Standard Versus Enhanced Exemptions Understanding the City of Pittsburgh’s Proposed LERTA Exemption Ordinance

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The City of Pittsburgh, in an attempt to stem the tide of collapsing real estate tax revenues from downtown Pittsburgh commercial properties, is on the verge of passing an ordinance creating a tax exemption authorized by Pennsylvania’s Local Economic Revitalization Tax Assistance (LERTA) Act creating a two-tier standard and enhanced exemption structure.* The City’s LERTA ordinance, bill 2024-0256, was unanimously approved at City Council’s April 10 standing committee. A public hearing took place on April 29. The LERTA ordinance will likely be adopted in May.

The reasons for the collapse of tax revenues, driven by successful tax assessment appeals, as described in the proposed ordinance are revealing. Fifteen downtown office properties have won assessment reductions for 2023 totaling $409.9 million, which could cost the city $3.3 million in tax revenue. The 15 office properties that have won significant assessment reductions do not include the Grant Building, which is facing foreclosure, and the K&L Gates Center after its owner consented to a foreclosure brought by its lender, Pacific Life Insurance. Downtown accounts for 23% of the city’s total real estate tax revenue. In response, City Council proposes to declare downtown an “acutely deteriorated area,” which qualifies “any person constructing, converting and/or improving deteriorated property, or construction, conversion and/or improvement of commercial, industrial, residential or other business structures or property in the acutely deteriorated area, including improvement constituting a qualified conversion to commercial use, commercial residential use (i.e., apartments), or residential use” for either a standard tax exemption or an enhanced tax exemption. There is no tax exemption for the value of land or the value attributable to any parking structure.

The purpose of the ordinance is to stem the tide of plunging downtown property tax revenues by leveraging tax exemptions to encourage the conversion of more office buildings in downtown Pittsburgh to residential buildings, encourage the adaptive reuse of office buildings in downtown Pittsburgh, and incentivize investment in downtown Pittsburgh. The City also sees the opportunity to create more affordable and market rate housing units during the ongoing housing crisis.

Standard Tax Exemption

Under the proposed ordinance, a developer may apply for and obtain a standard exemption from real estate taxes, not to exceed 50% in any single year for a period not to exceed six years. The exemption, consistent with the LERTA Act, is applicable only to that portion of the assessed valuation that exceeds the full assessed valuation prior to the issuance of the building permit for the project. A new project or a conversion will qualify for the standard exemption if the developer does not include affordable housing or create full-time-equivalent (FTE) positions.

Enhanced Tax Exemption

The principal differences between the standard tax exemption and the enhanced tax exemption are (a) the enhanced tax exemption may exceed 50% in any single year based on the project achieving certain affordable housing or job creation thresholds, and (b) the enhanced tax exemption period is 10 years or the maximum length of time permitted by applicable state law. The LERTA Act currently caps the exemption at 10 years. State Senator Wayne Fontana introduced SB 1158 on April 22; SB 1158 would increase the exemption period to 20 years.

The City’s finance director determines eligibility for the enhanced tax exemption based on the number of affordable units created that are affordable to tenants at various levels of the area median income (AMI). The table below summarizes eligibility for the enhanced tax exemption.

As the chart reveals, there is no incentive to provide more than 10% of affordable units for those whose earnings are at or below 50% of AMI, because the 100% exemption applies whether a commercial residential project or a residential project provides 10% or 20% of such units. Enhanced tax exemptions are also available for commercial or commercial residential projects that increase FTE positions. A commercial or commercial residential project that increases FTEs by 30 to 39 allows an exemption of up to 90% in any single year. Those that add 40 to 49 FTEs permit an exemption of up to 95% in any single year. A 100% exemption is available for a commercial or commercial residential project that provides an additional 50 or more FTEs. The FTE-based exemption will primarily benefit commercial projects defined as having industrial, commercial, or other business purposes. Commercial residential uses are multifamily projects, which generally do not generate more than a handful of FTEs.

The City of Pittsburgh is betting heavily on the conversion of office buildings to multifamily projects in order to revitalize downtown and stabilize its tax base. A recent study by the University of Toronto School of Cities tracked cell phone data from 62 downtown metropolitan areas to assess downtown recoveries. Pittsburgh’s business hours recovery from the pandemic was only 58%, while its after-hours recovery, nights and weekends, is 90%.** The LERTA ordinance will be an important incentive to increase the daytime recovery rate, and to stabilize and improve the after-hours recovery rate by increasing the number of downtown residents.

Notes:
*https://pittsburgh.legistar.com/LegislationDetail.aspx?ID=6569978&GUID=B82FF496-2381-4969-BEAA-AA712B92B627&Options=&Search=
**Drilling, Joanne. “The real key to downtown’s comeback may not be office space after all.” The Business Journals, April 22, 2024.