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Philadelphia’s City Council Proposing Bill to Make Developers Address Affordable Housing

Oct 17, 2017

Philadelphia has been a lucrative market for those that develop residential real estate. Demand has been outpacing supply since the end of the recession. Rents have been increasing while vacancies have been decreasing at a steady rate. This has caused an increasing number of developers to start residential rental developments in the city. In an attempt to attract young professionals, these properties have numerous amenities, views and exclusivity. Accordingly, they also have a price to match, ranging anywhere from $1,500-$5,000 per month or $18,000-$60,000 per year. The general rule touted by financial websites and magazines is that housing costs shouldn’t be more than 30% of the potential dweller’s income. This means annual earnings of $60,000-$200,000 would be required.   Considering that the average salary for the Philadelphia metro area (which includes Camden and Wilmington) is $53,456, half the people working in the city could not afford even the cheapest of these new properties, which the Philadelphia City Council deems problematic. To combat this problem, the Council’s plan is to institute a bill requiring all new developments to have the greater of one or 10% of the units meet the “affordable unit” classification.  There are also requirements to pay an undetermined application fee and sell or lease 7.5% of the units through the Philadelphia Housing Authority.

An “affordable unit” is defined as a unit rented or sold to an eligible tenant or purchaser whose rent is less than a purchaser’s down payment plus a 30-year mortgage payment, as well as typical carrying costs (property taxes, insurance, utilities, condo or HOA fees) of less than 30% of the maximum income level permitted. The maximum income permitted is 30% or 50% of the area median income for an eligible tenant or purchaser, respectively. These percentages change to 50% and 80%, respectively, if the property lies within the Core Metropolitan District limits. For some larger developments, the bill allows up to a 50% increase on the number of units permitted in the property. The assumed rationale is the development of more affordable units for the city’s residents.

The proposed bill could negatively impact development in the city, in that developers will be concerned with their ability to effectively market—and sell—the remaining 90% of the units at a premium price when 10% of the units are highly discounted. One requirement of the new Code is that the affordable units are required to be reasonably dispersed throughout the housing development.  To explain further: People tend to live near and around, and socialize with, others who have similar lifestyles. It may be more challenging for a developer to sell a high-priced penthouse apartment to a professional looking for exclusivity, when a lower priced unit may be located next door.  Should such a bill be passed, developers will have to comply with the new regulations and come up with creative living structures to make their projects sustainable.

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Ralph Estel

Mr. Estel is a Senior Manager in the Private Client Services Group with over 10 years of experience providing accounting, consulting and tax services to middle-market clients. His clients include real estate and construction companies.

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