and School District would no longer miss out on at least $2 million per year in uncollected property tax revenues, which represents the potentially collectible principal portion of the aggregate $70 million in delinquent accounts represented by vacant parcels. Reform may also improve collection efforts on existing accounts, if more robust enforcement efforts stem the addition of newly delinquent accounts.

More and Faster Development

Reducing the number of vacant parcels therefore holds the prospect of generating significant public cost savings through the removal of vacant parcels and thus of their negative effects. Even better is when those previously vacant parcels can be developed on, which leads to upfront construction activity, an increase in the City’s property tax base, and net new residents and wage earners. Thus, in addition to minimizing or eliminating the negative impacts of vacant parcels, reform would also generate positive impacts associated with development that takes place on these parcels. It is anticipated that reform would lead to net new development, over and above what is currently being demanded in the local real estate markets, for the following reasons:

1. By making the land acquisition process more efficient and more predictable, a reformed system is one that minimizes or eliminates some of the barriers to develop in the minds of real estate developers, thus leading to increased interest in developing within the city. Importantly, having a more efficient and more predictable system minimizes barriers and costs for not-for-profit housing developers as well, stretching scarce public funds and enabling development of additional homes where delays once disrupted efforts.¹⁹
2. By speeding up the acquisition of abandoned parcels, the reformed system would prevent undue deterioration of existing structures, potentially leading to significant reductions in the cost of redeveloping property.
3. A re-organized land management system with a single coordinating agency enables the City to assemble adjoining parcels for greater development opportunity, both in terms of parcels owned by different City agencies that did not previously collaborate like this on such matters as well as those that were privately owned and tax delinquent.
4. Additional development can be stimulated via more aggressive marketing and pricing of vacant parcels, by making more efficient the match-making between supply and demand of land and by making profitable development more frequently available by lowering the upfront costs associated with land acquisition.
5. The aforementioned reasons motivate not only for-profit developers building marketrate units, but also stretch the resources of not-for-profit developers building affordable and workforce units, as well as mixed-use developments, thus potentially creating additional supply.²⁰
6. Having an efficient system positions not-for-profit developers and the City to better leverage available resources at the state and federal levels, through programs such as the Pennsylvania Housing Finance Agency’s Homeownership Choice Program and the Low Income Housing Tax Credit Program. The ability of the City to acquire and dispose of properties strategically and expeditiously has a direct impact on a developer’s ability to leverage scarce public resources, so if the City is impaired in playing that role, it loses out on critical outside funding opportunities to stimulate development.

Most importantly, and for the reasons described above, vacant parcels would no longer be considered automatically “off-limits”: developers will not have to accept that there is imperfect information about the composition of the overall inventory of vacant parcels or the characteristics of individual parcels, there is a greater chance that larger parcels can be assembled for more attractive development opportunities, and the risks associated with the uncertain, cumbersome, and lengthy nature of the disposition process would be minimized or eliminated. This will have the powerful effect of increasing not only the supply of developable parcels within the city but also their demand.

_{19. Decreasing the cost of development has been proven to be associated with higher levels of development, as is evidenced by increases in development associated with the introduction of a ten-year property tax abatement program within the city. See, for example, “Building Industry Association: Philadelphia Tax Abatement Analysis,” Econsult Corporation (September 2006). More development also occurs when the amount of time it takes to bring a project through the development process is reduced, since this leads to higher returns on investment for developers and their investors.} 

_{20. In other words, it is anticipated that some of the increase in the production of housing units would come from neighborhoods stabilizing and prices increasing to the point that for-profit developers would find it feasible to build new units where previously it was financially infeasible; and some of the increase would come from non-profit developers finding the process of securing and reclaiming vacant parcels reformed enough that they can proceed more quickly with subsidized construction in neighborhoods where for-profit developers are not yet sufficiently motivated.}

Estimating Market Absorption – Short-Term Approach

It is difficult to pinpoint how much net new development would occur should reform efforts help clear the way, given the many variables that influence whether and where for-profit and not-for-profit developers choose to build. One way to roughly estimate the magnitude of that demand increase, at least in the short run, is to presume that reform would facilitate the development of vacant parcels in neighborhoods in which there currently exists already some semblance of economic motivation for construction activity, which can be loosely defined as occurring where current house prices presently exceed construction costs plus a minimal profit (the assumption being that where costs exceed prices, there is currently far less hope for market rate development).²¹

In reality, market absorption would be more nuanced than that. In some cases, development may make sense but there is some other barrier besides the disarray associated with vacant land management, so even solving the vacant land problem in those neighborhoods or on those blocks would not stimulate development. For example, there may be significant additional costs besides construction costs, such as the cost of land acquisition and/or environmental remediation, which deter development. In other cases, development may not otherwise make sense but it occurs anyway because of the existence of some sort of subsidy in the form of public investment and/or the efforts of not-for-profit developers.

Most notably, prices for existing housing units may be markedly different from prices that would be offered or demanded for newly constructed housing units. Furthermore, within neighborhoods there may be little if any relationship between prices for existing housing units and prices for newly constructed housing units. Therefore, it is not unusual that some neighborhoods where prices of existing housing units are lower than construction costs may yet bear new housing at higher price points, or that some neighborhoods where prices of existing houses units are higher than construction costs may yet not bear new housing at any price point. Thus, the assumption that development would occur where prices presently exceed costs is just that – an assumption – and is intended only to suggest a certain scale of impact, not to predict that that is precisely and definitely where development would occur.

Based on current citywide construction cost averages and on house transactions that took place between Q1 2009 and Q1 2010, it is estimated that there are about 3,400 vacant parcels in Census tracts where current house prices presently exceed construction costs plus a minimal profit for the developer of 10 percent (see Figure 4.1).²² Assuming that this first round of development opportunities could be realized in five years, that equates to about 680 new housing units per year (see Figure 4.2). As noted above, there may be many more Census tracts in which the market would bear a price for a new house that exceeds current construction costs plus a minimal profit, than there are Census tracts in which the average sales price for existing, non-new houses exceeds current construction costs plus a minimal profit. Thus, this count of parcels is intended only to provide a general and conservative estimate of the order of magnitude of development that could take place in the short term, not necessarily to predict the location and scale of actual development.

_{21. See Appendix I for a map of Census tracts where current house prices currently exceed construction costs.}

_{22. I.e. within the Census tract, the average price of houses transacted from the first quarter of 2009 to the first quarter of 2010 is greater than the citywide average construction cost per square foot times the average house size, as well as a 10 percent profit margin. If a 10 percent profit is not accounted for, then the number of vacant parcels in Census tracts where prices presently exceed costs rises to 4,697. If, further, one accounts for the estimated 6.45 percent house value increase that is suggested would take place should the problem of vacant parcels be solved within the City, the number of vacant parcels in Census tracts where prices presently exceed costs further rises to 5,561. To be conservative, the lowest number was used in this analysis.}

As a point of reference, Philadelphia City Planning Commission’s (PCPC) most recent 2035 projections anticipate that the City will experience a net increase of 46,000 housing units from 2010 to 2035, or about 1,800 housing units per year.²³ It does not seem unreasonable to imagine that a solution to the problem of vacant land would be responsible for a large proportion of that net increase or for growth over and above those base projections. Consider also that during the period from 1997 to 2008, which covers both boom years and bust years in the local and national real estate markets, an average of 875 units were added on an annual basis, during a time period in which there was no relief in the negative effect of vacant land on neighborhoods and development.²⁴

_{23. Based on a July 15, 2010 memorandum from Gary Jastrzab, Deputy Planning Director. These projections help validate the perspective that the City’s progress between 2000 and 2010 provide optimism that the major trends causing significant population loss from 1950 to 2000 have largely abated, and that there is very real potential for net growth in the years and decades to come.} 

_{24. See Appendix J for a table of new housing units constructed by year during this time period. Furthermore, during the 50-year period from 1950 to 2000, when the City suffered its most significant declines, there was a net loss of 170,000 households, or about 3,400 housing units per year, according to the US Census Bureau Profile of General Demographic Characteristics. Adding back about 680 units per year over a five-year period would therefore represent adding back in five years what was lost each year on average from 1950 to 2000.}

Economic and Fiscal Impact Estimates – Short-Term Approach

Assuming that about 680 residential units are added each year for the next five years following the implementation of a reformed vacant land management system, there are a number of net new economic and fiscal impacts that proceed. Construction activity generates economic and fiscal impacts, new housing units lead to more real estate transfer tax revenues and property tax revenues, and new residents and wage earners lead to more wage tax revenues and sales tax revenues (see Figure 4.3).²⁵

_{25. See Appendix K for additional detail on economic and fiscal impact estimates.}

To begin with, that much construction results in jobs created, as well as other economic and fiscal impacts that proceed from that net new construction activity. Based on estimated direct net new construction activity of about $120 million per year,²⁸ it is estimated that total annual economic impacts would result of about $180 million supporting about 800 jobs and about $30 million in earnings and generating about $1.9 million in tax revenues to the City, once the spillover effects resulting from the direct net new construction activity have been properly accounted for (see Figure 4.4).²⁹ Since it is anticipated that 680 residential units would be added on annual basis, those estimated amounts represent impacts that would occur each year for five years.

_{26. Tax revenues generated during construction and real estate transfer tax revenues are considered to be annual in nature. Each year, housing units get built, so each year construction activity leads to tax revenues and initial housing sales lead to real estate transfer tax revenues. These amounts will be roughly the same each year, and will be generated each year. In contrast, property tax revenues, wage tax revenues, and sales tax revenues are considerable to be accumulating in nature. Each year, a new wave of housing units, wage earners, and residents are added to the City. So each subsequent year’s tax base would be larger than the previous year, and thus these amounts would grow over time.} 

_{27. The existence of the City’s 10-year property tax abatement program means that any net new property tax revenues associated with new construction would commence after Year 10.} 

_{28. 680 new housing units x 1997-2008 citywide average square footage per unit of 1,455 x current citywide average construction cost per square foot of $128 = $120 million in direct construction costs.}

_{29 Net new construction activities have significant spillover effects, resulting from two kinds of additional expenditures that occur as a consequence of the net new direct expenditures:} 

• _{First, indirect expenditures are those expenditures resulting from all intermediate rounds of production in the supply of goods and services. For example, upfront construction will necessitate various contractors increasing their purchases of materials, thus creating a spillover effect on those suppliers.} 

• _{Second, induced expenditures are those expenditures that are generated through the spending of earnings generated by the direct activities as well as by the indirect activities of supplying firms. For example, workers on a construction site will themselves spend their earnings on various items, such as food, clothing, and housing.}

  _{Citywide economic impacts, in the form of the sum of direct, indirect, and induced expenditures, and of the employment and earnings supported by that composition and scale of total expenditures, can be estimated by utilizing input-output models and multipliers. Input-output modeling is a standard way to measure the total economic impact of any net new economic activity.} 

  _{Econsult constructed an economic impact model for this purpose, which incorporates data from the US Department of Commerce’s Bureau of Economic Analysis. Econsult also developed a fiscal impact model to generate detailed estimates of the increases in state tax collections that result from these expenditures, employment, and earnings. See Appendix L for more information on these economic and fiscal impact model methodologies.}

_{30. If one assumes that expenditure levels grow at the same rate of inflation, these dollar figures can be taken to represent inflation-adjusted amounts.}

_{31. I.e. the wage tax revenues, sales tax revenues, and business privilege tax revenues that are generated to the City by construction and related activity.}

Furthermore, each of those residential units, when sold, would generate real estate transfer tax revenues. It is conservatively estimated that adding about 680 residential units represents $136 million in home sales transactions per year.³² Thus, if about 680 residential units are added each year, that means the City would gain about $4.1 million in real estate transfer tax revenues annually (see Figure 4.5).³³

Though property tax revenues would be abated in the first ten years because of the City’s property tax abatement program, after that time period the units would continue to add to the property tax base. In Year 1, it is estimated that adding about 680 residential units within the city would mean adding $43.5 million in assessed value and therefore about $3.6 million in property tax revenues;³⁴ and, because of the ten-year property tax abatement, that is the amount that would be added to the property tax rolls in Year 11. In Year 2, it is estimated that the city would add an additional 680 residential units, which, in addition to the newly added residential units from Year 1, results in a $87.0 million increase in assessed value and therefore $7.2 million in property tax revenues; and, because of the ten-year property tax abatement, that is the amount that would be added to the property tax rolls in Year 12. Assessed value base and property tax revenues thus continue to accumulate in this fashion and are added to the property tax rolls ten years later (see Figure 4.5).

Finally, the new units would also generate net new residents and workers within the city, resulting in wage tax revenues and sales tax revenues. It is conservatively estimated that the addition of about 680 residential units would result in about 800 new residents and about 340 new wage earners being added each year,³⁵ leading to $500,000 in net new wage tax revenues and $25,000 in net new sales tax revenues each year (see Figure 4.5).³⁶ As with assessed value base and property tax revenues, these amounts also accumulate: since, each year, net new residents and workers are being added as a result of net new residential units being added, each successive year’s addition in wage and sales tax revenues is greater and greater, since net new residents and workers that are added in one year remain within the city in subsequent years.

_{32. 680 housing units x average new house sale price of $200,000 = $136 million in net new house sale transactions. Multiplying the average new house size of 1,455 square feet by citywide average construction costs of $128 per square foot, and then applying a 10 percent profit and assuming no land costs, results in a house sale price of $205,000, which is then conservatively rounded down.} 

_{33. 680 housing units x average new house sale price of $200,000 x 3% City real estate transfer tax rate = $4.1 million in net new real estate transfer tax revenues. Conservatively, this only accounts for real estate transfer tax revenues associated with initial sales, not with any subsequent sales of those units in the future.} 

_{34. 680 new housing units x average new house sale price of $200,000 x 32% equalization ratio (i.e. ratio between assessed value and market value) = $43.5 million in assessed value x 8.264% property tax rate for City and School District = $3.6 million in net new property tax revenues, of which about $1.4 million would go to the City and about $2.2 million would go to the School District.} 

_{35. It is conservatively assumed that the addition of new housing units leads to one-half of the amount of net new residents and wage earners, to account for internal shifts. Thus:}

• _{680 new housing units x 2008 US Census average household size of 2.34 x 50% are net new to the city = 797 net new residents.} 
• _{680 new housing units x estimated 1 wage earner per household x 50% are net new to the city = 340 net new wage earners.} 

_{36. 340 net new wage earners x 2008 US Census median household income of $37,090 = $12.6 million in net new wages within the city. Thus:}

• _{$12.6 million in net new wages x 3.93% wage tax rate = $495,597 in net new wage tax revenues.}
• _{$12.6 million in net new wages x estimated 10% of wages spent on sales tax eligible purchases x 2% City portion of sales tax rate = $25,000 in net new sales tax revenues.}

_{37. If one assumes that revenue levels grow at the same rate of inflation, these dollar figures can be taken to represent inflationadjusted amounts.} 

_{38. The existence of the City’s 10-year property tax abatement program means that any net new property tax revenues associated with new construction would commence after Year 10.}

All together, the tax revenue gain to the City resulting from the addition of these residential units each year would be about $6.5 million in Year 1, increasing to about $8.5 million in Year 5, for a cumulative five-year gain to the City of well over $35 million or more (see Figure 4.6).³⁹ These benefits would be over and above the gains associated with the minimization or elimination of $3.6 billion in property value loss, over $20 million per year in expenditures associated with the maintenance of vacant parcels, and at least $2 million more each year in uncollected property taxes from delinquent vacant parcels. Additionally, these numbers do not account for any positive impacts from owners of neighboring parcels responding to blight removal and new development by recommitting to their properties instead of moving away and by reinvesting in those properties instead of letting them deteriorate.

_{39. These amounts do not include any net new property tax revenues, which would not be seen until beginning in Year 11 (because of the existence of the City’s 10-year property tax abatement program), when $3.6 million in property tax revenues would be received, representing net new property tax base added in Year 1.}

_{40. If one assumes that revenue levels grow at the same rate of inflation, these dollar figures can be taken to represent inflationadjusted amounts.} 

_{41. The existence of the City’s 10-year property tax abatement program means that any net new property tax revenues associated with new construction would commence after Year 10.}

Estimating Market Absorption – Long-Term Approach

Whether the pace of redevelopment slackens or accelerates after this first round remains to be seen. On the one hand, these vacant parcels represent the least blighted neighborhoods, so the work would appear to be more difficult to sustain once those parcels have been developed. On the other hand, these initial redevelopment efforts may create positive momentum in other, lower-valued neighborhoods, such that the number of places where for-profit and notfor-profit development makes sense grows over time.

Furthermore, removing the blighting effect of vacant land in these other neighborhoods may have larger percentage effects on prices related to costs, and may therefore lead to greater impetus for development. Recall that it is in these lower-valued neighborhoods where vacant parcels are more common and where addressing the problem of vacant land may translate into the removal of property value reductions that are as steep as 20 percent.⁴² This is a price adjustment that may “tip” some neighborhoods towards more viability from the standpoint of market-rate and affordable housing construction.

An alternative way to estimate the magnitude of demand increase resulting from vacant land reform, which may hold some guidance as to long-term market absorption potential, is to try to infer a relationship between changes in value associated with the removal of the blighting effect of vacant parcels and attendant changes in density. In other words, as the blighting effect of vacant parcels on neighborhoods and on property values is addressed, housing values rise, and new development is induced.

Based on this alternative, long-term approach, Econsult estimated that vacant land reform could result in 29,000 new residential units over a 50-year period, for an average of about 580 new units per year. Though such long-range forecasting is imprecise by nature, these results seem to be consistent with Econsult’s short-term approach to estimating market absorption (680 units per year for five years), with recent historical performance in terms of new housing construction (875 single-family and multi-family units per year from 1997 to 2008), and with other related growth forecasts (PCPC estimates 46,000 new housing units from 2010 to 2035, or about 1,800 units per year). If vacant land does in fact stimulate the projected 29,000 net new residential units, the estimated cumulative fiscal impact is about $75 million within 10 years.⁴³

_{42. Where there are greater numbers of vacant parcels, there is greater population loss and disinvestment. Removing the blighting effect of vacant land citywide would therefore have an outsized positive impact in these neighborhoods, leading to net new activity and tax revenue generation when compared to an alternative scenario in which population loss and disinvestment continues.} 

_{43. See Appendix M for more information on this alternative, long-term approach to estimating market absorption.}

Overview

Heretofore the discussion has been at a citywide level: the vast majority of vacant parcels hold minimal market value, they impose substantial costs upon the City of Philadelphia and its residents, and transforming them from being perceived as unavailable and unattractive to being efficiently and strategically deployed towards development activities can create meaningful benefits in addition to minimizing or reducing current costs. It is useful to also consider if and how this formula has been and is being applied at a neighborhood level.

Therefore, information is provided in this section on the instructive example of Kensington, which has had significant public investment and which now enjoys healthy increases in property values where once there was significant blight and disinvestment (see Figure 5.1). A closer look at Kensington’s example suggests that by addressing the problems associated with vacant land, neighborhoods can stabilize and growth can occur.⁴⁴

_{44. See Appendix N for a brief write-up on a second and different neighborhood example, that of Eastern North Philadelphia.}

_{45. “Philadelphia Housing Price Indices,” Econsult Corporation (August 10, 2010). The Kensington/Frankford real estate submarket, which is larger than just the Kensington neighborhood, is roughly defined as being bounded by the Delaware River, Poplar Street, 5th Street, Erie Avenue, and Frankford Avenue, and Bridge Street.}

Notably, this neighborhood example is also a good example of the positive role that strong not-for-profit developers can play in transforming blighted neighborhoods. In many instances throughout the City, community-serving organizations have entered neighborhoods with virtually no market-rate development potential and, with the help of significant public investment, developed subsidized affordable housing units. Echoing a theme featured prominently in this report, this has had the effect not only of providing a much-needed good – affordable housing – but also of reducing vacancy and its blighting effect, with attendant wealth benefit to existing households and change in the market viability of previously less developable neighborhoods.

Kensington

The evolution of the Kensington neighborhood in Near Northeast Philadelphia⁴⁶ makes for an illustrative example of industrial re-use.⁴⁷ Industry shifts over the second half of the 20th century had transformed Kensington from a strong, working-class neighborhood into a place of extensive blight, vacancy, and peril. In the transformation of Kensington into a magnet for arts and artists, reclamation and re-use have played and continue to play a significant role: in 1996, New Kensington Community Development Corporation (NKCDC) joined with the Pennsylvania Horticultural Society to “clean and green” trash-strewn lots into mini-parks, NKCDC has converted a former textile mill into 27 artists’ housing units, run-down playgrounds and fields have been cleaned up made safe and popular again, and one of the three “design challenge” proposals for the Community Design Collaborative’s current industrial land campaign involves the repurposing of former factory buildings for more modern commercial use.⁴⁸ As a result of significant public investment in vacant land reclamation, new housing starts have increased, property values have risen, and crime and blight have diminished: vacant land improvements were found to increase surrounding housing values by as much as 30 percent (translating in an aggregate property value gain of $12 million), and new tree plantings increased surrounding housing values by about 10 percent (translating in an aggregate property value gain of $4 million).⁴⁹

Lessons Learned

Neighborhoods like Kensington were able to make the turnaround from downward trending to upward trending due to a combination of macro-economic trends, public investment, and hard work on the part of local advocates. The turnarounds flipped the vicious cycles into virtuous cycles, as upward tipping points resulted from the reclamation of previously vacant parcels as assets from which to build developments and initiatives that could then beget additional developments and initiatives.

In such cases, community groups that had a civic vision for their neighborhoods were able to encourage the overall redevelopment of vacant land through a strategic framework rather than in a piecemeal fashion. Such an approach is a microcosm of what can and should occur citywide were a single approach instituted to manage vacant land in Philadelphia, with the requisite broad perspective to plan the process of vacant land acquisition, management, and disposition in a fashion that encourages the emergence of vibrant blocks in healthy neighborhoods.

_{46. Roughly bounded by Front Street, Erie Avenue, and Castor Avenue.} 

_{47. According to a merge of the Philadelphia Water Department inventory of vacant parcels and the master Board of Revision of Taxes parcel file, approximately 1,200 of the 40,000 vacant parcels within the City are industrial in nature. Later this year, the Philadelphia Industrial Development Corporation is expected to release its study of industrial parcels within the City.} 

_{48. “New Heights for Postgreen's Awesome Town ,” Brownstoner Philadelphia (June 3, 2010); “City Blocks: Frankford Avenue Revival ,” Metropolis (June 1, 2010); “Turning Philadelphia's industrial past into jobs today,” WHYY (May 27, 2010); “Derby is a Vehicle for Artists’ Creativity,” Philadelphia Inquirer (May 23, 2010); “Crack Pipe to Half-Pipe,” Philadelphia Daily News (January 29, 2010); “Turning a Field of Dreams Into Reality,” The Spirit Community Newspaper (September 9, 2009); “Revitalization Planned for PR Waterfront,” The Spirit Community Newspaper (May 6, 2009).} 

_{49. “The Determinants of Neighborhood Transformations in Philadelphia: Identification and Analysis: The New Kensington Pilot Study,” Wharton School of Business (Spring 2005). This report was co-authored by two Econsult team members.}

Vacant land within the city of Philadelphia imposes significant costs on the City, at a time when it can least afford to bear them: vacant parcels diminish property values within the City by an aggregate $3.6 billion, a variety of City agencies together spends over $20 million annually to maintain City-owned and non-City-owned vacant parcels, and privately held vacant parcels represent at least $2 million each year in uncollected property tax revenues to the City and School District. Most of the value within the City’s inventory of vacant parcels is concentrated within a small proportion of that inventory, which suggests that if a more strategic approach was taken, there could be considerable gains to the City from public remediation of some vacant parcels, aggressive disposition of others for private remediation, and the holding and assembling of still others for development opportunities.

A more comprehensive and strategic approach to vacant land management would allow the City to look across its inventory of vacant parcels and decide on which parcels to hold and which to release, and for what purposes. More effective policies and procedures will prevent parcels from becoming vacant in the first place and will provide clear paths for those that do to be quickly and strategically redeployed for higher use.

A reformed approach would lead to a more efficient, predictable, and strategic acquisition and disposition process. Vacant parcels would more quickly and systematically be identified, and remedies undertaken to facilitate their redeployment for positive purposes. If successfully carried out, a reformed vacant land management process would minimize or eliminate the costs described above, and in some cases there would be the additional benefits associated with development, roughly estimated at over $35 million or more within five years.