Committee Hearing, April 24, 2009

COUNCIL OF THE CITY OF PHILADELPHIA2 COMMITTEE ON LEGISLATIVE OVERSIGHT3 - - -4 Room 400, City Hall5 Philadelphia, Pennsylvania Friday, April 24, 2009, 2:42 p.m.6 - - -7 8 9 Resolution 090151 - Authorizing the Philadelphia City Council's Committee on Legislative10 Oversight to hold public hearings on Philadelphia's building costs, home values, and11 potential strategies and remedies to encourage development.12 13 14 COUNCILMEMBERS PRESENT:15 James F. Kenney, Chair16 Curtis Jones, Jr. Brian J. O'Neill17 Also Present: Councilman Frank DiCicco18 19 20 - - -21 22 V A R A L L O Incorporated Litigation Support Specialists23 1835 Market Street, Suite 600 Philadelphia, Pennsylvania 1910324 215.561.2220 215.567.2670 25 26 2 4/24/09 - LEG. OVERSIGHT - RES. 0901511

Good2 afternoon, everyone. I want to personally3 apologize. I had people from out of town4 that were delayed on their flight, and my5 meetings got backed up, and I'm here.6 Thanks.7 This is the Committee on8 Legislative Oversight to hear testimony on9 Resolution 090151, which is a resolution10 authorizing the Philadelphia City11 Council's Committee on Legislative12 Oversight to hold public hearings on13 Philadelphia's building costs, home values14 and potential strategies, and remedies to15 encourage development.16 The first witness that we have17 is Andrew Altman, Deputy Mayor.18 (Witness comes forward.)19

Oh, I'm20 sorry. Also in attendance here, for the21 record, is Brian O'Neill, who's a member22 of the committee, and Frank DiCicco, who's23 the sponsor of the resolution but not a24 member of the committee.25 26 3 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Please identify yourself for the2 record.3

Okay. Thank you.4 Andy Altman, the Deputy Mayor for Planning5 and Economic Development, Commerce6 Director.7 Good afternoon --8

Good9 afternoon.10

-- Chairman Kenney11 and members of the City Council Committee12 on Legislative Oversight. I'm here today13 to testify on Resolution 090151 on14 building costs, home values, and potential15 strategies and remedies to encourage16 development.17 I -- my testimony is brief and18 I'll be brief.19 Development costs and tax20 structure are clearly two very important21 issues for Philadelphia and for our22 administration. We've created, through an23 executive order, and have convened the24 Mayor's Task Force on Tax Policy and25 26 4 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Economic Competitiveness specifically to2 analyze the tax and development costs and3 explore implementation of tax-based4 incentives for construction in the context5 of other tax policy reforms.6 I think we all share the goal to7 make Philadelphia a friendly place to do8 business, where projects can be built9 responsibly, quickly, and profitably. The10 economic slowdown plan gives us the time11 to plan and prepare for the next wave of12 investment by creating policies and making13 investment affordable and easier. That14 includes not only looking at our cost15 structure but also our approval process,16 which has cost projects. It's something17 I've been focusing on since starting and18 an area where we have seen some19 significant improvement.20 With Licenses and Inspections,21 delay time in the concourse has been cut22 in half, with the wait for any permit23 taking less than an hour. Similarly,24 they're reviewing applications faster and25 26 5 4/24/09 - LEG. OVERSIGHT - RES. 0901511 providing a response for commercial2 applications within 25 days and3 residential projects within 15 days. Both4 of these improvements make Philadelphia a5 friendlier and, hopefully, a slightly more6 cost-effective place to do business.7 Importantly, we've begun a8 comprehensive review of the development9 permitting process, with the support of10 the private sector and foundations across11 all of the line agencies. We want to12 ensure buildings are built safely and13 responsibly, but the approval process14 needs to be much clearer, easier, and15 predictable.16 That is just one piece of the17 cost structure. I hope that through the18 Mayor's task force and public hearings19 like this, we can identify other issues20 and areas for improvement.21 I'd like to thank you for the22 opportunity to testify. I'd like to thank23 Councilmember DiCicco for introducing this24 resolution, Chairman Kenney, and other25 26 6 4/24/09 - LEG. OVERSIGHT - RES. 0901511 members of the committee for this hearing.2 And I'm happy to answer any questions.3 And I just want to say -- this4 is fairly general -- but we really do5 appreciate what you're doing, and this6 task force that we've set up is working7 over the next essentially four months,8 analyzing our tax structure as well as9 cost structure.10 And, hopefully, with the11 testimony today and in working with your12 committee, we'll come up with some real13 reforms, but it's something that we are14 taking very seriously and looking at all15 of our costs in Philadelphia.16

Thank you17 very much.18 Before I open it up for19 questions, I'd like to that Councilman20 Jones, who is also here as a member of the21 committee.22 Councilman O'Neill?23

Just one24 question, Deputy Mayor.25 26 7 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Philadelphia is embarrassingly2 low on this list of average 2005 pricing3 cost ratio. It's a -- and being a4 northeastern city, an East Coast city,5 with unionization, you would expect a lot6 of cities like us to be lower than cities7 that have clearly lower rate structures8 and things for construction.9 But it isn't the case. I mean,10 San Francisco, Los Angeles, D.C., Boston11 are near the top of the better numbers.12 In other words, they have a higher13 price-to-cost ratio. We have a much, much14 lower. We're down with Detroit and15 Pittsburgh and St. Louis, cities we16 wouldn't be trying to be emulating right17 now in terms of economic development and18 things.19 But the ones we would be trying20 to are up near the top, including New York21 City, which is -- unless, you know, it --22 is there one silver bullet or one --23 silver bullet's not the right word, but is24 there one cost factor that really stands25 26 8 4/24/09 - LEG. OVERSIGHT - RES. 0901511 out in Philadelphia that is not present in2 Washington, D.C., Los Angeles, San3 Francisco, Boston, New York?4 And you've had -- as I'm asking5 you the question, I know you've had a6 little experience in Washington, D.C. on7 the public side and New York on the public8 side.9

Yeah.10

So if you11 could just comment on that just -- this is12 just --13

Generally.14

-- general15 and where we really have to do the most16 work.17

I think there's a18 couple of points there, and I think you're19 going to hear -- I think Kevin Gillen may20 be here -- there he is -- who's done a21 number of these studies could speak more22 empirically on this.23 I mean, I -- one of the big,24 huge differences, obviously when, you're25 26 9 4/24/09 - LEG. OVERSIGHT - RES. 0901511 talking about, let's say, cities like New2 York, San Francisco, and Washington is3 just they can command much higher prices.4

Okay.5

So even if we're6 the same -- the -- I think the problem is7 that even if we're the same cost8 structure, we don't have the same value on9 the other side.10 So if we -- New York can11 compensate for many of these costs,12 because they can just charge higher13 prices, that's where Philadelphia, I14 think, the real competitive problem for15 Philadelphia is, is that even if we're --16 even if your labor costs are even with a17 New York, our labor costs aren't18 significantly less.19 Our problem is, even cost of20 materials, if you break this down -- and I21 hope Kevin will go through it, but the22 cost of materials, cost of labor,23 regulatory costs, our tax structure, when24 you add all of that up, we have a --25 26 10 4/24/09 - LEG. OVERSIGHT - RES. 0901511

When you're2 drilling down --3

When you're4 drilling --5

-- which6 this isn't but --7

Yeah.8

-- but9 we're going to have some more testimony on10 that, which is the one that would have the11 most impact? And then we could go to the12 second, third, or fourth, but maybe we13 would want to attack the first one first,14 the one of the highest magnitude.15

Yeah. I would --16 you know, I would honestly defer to others17 only 'cause I'd want to give you a -- mine18 would be an impression as opposed to19 someone who's really drilled down on the20 cost structure.21 We're going to be doing that22 over the -- in this -- the reason we set23 up the Tax and Economic Competitive Task24 Force and we knew that the Councilmembers25 26 11 4/24/09 - LEG. OVERSIGHT - RES. 0901511 were going to introduce this resolution2 and to look at some hearings, was to go3 through in a lot of detail exactly what4 the cost structure is, going through5 development costs and figuring out what6 those factors are on the regulatory side.7 I mean, I know there's a lot of8 discussion. I've seen the labor costs.9 It's not even so much labor costs; it's10 also the structure of, you know, when you11 look at how different agreements in terms12 of the number of different trades and13 costs that those add and efficiencies, but14 that's one factor, and I think I want to15 have a better sense empirically of what it16 really looks like to understand that.17 We're trying on the regulatory18 side. There are definitely costs to the19 uncertainty and to the timing, and we're20 trying to correct that, but I don't know21 if that's the single biggest factor, to be22 honest.23

All right.24 Well, let's look at something you are25 26 12 4/24/09 - LEG. OVERSIGHT - RES. 0901511 familiar with and you have a lot of2 experience with. Washington, D.C. not3 that long --4

Yes.5

-- I'm6 talking about just pre-Tony Williams,7 Anthony Williams as mayor -- it was a8 ghost town for construction.9

Yes.10

It now is11 that -- it seems like there's a crane on12 every corner.13

Yes.14

And it's15 been that way for quite some time.16

Yep.17

Whether the18 economy's up, the economy's down.19

Yep.20

What21 changed in Washington, D.C.? You don't22 need Mr. Gillen or any others. What23 changed that made it go from zero to 10024 in a fairly short period of time? Who put25 26 13 4/24/09 - LEG. OVERSIGHT - RES. 0901511 their foot down?2

Obviously, great3 leadership -- no. Obviously, the real --4 I'll give you a couple -- I think there5 are a couple of factors.6 One big factor in Washington is7 the fact that the federal government8 started to go through a very9 significant -- there was a significant10 expansion of federal activity. And the11 one advantage the Washington economy has12 is that the federal government -- and13 you're right, it was a ghost town for a14 long -- for a long time, development had15 really been stalled. I think it hit a16 point where there was a lot of -- because17 there hadn't been a lot of construction,18 there wasn't a lot of supply of office19 product in Washington, D.C. It had pretty20 much -- they had a very low vacancy rate.21 So what happened was, as the22 government spending really started to gear23 up --24

This is25 26 14 4/24/09 - LEG. OVERSIGHT - RES. 0901511 under twelve years of Republican2 administrations?3

That's why there4 was --5

Good.6

As you remember,7 the budget was -- the deficit that was8 inherited, the -- those numbers went --9 started to go up. It created a big10 demand, obviously, because the supply was11 constrained.12 And so, you started to see a lot13 of that pent up demand needing to --14 leading to new office construction --15

Forget16 office construction --17

-- in the city.18

-- 'cause19 I'm --20

That was a big --21 that was a big factor.22

I don't23 think you're giving us the full story, and24 that may be a good reason --25 26 15 4/24/09 - LEG. OVERSIGHT - RES. 0901511

Well, I'll give you2 another big reason.3

There's4 sensitivities, I'm sure, but how 'bout5 just housing? No one used to live --6

Yeah.7

-- in what8 is sort of the downtown part of the9 district --10

Yeah.11

-- by12 anybody's definition.13 There are condo developments and14 apartment rental developments all over the15 place.16

Yep.17

The federal18 government had nothing to do with that.19 What drove that from being zero to a20 hundred --21

Yeah, yeah.22

-- in a23 short period of time?24

Yeah, good25 26 16 4/24/09 - LEG. OVERSIGHT - RES. 0901511 question.2 I think, um... and they are3 related a little bit is -- and because4 the... It's a couple of things.5 One is, over time -- the D.C.6 housing market, you have to actually go7 back beyond even when we started --8 started to benefit from the fact that over9 a ten-year period before that, even10 fifteen, there was the Pennsylvania Avenue11 Development Corporation that started to12 make investments in building some of13 the -- actually in terms of land into14 housing.15 (Indiscernible; parties talking16 over each other.)17

We can cut18 this short. Did something change that got19 the cost down --20

Uh --21

-- of doing22 major construction projects like condos,23 apartments, office buildings in the24 district?25 26 17 4/24/09 - LEG. OVERSIGHT - RES. 0901511

Let me answer your2 housing question. A big -- we did do3 things, like we changed the zoning for4 residential. That was significant in5 trying to recalibrate the land -- the6 value in the downtown area for housing7 construction and actually started to8 create a better incentive for that.9

Okay, let10 me get --11 (Indiscernible; parties talking12 over each other.)13

That helped with14 the cost structure.15

Did16 something change in the cost of17 construction --18

No. The cost of19 construction --20

-- that was21 significant?22

No, the cost of23 construction -- the cost of construction24 went -- the cost of construction didn't25 26 18 4/24/09 - LEG. OVERSIGHT - RES. 0901511 change. Actually, it went -- probably2 became a lot more expensive.3 The issue is that the value in4 D.C. started to be a lot higher so it5 could be absorb the higher costs.6

Okay.7

So what happened,8 what we saw happen is -- and I'll go back9 to my story for a second, because there's10 nothing that we did very much on the cost11 side of construction 'cause material12 prices were up, labor prices were up.13 But what happened is that the14 district started to benefit from the fact15 that it could take -- it could charge a16 lot more. You started to see the demand17 for residential that had been pent up, so18 you could start charging rents that were,19 you know, much, much higher. And they20 could absorb that cost.21 Philadelphia has a different22 structure because, even as I said, if we23 keep our labor, we keep our costs the24 same, the rents aren't increasing; the25 26 19 4/24/09 - LEG. OVERSIGHT - RES. 0901511 rents are staying stable.2 That was the difference in the3 D.C. equation. If you look at what's4 happening in economic value in D.C., those5 apartments and offices were trading at6 numbers unimaginable to people, and a lot7 of that was fueled -- and including the8 residential demand, this is the connection9 to the office -- the residential demand10 because there was so much increase not11 only in D.C. but in the regional economy.12 And the people who were coming13 to work in the consulting jobs, in the14 service jobs, at the law firms, that15 increased dramatically. And many of those16 people in the 20s and 30s wanted to leave17 in the city. So because of the metro18 system, they could even go to a job in19 Alexandria.20

Okay.21

So you see what I'm22 saying? It's an interconnected story --23

All right.24 I don't want to (indiscernible) --25 26 20 4/24/09 - LEG. OVERSIGHT - RES. 0901511

-- but it was a lot2 about the value of the increase in the3 district.4

Okay.5

Thank you6 very much.7 Councilman Jones?8

Well, I had a9 opportunity to go up to Brooklyn, New York10 on some other business dealing with the11 courts. During that time, we had a reason12 to go through the neighborhoods, and I13 examined some of the housing stock.14 I had to ask three separate15 times as to what the fair market value of16 the properties were when the guy told me17 for a rowhouse of questionable repair, in18 a state of disrepair actually, was going19 for 750 to a million dollars in a20 neighborhood that if I had to be a21 pedestrian would have ran through.22 Is it a question of demand23 simply, that people want to be in a24 location so much that they're willing to25 26 21 4/24/09 - LEG. OVERSIGHT - RES. 0901511 pay --2

Yes.3

-- far beyond4 what is reasonable? And if that is, in5 fact, true, then when I -- conversely,6 when I get people that come here to7 Philadelphia and see our housing stock,8 they're ready to write a check now.9 So what does that mean for us by10 way of value and potential of the market11 to others what we have and take, quite12 frankly, for granted?13

Right. Well, look,14 a Philadelphia advantage -- the flip side15 of this, right, is -- I mean, this is the16 -- this is the dilemma, right?17 On the one hand, we're an18 affordable city relative to other19 northeastern cities, okay? The flip side20 is that because we are affordable there21 aren't the same margins in terms of22 possibility for development so -- because23 they're getting that rowhome that's 300,0024 here, in Bedford Stuyvesant, let's say,25 26 22 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Brooklyn example, right? Bedford2 Stuyvesant was the example of, you know,3 years ago, for a very, you know,4 distressed community, today Bedford5 Stuyvesant are million-dollar condos,6 right? because of the demand in New York7 for a space, Manhattan people are priced8 out of Manhattan.9 And what's happened in Brooklyn10 is they can't afford Manhattan, you can't11 afford a thousand dollars a square foot,12 you're going to Brooklyn, pushing Brooklyn13 prices up. And now you're getting priced14 out of Brooklyn. Now you see what's -- I15 mean, before the economic downturn, people16 were looking at Queens.17 There's just been -- I mean,18 also, the New York population increased.19 It's one of the cities in the northeast20 that actually was increased significantly21 in population. And so, therefore, it was22 getting huge pressures on supply.23 So that combination of also24 people staying in the city and wealthier25 26 23 4/24/09 - LEG. OVERSIGHT - RES. 0901511 staying in the city -- and now you're2 seeing values start to drop, but they're3 still dropping at levels 'cause they were4 so high.5 So that's the -- that's the --6 we don't have the same demand --7

So it is a8 function of demand, A.9

And cost.10

And then11 cost, B. And the purpose of this hearing12 is, how do we control costs?13

Right.14

So how do --15 from the Administration's point of view --16

Right.17

And you kind18 of skirted around, quite frankly,19 Councilman O'Neill's true questions. Give20 me three things we can do.21

Sure.22

To help23 control costs.24

Yes. And, by the25 26 24 4/24/09 - LEG. OVERSIGHT - RES. 0901511 way, I didn't mean to skirt around it. I2 think that the D.C. story wasn't one --3 was a different story. That's why it4 wasn't so much about finding the one cost5 factor, because the cost factor wasn't6 what was inhibiting it as much.7 The but -- so I'd say there's a8 couple of things. One, you know, we've9 had this discussion: I think you have to10 keep certain policies in place that make11 us competitive, like the tax abatement, I12 mean, you know, because I believe that13 those kinds of policies are very important14 to keeping the cost equation in balance.15 So I think we have to make sure16 that we do no harm to those policies we17 have in place that have been helpful to18 development. That's one.19 And that's very important20 because I'm very concerned out any21 uncertainty in that structure given our22 costs.23 Two, I think we do on our side,24 which is what we're looking at now, we25 26 25 4/24/09 - LEG. OVERSIGHT - RES. 0901511 have to look at other issues in our tax2 structure as well as our regulatory3 structure and see how can we drive those4 costs down, if we can. Whether that's5 permitting times, whether it's6 uncertainty, whether it's some of our tax7 structure that makes us uncompetitive, we8 need to do that.9 And then third is, we have to10 look at the whole structure of -- and11 that's, by the way, we had issues here12 around the cost. There was a hearing13 about, you know, about our code and PVC14 and a number of things. We have to look15 at our code and see where are we adding16 costs and see how we can reduce those17 costs.18 And then the third, I think, you19 know, it's working with contractors, with20 unions, working together to figure out,21 can we drive down some cost structure22 here. Are there places where we can find23 savings ourselves because we want to make24 sure that we're as competitive as25 26 26 4/24/09 - LEG. OVERSIGHT - RES. 0901511 possible.2 So I guess the answer is, you3 want to be pushing at all of these4 factors. You want to keep policies we5 have in place that work, I want to drive6 down tax and regulatory structures, I want7 to drive down costs of -- between -- of8 the cost of construction on the labor9 side. And I think they all work together10 to create a better tax structure.11 And I think you have to look at12 all the factors and attack them together,13 and I think we have to do it all together.14 It's all in our collective benefit to try15 to -- each percent difference is a big16 difference.17

I'm going to18 let you go because I think we have some19 folk here who are going to offer some20 perspective to this.21 But is it -- just real quick is22 it true that from the North Philadelphia23 train station, you can be in New York City24 in '90 minutes or --25 26 27 4/24/09 - LEG. OVERSIGHT - RES. 0901511

Oh.2

How long does3 it take?4

From North5 Philadelphia?6

Yeah.7

Well, first, it has8 to stop there more frequently that it9 does. They've cut back service from North10 Philadelphia, I mean, which is a problem,11 and we want to work them, Amtrak, to get12 more service.13 But, I mean, you're -- you're14 under 90 minutes.15

Under 9016 minutes?17

Under.18

And there are19 some suburbs of New Jersey that it takes20 longer than that to get to work --21

Absolutely.22

-- because of23 traffic.24

Absolutely.25 26 28 4/24/09 - LEG. OVERSIGHT - RES. 0901511

I'm just2 saying -- and I understand all of the3 other cost factors, I really do. But some4 of it is a question of marketing what we5 have by way of the strategic location of6 Philadelphia just as branding.7

Sure.8

We have a lot9 to offer, and I don't think a lot of10 people kind of have discovered that yet11 until they come here, and then they're12 willing to buy.13

I agree.14

So we have to15 do something by way of a city to market16 that factor. That's just my point.17

I agree with that.18

Isn't that19 what you described earlier, the Manhattan20 effect that -- I mean, they had 'em filled21 up, and then the rest of the surrounding22 communities around Manhattan rose in value23 because there was a need.24 Isn't that what happened here?25 26 29 4/24/09 - LEG. OVERSIGHT - RES. 0901511 When Center City, river to river, Spring2 Garden to South, filled up, neighborhoods3 south, like South Philadelphia where4 Councilman DiCicco and I live, Fishtown,5 Northern Liberties, the Art Museum area,6 parts of West Philly began to become more7 valuable because people wanted a place to8 live that was conducive and close to,9 proximate to Center City.10

Yes.11

And I would12 contend because he (looking at Councilman13 DiCicco) maybe won't want to pat himself14 on the back, but I would contend that the15 tax abatement was probably the single16 biggest factor in that.17 And that's why the frustration18 level that we have in trying to explain to19 folks who didn't -- who don't have the20 ability to take advantage of the tax21 abatement, why, in their eyes I know it22 seems to be unfair, but the value of your23 home relative to other three, four, five24 infills that were done on your street25 26 30 4/24/09 - LEG. OVERSIGHT - RES. 0901511 significantly rose because of the2 abatement.3 Were it not for the abatement,4 you would have four, five vacant lots, the5 value of property wouldn't be worth what6 it is today, and we wouldn't have7 neighborhoods like Northern Liberties,8 Fishtown, parts of South Philly, and the9 Art Museum area and the Spring Garden area10 that have been amazingly redeveloped.11

As you know,12 Councilmembers, I strongly believe that.13 And I --14

That was more15 directed towards the --16 (Laughter.)17

But I do want to18 make one comment on that, and I think it's19 important no to belabor this, but20 particularly in these economic times, I21 think one of the things, when we talk22 about what we have to do on our cost side23 and the development side is that, look,24 right now, it's very hard to build25 26 31 4/24/09 - LEG. OVERSIGHT - RES. 0901511 anything, to get financing for anything,2 with the credit markets as he exist today.3 We have to make sure that as we4 look 12 months, 24 months out at economic5 recovery, as the economy starts to6 stabilize again, that we haven't created7 more impediments in the future and changed8 things that I believe are working now,9 even if it's a slow cycle and10 (indiscernible) 'cause people are thinking11 ahead about, you know, the next round of12 investment. You want to be able to13 calculate what it is.14 And we want to be careful -- I15 don't just mean on the abatement side, but16 on other costs' side so that we're not17 creating cost factors that create more18 uncertainty. It's a difficult enough time19 on the financing side.20 So it's also the perfect time, I21 have to say, for what this committee is22 doing and for what the tax policy23 committee is doing, to take a look at some24 of these cost drivers and try to bring25 26 32 4/24/09 - LEG. OVERSIGHT - RES. 0901511 them down where we can, on all fronts.2 You know, as I said, permitting,3 labor, regulatory, you know, anyplace that4 we can start to make a dent in that cost5 equation is an important step that I think6 we all need to take.7

Councilman8 DiCicco.9

Thank you,10 Mr. Chair. And thank you, Mr. Altman.11 I too understand the dynamics12 between Washington, D.C. and New York, and13 they command higher prices. And at least14 for New York, it's always been that way,15 as far as I can see.16 And I also understand Councilman17 Jones talking about marketability. And I18 think the ten-year tax abatement was one19 of those tools that we've used and quite20 successfully. The real problem that I21 see, and one of the reasons why I wanted22 to do this resolution, was to get to23 things that are much more closer to home.24

Right.25 26 33 4/24/09 - LEG. OVERSIGHT - RES. 0901511

Comparing2 Philadelphia not to New York but to Bucks3 County or on the other side of City Line4 Avenue or South Jersey, because the5 demographics in our area, although we'd6 like to have more wealthy people move7 in -- and they are moving in, but they're8 never going to -- I don't think we're ever9 going to see the importation of that many10 more wealthy people compared to what New11 York gets or Washington, D.C.12 We are a city of neighborhoods,13 we are a city of average folks, medium-14 income folks who can afford houses15 somewhere between the 250 and $350,00016 price range, just by way of example.17

Mm-hmm.18 COUNCILMAN DiCICCO: We can't19 build those homes in the City of20 Philadelphia --21

Right.22 COUNCILMAN DiCICCO: -- unless23 they're subsidized by some government24 funds.25 26 34 4/24/09 - LEG. OVERSIGHT - RES. 0901511 And it all comes back to2 profitability. New York builds at 15 or3 sells at $1600 a square foot. Washington,4 D.C., whatever they do.5

Yep.6

There is a7 marker there to buy that. So the8 incentive for the developer is to build9 because the developer knows they're going10 to recapture their investment and make11 money.12

Right.13 COUNCILMAN DiCICCO: You can't14 build a house in the City of Philadelphia15 without a government subsidy and try to16 sell it for $300,000 and make a profit.17

That's right.18

And that's19 where I think the rubber meets the road,20 is in the cost of doing business.21

Yes.22

And, look,23 I don't want this hearing or future24 hearings we have on this to become an "us25 26 35 4/24/09 - LEG. OVERSIGHT - RES. 0901511 versus them." I mean, it shouldn't be2 about that.3 For me, it's always been, how4 does everyone benefit -- developers, the5 City, labor, everyone continually working6 to continue to grow this city. But all I7 really see is stagnation. You either have8 the high end or the lower end, without9 meaning any disrespect, that is government10 subsidized.11

Absolutely.12 COUNCILMAN DiCICCO: And the13 high end that's done on its own because14 there's a niche market out there. You15 build so many million-dollar condos. We16 think we've got enough people in the17 region that'll move in, the empty-nesters18 that fill them.19 And everything else in between20 stays stagnant.21

Right.22

And that is23 where the difficulty is, I believe.24

Right.25 26 36 4/24/09 - LEG. OVERSIGHT - RES. 0901511

And my2 friends in the labor movement -- and I do3 have a few left. I don't know about after4 today, but I do have. I never -- and it's5 unfortunate that there's no one from labor6 here today, 'cause I think that's what7 we're trying to do, is get this roundtable8 discussion and not say that you are at9 fault, but what are the reasons why it10 costs so much in Philadelphia for the same11 house -- more in the Philadelphia for the12 same house that's being built across City13 Line Avenue.14 We -- if those numbers don't15 change, we'll -- we can have a thousand16 hearings and nothing will change. And17 development for moderate, middle-income18 housing will never happen in this city.19 So, you know, I think at some20 point, we're going to have to make that21 effort to really sit down to have these22 adult, intelligent conversations about the23 future of everyone. Otherwise, it's just24 going to continue down the path we've been25 26 37 4/24/09 - LEG. OVERSIGHT - RES. 0901511 for the last I don't know how many years.2 And I think this is a good time3 to do it: Plan, so that when the economy4 turns around, we can have, I think,5 jump-start literally hundreds, if not6 thousands, of moderate, middle-income7 housing units in the City of Philadelphia,8 based on my conversations with many of the9 developers who have to put up and take the10 risk of putting their money up or11 borrowing the money to get these projects12 underway.13 And you don't see it14 happening -- again, not to be redundant --15 unless it's government -- Jefferson16 Square, in South Philly, it's a fantastic17 project. It sold out in four days. But18 for the government subsidy, it never would19 have existed. They'd be two blocks of20 empty lots right now.21

Mr. Chairman.22

Please.23

Thank you,24 Mr. Chair.25 26 38 4/24/09 - LEG. OVERSIGHT - RES. 0901511 For the record, I, once upon a2 time, sat where you're sitting now. I'm a3 Commerce alumni, and I was around when you4 guys in Council passed the ten-year tax5 abatement.6 I absolutely understand what7 it's meant to the skyline of the South8 Philadelphia and the tax base that it9 helped to expand. I understand your point10 about how it increased value in the11 circles of development that went out as12 far as West Philadelphia, that Parkside in13 my district are now experiencing actually14 from it. I understand that.15 What I am trying and others in16 Council are trying to do is do exactly17 what you said: bring rational minds to the18 table as we debate some of the priorities19 of the budget and where these dollars come20 from. There's been a swing to say that21 these tax abatements are unfair. And what22 we have to demonstrate is that they23 aren't, and you're making that point24 today.25 26 39 4/24/09 - LEG. OVERSIGHT - RES. 0901511 The point of it is now, where do2 we go from here and what do we do to3 preserve what you have articulated is a4 fragile market? And I don't want to tip5 the scale in the negative because we can't6 afford it, quite frankly.7 So we have to figure out what we8 can do to get money from where we can in a9 a rational, well thought out, well10 planned, and equitable way so that all11 parties benefit, including people who are12 getting ready to at least experience some13 form of real-estate tax increase.14 So if rational minds can come15 together -- I've learned a great deal16 since I introduced my bill. People have17 been kind enough to come and talk to me18 and give me their honest opinion about the19 bill and what we can do to make it at20 least more palatable so that it isn't a21 disincentive to build but an incentive to22 build in a different way.23 So I'm listening, I hear you,24 and I hope the dialogue to continue in25 26 40 4/24/09 - LEG. OVERSIGHT - RES. 0901511 earnest.2

Thank you3 very much.4 Have you -- I mean, I know5 you're looking at a number of different6 options or at a number of different policy7 issues relative to being prepared for the8 upswing and for the unfreezing of the9 credit situation.10 If you're a fan of the ten-year11 tax abatement and you don't want to see it12 go away, what you do recognize is that13 certain areas of the City have not14 experienced the benefit of the ten-year15 tax abatement. Have you looked at any16 scenarios in keeping the ten-year tax17 abatement, perhaps having an expanded tax18 abatement targeted for specific19 neighborhoods that have not experienced20 the upswings, say, 12, 13, 15 years.21

Could I22 interject?23 I actually had those bills, but24 I didn't think this was -- this year was25 26 41 4/24/09 - LEG. OVERSIGHT - RES. 0901511 the appropriate time to do them. And I2 did talk to Andy about this. New York has3 a great model. In some neighborhood, you4 get 15 years; in some, 20 years, whatever.5 So, Mr. Chairman, that is6 something we have been looking at, but due7 to the economic climate and the budget8 crisis we're going through, we didn't9 think it would get much support at this10 particular time.11

No, and I12 understand. I understand the sensitivity13 of timing.14 However, I think the sad part15 about it is, is that because of the -- I16 think because of the economic crisis,17 there's probably a need to do something18 more radical than you would do under19 normal circumstances as opposed to20 hunkering down and waiting to duck under21 the wave, being in front of the curve with22 neighborhoods, for example, in Southwest23 Philadelphia and in other -- well, North24 Philadelphia, some other areas that really25 26 42 4/24/09 - LEG. OVERSIGHT - RES. 0901511 could use a shot in the arm in the2 middle-class residential housing3 development.4 To me it would seem that if the5 ten-year worked for Center City and the6 surrounding environs, then 12, 13, 15 may7 work in struggling neighborhoods that8 could take a advantage of a new housing9 bases targeted to middle-class and10 lower-middle-class homeowners.11 So you guys are --12

I mean, we did --13 we have not looked at that. I mean, in14 effect, we've talked about it in general15 terms but didn't think that this was the16 right timing for that.17 We have an abatement in place; I18 think that's sufficient right now. We19 have a lot of other issues, as you know,20 on the table trying to get through. I21 didn't feel that -- it's complicated,22 there are equity issues, there are all23 kinds of issues.24

But let me25 26 43 4/24/09 - LEG. OVERSIGHT - RES. 0901511 just -- let me just -- before Councilman2 Jones -- let me -- one of the complaints3 about the ten-year tax abatement comes4 mostly from middle- and lower-middle-5 class-income people who say, Well,6 (indiscernible) have to take advantage of7 that.8 But if you do something9 innovative like a 15-year in neighborhoods10 that are middle- and lower-middle class,11 wouldn't you be kind of leveling the12 complaint field by saying that, Yeah, we13 can take advantage of this now, and this14 is something targeted that is for us not15 and just for the, quote/unquote, wealthy16 people buying condos in Center City.17

Yeah. And that's18 why you're holding a hearing.19

Well, I20 actually agree with the chairman.21 Mr. Chairman, I actually agree with you22 that we should not plan this city out of23 fear of today; we should plan it in this24 rough time for a better city.25 26 44 4/24/09 - LEG. OVERSIGHT - RES. 0901511 And now is the time to do and2 consider things that can bring us out of3 this, whether it is extending a middle-4 class tax abatement for middle-class5 housing to stimulate that sector. It6 might be a good time for it. So I at7 least think that the dialogue should8 continue.9 We should be cautious in taking10 action that might be volatile, but we11 should be considering aggressively the12 dialogue, considering some of the13 alternatives, such as the infamous Plan B.14 I mean, we should really be trying to15 build life boats now.16

Yes.17

I just want to say18 one thing too. We've spent a lot of time19 on the abatement and we hadn't considered20 that. I mean, we just said we'd just21 focus on the existing abatement.22 I think the only point I'd like23 to leave with -- 'cause I appreciate this24 hearing and what you want to accomplish,25 26 45 4/24/09 - LEG. OVERSIGHT - RES. 0901511 and I think what we all want to accomplish2 here is this is exactly the right time to3 take a hard look at ourselves. And I want4 to move off the abatement for a second5 'cause I think we've had a lot of6 discussion.7 But New York City, for example,8 as you may have read in the New York Times9 two weeks ago, or maybe it was three weeks10 ago now, that said six, I think, major11 developers had reached an agreement with12 some of the unions in New York City around13 some of the construction-cost issues and14 had a voluntary agreement amongst them to15 agree to some cost reductions.16 And this is New York City, which17 we just talked about as the example of a18 high-value city because they have,19 obviously, seen a precipitous drop in20 what's happening in that economy -- job21 loss, vacancy rates, construction stop.22 So they are even starting, even in that23 market, to look at ways that they can24 reduce their costs.25 26 46 4/24/09 - LEG. OVERSIGHT - RES. 0901511 So I agree with you, Councilman2 DiCicco. This is not a blame labor, blame3 the developers, blame the government. I4 think this is time for all of us to take a5 look and say: Where can we all reduce6 costs? where can we come to some voluntary7 agreements? where can we reach agreements8 to reduce cost structures? And have that9 discussion and not be afraid of having it,10 not have it be polarized.11 And say, you know, through12 vehicles like this to Council and the tax13 task force that the Mayor set up, say if14 we can get down another 5 percent, if we15 can get another 7 percent, if we can get16 10 percent, 15 percent down in our costs17 and put that structure in place, get the18 economy a bit juiced, get it to a point19 where it stabilizes again, those costs may20 come back up because the demand will be21 up.22 The problem for us right now is,23 our values are not going to go up; values24 are dropping. So if the margin before was25 26 47 4/24/09 - LEG. OVERSIGHT - RES. 0901511 thin between the cost of building in2 Philadelphia and what you can sell or rent3 at in Philadelphia, that was a thin margin4 in a good market, in the most robust time,5 which is where New York and Washington --6 that's part of the story. New York and7 Washington could absorb that cost because8 it had a very steep increase.9 We're not. We've always been10 steady. Now we've dropped some. I'm not11 the economist, but the margins get thinner12 and thinner is my only point.13 So even housing values, as you14 said, Frank, that may have been 350, maybe15 now they're 300. Well, in Philadelphia,16 that starts to make that even smaller. So17 this is the time to take that hard look18 and get some of those, I think, cost19 reductions in place now.20 And we welcome working with21 everyone in the development business22 community and the Council to make that23 happen.24

Thank you25 26 48 4/24/09 - LEG. OVERSIGHT - RES. 0901511 very much. Thank you for your testimony.2 Mr. Sherman, please.3 (Witness comes forward.)4

Good afternoon.5

Good6 afternoon.7

Thank you for --8

Please9 identify yourself for the record.10

Oh, yes, yes. My11 name is Sam Sherman. I'm the president of12 the Building Industry Association of13 Philadelphia.14 I'd like to thank Councilman15 Kenney, Councilman Jones, and Councilman16 DiCicco for hearing my testimony today.17

For the18 record, it's on a Friday afternoon, at19 3:17 p.m.20

3:17?21 (Laughter.)22

Okay, I'll be23 brief.24 You know, I have written25 26 49 4/24/09 - LEG. OVERSIGHT - RES. 0901511 testimony, but as is my practice, I2 usually don't read directly off the paper;3 I try to just make my points and then set4 up the rest of the speakers5 I think Andy Altman, at the end6 of his testimony, really touched on some7 fundamental issues that affect the8 development community and the City. And9 it really comes back to Philadelphia has a10 very -- not a very -- well, it has a low11 median income.12 We have one of the highest13 poverty rates of any city of our size in14 the United States, and yet our cost15 structure is fixed at a point where we're16 reflective of New York and Washington and17 San Francisco, all these other high-wealth18 cities. And what's happened over the19 course of the years and decades is that20 this whole dynamic has played out in21 public policy.22 We have what I call a bifurcated23 housing market in this city. We service24 the poor and lower-middle class, and we25 26 50 4/24/09 - LEG. OVERSIGHT - RES. 0901511 service the very wealthy as far as what2 our market addresses. What we're not3 doing is, we're not repopulating our4 neighborhoods with a middle class that5 typically pays more in taxes and sends6 their kids to public school and overall7 builds vibrant neighborhoods8 And what's happened is, because9 of that disparity, there have been10 measures put into place such as the11 ten-year tax abatement. There's a lot of12 subsidy out there for lower-income13 housing. Even on commercial construction,14 we have KOZs and KIZs and all these15 others.16 Philadelphia does not have a17 true private market. There is a subsidy18 attached to almost everything that gets19 built in this city. And when you start20 going down that road, rather than dealing21 with the fundamental issues that affect22 the ability of a developer to bring a23 product to market that the population in24 the city can actually afford to buy, then25 26 51 4/24/09 - LEG. OVERSIGHT - RES. 0901511 you start not dealing with the fundamental2 issues because legislation is introduced3 to deal with this and deal with this and4 deal with this.5 If we can get to the nub of the6 problem, which is raising median incomes7 in the city and lowering our cost, the8 market has got to find an equilibrium.9 Until we achieve that goal, we will10 continue to have the attempts to restrict,11 reduce, eliminate the tax abatement, we'll12 continue down this path of throwing more13 and more public money at housing projects.14 And where does that with get us?15 It gets to us to a place where you have a16 vibrant Center City core, but those17 economic benefits aren't spreading into18 the neighborhoods where the investment is19 most needed.20 So what I would suggest is,21 rather than only looking at cost, which I,22 as President of the BIA, I represent23 developers. Cost right now is our biggest24 concern. But in the long run, as we look25 26 52 4/24/09 - LEG. OVERSIGHT - RES. 0901511 beyond this recession, we need to start2 addressing the issues that will help to3 raise median incomes in the city4 And that's a long, hard slog.5 The solutions to those problems are not6 easy, but it's going to take leadership,7 it's going to take work. And my8 organization will work with any member of9 City Council, any member of the10 Administration that wants to drill down11 and really address these issues.12 It's not about being anti-union,13 it's not about picking on L&I, it's not14 about picking on City Council. This is15 about everybody has to come together and16 work to a common goal, and that goal17 should be reducing our costs and raising18 median incomes and putting more people to19 work.20 And with that, I'll introduce21 the rest of the panel.22

Thank you23 very much.24 I have Kevin Gillen and Brian25 26 53 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Uher.2 (Witness comes forward.)3

Hi. Please4 identify yourself for the record.5

Kevin Gillen.6

Please7 proceed with your testimony.8

11 Over the past several years,12 several public-policy issues that have13 important implications for our real estate14 market have been debated and considered by15 City Council. 23 eConsult has been involved in24 all of those issues, as an independent25 26 54 4/24/09 - LEG. OVERSIGHT - RES. 10 According to the independent11 consulting firm RS Means, Philadelphia has12 an average cost of construction that is 1813 percent above the national average. We're14 the fourth highest-cost city in America,15 right behind New York, San Francisco, and16 Boston. As Mr. Altman and Mr. Sherman17 mentioned, while our costs of construction18 may be as high as in those three cities,19 our incomes, rents, and property values20 are not only well below those three other21 cities but below the national average as22 well. Or to put it succinctly, as I like23 to say, we're a city with New York24 construction costs but Baltimore property25 26 55 4/24/09 - LEG. OVERSIGHT - RES. 23 In the case of the ten-year tax24 abatement, the abatement has been critical25 26 56 4/24/09 - LEG. OVERSIGHT - RES. 6 Notably, however, the abatement7 in its currents form is only sufficient to8 bridge the gap for relatively high-end9 development in prime locations -- condos10 in Center City -- than it is for11 affordable housing for low- to moderate-12 income households in the rest of13 Philadelphia. 17 I gave you a chart earlier. S. cities by the ratio of20 their average house price to their average21 price of home construction, you can see22 that Philadelphia is third from the23 bottom, right down there with Detroit and24 Pittsburgh, and very far from the other25 26 57 4/24/09 - LEG. OVERSIGHT - RES. 12 Of course, there is a13 significant range of house prices in14 Philadelphia and a significant range of15 construction costs for them. The16 relatively wealthy can afford to pay these17 costs, so they get new condos in Center18 City. 21 So not only do these high costs22 prevent our lower-income residents from23 obtaining new housing, they also provide a24 significant disincentive to invest in and25 26 58 4/24/09 - LEG. OVERSIGHT - RES. 0901511 maintain their existing housing. 7 In neighborhoods where the8 former is less than the latter, investing9 in your home is actually a money loser10 because it costs you more than it benefits11 you. 23 And, moreover, that one-third24 would be overwhelming concentrated in the25 26 59 4/24/09 - LEG. OVERSIGHT - RES. 2 The remaining two-thirds of the City's3 housing for low- to moderate-income4 Philadelphians would essentially go5 homeless. 12

Question,13 Councilman Jones?14

I'll wait,15 I'll wait.16

You sure?17 It's up to you.18

But I don't19 want you to leave.20

Okay.21

Would you22 please identify yourself for the record.23

Good afternoon,24 Councilmembers. 25 26 60 4/24/09 - LEG. OVERSIGHT - RES. , ironically enough. 5 The reason I'm here today was, I6 was asked here to be by the BIA. I grew7 up in South Jersey. I went to Penn, I8 went to Wharton. I lived in Northern9 Liberties, I lived in West Philly, I've10 lived in Fitler Square. 13 What I'm here today to talk14 about is very, very simple. As part and15 parcel of this discussion, they asked me16 to look at the cost of adding green to the17 construction or the rehabilitation18 actually of a rowhouse in Philadelphia and19 compare to it something we knew. 21 So what we've done is, take a22 rowhouse of 1260 square feet, build it in23 Washington, look at the material and labor24 costs, look at the energy benefits that25 26 61 4/24/09 - LEG. OVERSIGHT - RES. 2 And then we've taken the elevated labor3 costs in Philadelphia, done a conversion,4 and looked at the same numbers. , 1260 square foot, will be about10 $15,700. That includes added labor time,11 but more importantly, it adds material12 upgrades and process upgrades, HVAC13 equipment upgrades, heating and cooling,14 and things like that. C. 24 If you look at the first-year25 26 62 4/24/09 - LEG. OVERSIGHT - RES. C. 2412 percent for Philadelphia. 13 However, when you then go and look at the14 life span, going forward, the story gets a15 little inky. C. house doing this is17 about 10 to 11 years; so, in other words,18 the recoup from the savings for the effort19 for its costs is about that. 23 is but 3-and-a-quarter, $325,000. The24 average price that I've gotten for25 26 63 4/24/09 - LEG. OVERSIGHT - RES. 13 In Philadelphia, I couldn't tell14 you what that number is; there aren't15 enough of them that have been sold at16 these prices and built them this way. 21 Now, there are some issues here22 having to do with breaking out the pieces23 of green. Some things essentially are24 weatherization; they ave great returns and25 26 64 4/24/09 - LEG. OVERSIGHT - RES. 0901511 are cheap to do. Other things have to do2 with rehab en mass, insulation, things of3 that sort, and those are more expensive,4 and I can answer those questions. 6 And I suppose the one final7 thing to bring up at this point is the8 abatement itself. I had heard about the9 ten-year abatement in Philadelphia and10 then looked into it. , it again would cover costs12 because it takes about ten years to13 recover, and the abatement lasts about ten14 years. 23

Thank you24 very much.25 26 65 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Councilman Jones.2

And I3 appreciate all of the work that was done4 by you two gentlemen, and my regards to5 your boss, Steve. I used to work for him6 when I was in Commerce, and he is a7 respected intellectual. So thank you for8 your all of your testimony.9 However, a couple of questions.10 As it relates to natural disasters, one11 might consider the whole mortgage12 foreclosure a disaster. How do we compare13 to other cities as it relates to that14 price (indiscernible), overinflated15 mortgage amounts? How did we fare16 based -- if we were to do the same matric17 of these cities, how did we fare in that18 regard?19

It's a great20 question.21 Relatively speaking, compared to22 most other large U.S. cities, we have23 performed relatively well during this24 housing burst.25 26 66 4/24/09 - LEG. OVERSIGHT - RES. 0901511

And why is2 that?3

I was just about to4 segue to that.5 For one thing, we didn't have6 the penetration and proliferation of all7 of the sub prime lending here, all the8 speculative flipping of homes. We didn't9 have all of the overbuilding of homes10 compared to cities like Phoenix or Vegas11 or places like that.12 Hence, our price run-up here was13 not as much as in those other cities. Our14 house prices here basically doubled over15 the course of the boom. They've fallen16 about 18 percent since.17 But I'd point out to you that18 the reason that we don't have the19 short-term problems that those cities have20 is because we have a much bigger long-term21 problems. Because of our underlying22 fundamentals -- low incomes, low rents,23 high construction costs -- prevented us24 from overbooming as those cities did, thus25 26 67 4/24/09 - LEG. OVERSIGHT - RES. 0901511 we don't have as far to fall during this2 downturn.3

That's why I4 love smart people. I just keep it real5 simple. The same thing that makes you6 laugh makes you cry, right?7 We didn't suffer from them8 because we didn't have overinflated9 price-to-ratio values either, all right.10 And so when they underwrote some of these11 properties, we didn't go for that.12 So now, some of these cities,13 these very cities that you cite, are14 readjusting back to reality, reality. And15 they're stuck with a lot of toxic assets16 based on that. And some of these cities,17 some of their neighborhoods where that18 occurred, they are ghost towns.19

Mm-hmm.20

So, as the21 market adjusts back to us, maybe this was22 a blessing, you know, in a strange kind of23 way.24 So, as we start to look to the25 26 68 4/24/09 - LEG. OVERSIGHT - RES. 0901511 future plan and our way out of this, I2 understand, you know, the work you did and3 the importance of these factors, but to a4 degree, some of these ratios were5 overinflated anyway. And they got caught6 in a much more acute way than we did7 because of it.8 So I'm going to put a pin in9 that. I love I eConsult. And tell Steve10 I said hello.11 To your piece of how much green12 costs, now, what were the factors that13 made us different than them? I mean, I'd14 like you to narrow that down as to why our15 green costs more than their green.16

Absolutely. The way17 that I did it was extremely simple, did18 not have a lot of craziness in here.19 I priced the materials that had20 to be physically added to the building to21 make it green at Washington, D.C. prices,22 which are comparable or actually slightly23 cheaper than this region, depending. It's24 really a function of supply chain. So the25 26 69 4/24/09 - LEG. OVERSIGHT - RES. 0901511 bottom line is, you can drive two hours,2 you know, south and go pick it up if you3 want to.4

Mm-hmm.5

So the material costs6 are identical, the installations are7 identical.8 I took Washington, D.C. labor9 prices, based on our knowledge and10 experience of what it takes to get this11 size of building, these materials, to get12 it to the efficiencies you want. This is13 all energy efficiency work, by the way,14 and I'll tell you what those are in a15 second.16

Mm-hmm.17

And then I simply18 multiplied the national average, converted19 it from our Washington 5 percent over the20 national average, back to the national21 average, and then multiplied by the22 Philadelphia multiplier from RS Means.23 And that was it. And that's the24 whole difference. The whole difference is25 26 70 4/24/09 - LEG. OVERSIGHT - RES. 0901511 cost of labor.2

And at the3 end of the day, it's what percentage more4 to build green here?5

Yeah. So you're6 looking at a cost difference of about 12,7 13 percent. That's about the difference8 in labor prices. And it's apples to9 apples. So about 12, 13 percent.10

So in order11 for green to be something that we pursue,12 we're going to have to figure out how to13 incentivize those margins.14

Yeah. I think that's15 exactly right.16 And if I can, there's very17 strong concern, at least during the18 testimony today about, the middle- and19 lower-middle class being able to capture20 abatement value.21 In here, when you green a22 building so to speak, you do things to the23 envelope. Insulation, you tighten up the24 airflow. You do things to the heating and25 26 71 4/24/09 - LEG. OVERSIGHT - RES. 0901511 ventilation; you use more efficient stuff,2 you tighten the ductwork, you make sure3 the ducts actually get put in the way4 they're supposed to get in instead of, at5 least in our region, the way they6 typically get put in.7 You look at the windows.8 Incidentally, the cost increment for low-e9 glazing in our region is $189 bucks for10 the whole building. That's it. Over wood11 and without. Not bad.12

Mm-hmm.13

Then you look at14 lighting, what's going on. That's called15 base loader, everyday load. That has16 nothing to do with the summertime.17 And plumbing, what you do there18 for low-water use. And I actually19 calculated the savings on plumbing with20 using the Philadelphia Water Authority's21 numbers.22

Just point of23 information. Did you -- see, I got to get24 better at that. Let me interrupt you.25 26 72 4/24/09 - LEG. OVERSIGHT - RES. 0901511

Sure, of course.2

Did you use,3 in your sampling of Philadelphia, the4 Onion Flats development, I believe, in5 your district?6

Right. No, although7 I have toured Onion Flats and I've talked8 to the McDonald Brothers.9

They've been10 able to define what I hear your --11

Right, of course. My12 question to you would be this: Were their13 costs on par with the average costs of14 construction in Philadelphia? In other15 words, were they -- I mean, my16 understanding of the McDonald Brothers is17 that they're licensed electricians, at18 least one of them.19

Yeah.20

And they've had some21 construction experience.22 My guess is, what they did, was23 run the job themselves. Whether or not24 they were subject to prevailing wage rates25 26 73 4/24/09 - LEG. OVERSIGHT - RES. 0901511 during the construction of Onion Flats, I2 couldn't answer that question.3

So it isn't4 the green; it's the hands that put the5 green in?6

Well, absolutely.7 So, for example, what's green8 here in this build-out that gave me a 409 percent knockdown in my heating and10 cooling costs in a rowhome.11

Mm-hmm.12

I went from R13 in13 the walls, which is junky fiberglass, to14 some foam board, air-sealed properly, and15 some blown cellulose at 50 cents a square16 foot, which ends up coming in at about 217 grand for that place. That's material18 costs the installation is a day.19 So how much it costs to get it20 in is really the challenge.21

Let me ask22 one another question and then I'll stop23 because I get your point.24

Sure.25 26 74 4/24/09 - LEG. OVERSIGHT - RES. 0901511

And the only2 other question is: Is the natural3 progression of products and supplies and4 materials coming to the point that the5 prices are coming down on them?6 Over time, has it been easier to7 achieve some level of energy efficiency or8 green through material purchases because9 everyone's coming to that point anyway?10

Right. It's a great11 question. And I'm not intentionally12 complicating the answer.13

That's all14 right.15

The reality of green16 is this: It's high-performance17 construction, it's quality construction,18 it's enforcement of existing code, and19 it's paying attention to 20 or 30 things20 that typically get ignored in21 construction, and spending the extra22 incremental cash to make sure it gets23 done. At the end of the day, that's it24 not. It's not really contingent on25 26 75 4/24/09 - LEG. OVERSIGHT - RES. 0901511 material costs per se, and let me point2 out why.3 If you look at the aggregated4 cost for the greening of this building5 here, only 6,000 or $6500 of that 14 or6 $16,000 total is actually materials. And7 when you say "cost," well, it's not that8 the price of green insulation is higher9 than brown insulation and fiberglass10 versus cellose; they're the same cost.11 The point is, I'm putting more in.12 So I'm buying five pencils13 instead of two, and I don't know that five14 pencils will ever be as much as two if15 they're all the same-cost pencil.16 So there is an issue with green17 having to do with the quality of what you18 start with, and it's dividends as you go19 forward. You're building a better car.20 It's a Toyota versus Ford at the end of21 the day.22

My final23 comment -- and I appreciate your testimony24 is -- that the thing I've learned from all25 26 76 4/24/09 - LEG. OVERSIGHT - RES. 0901511 of my conversations with those who are2 willing to talk to me is that this is a3 work in progress, that we need to figure4 out where -- instead of penalizing, how to5 incentivize, and where those price points6 meet so that it makes sense both for the7 developers and the end-users. And we'll8 work on that.9 And that's my commitment on it.10

Thank you11 very much.12

Thank you.13

Thank you14 for your testimony.15

Thank you. And16 please consider us as a resource in the17 future, going forward.18

Will do.19 Mr. Orens, Mr. Colaizzo and Mr.20 Kassis.21 (Witnesses come forward.)22

Hi. Whoever23 would like to start first, please identify24 yourself for the record and proceed with25 26 77 4/24/09 - LEG. OVERSIGHT - RES. 0901511 your testimony.2

Good afternoon to3 the members of City Council. My name is4 Michael Colaizzo. I'm a developer and5 builder doing business in Philadelphia for6 nearly 25 years. My work experience has7 taken me around the country. 20 NAHB has recently launched, in21 partnership with the International Code22 Council, the National Green Building23 Standard, which is (indiscernible)24 approved. In this challenging25 26 78 4/24/09 - LEG. OVERSIGHT - RES. 0901511 environment, we are striving to provide2 decent housing for all, but we need to3 control costs. 5 By January 1st of 2011, the6 fire-sprinkler mandate will go into effect7 in Philadelphia. And, again, Philadelphia8 will become uncompetitive. 13 Some jurisdictions have required14 sprinkler systems in the past. They wish15 to keep people out of housing. 23 The Philadelphia Water24 Department has argued that if the water is25 26 79 4/24/09 - LEG. OVERSIGHT - RES. 0901511 shut off for nonpayment and, you know, we2 have a sprinkler system, in essence, the3 building will not be protected. 7 Quickly, I also recently8 developed a 900-square-foot in South9 Philadelphia and installed two 18-10 (indiscernible) heat pumps. They worked11 beautifully. I added some radiant floor12 heating. Beautiful job. 14 Shortly after the tenants moved in, it15 failed. 17 And this gets back into what18 we're discussing today. As technology is19 coming around, what we're using today20 won't be around tomorrow. None of the21 major suppliers -- they shipped all of22 their units back 'cause they weren't23 selling. In essence, I had to install a24 standard water heater in while I got the25 26 80 4/24/09 - LEG. OVERSIGHT - RES. 3 And this home was delivered at4 900 square feet for about $100,000. 7 Basically, some things work and8 others don't. On a small scale, this is9 mistake is no big deal. But,10 unfortunately, high-cost products in the11 market, before they're accepted and12 tested, can be costly. 20 Subsidized programs. This is21 just one anecdote. As we adopt new22 technology and best practice in codes23 addressing our concerns, the ICC code is24 constantly changing. In the last round,25 26 81 4/24/09 - LEG. OVERSIGHT - RES. 2 The National Association of Home Builders3 took positions on 900. 6 The building codes are necessary7 for life, fire, and safety. And that's8 where we should go. You know, I believe9 that beyond life fire safety, we have to10 be careful of what additional local11 jurisdictions put in place. And national12 codes address everything. If you build a13 building, it's too close to another14 building, you have to use a different15 material. 23 And I know it's a thorny issue,24 and we've had other hearings here, but as25 26 82 4/24/09 - LEG. OVERSIGHT - RES. 4 And we're going to be a little -- just a5 one little notch. 10

Thank you11 very much for your testimony.12

Scott Orens, Orens13 Brothers Real Estate. Thank you very14 much. I've been asked to talk about the15 high cost of construction in Philadelphia.16 I have about a half a page here.17 It's Friday afternoon; I realize that. I18 can sum it up -- really, when you talk19 about construction, you talk about20 materials, you talk about labor.21 Materials are pretty much the22 same here as they are almost everywhere23 else in the United States. Our labor24 costs are too high; that's the simple25 26 83 4/24/09 - LEG. OVERSIGHT - RES. 0901511 explanation. Our costs for union labor2 are too high relative to what we can sell3 it for. I'm not going to build something4 and sell it for one third of what it cost5 me to build; it's just not going to6 happen.7 Just so you know, in addition to8 being a licensed broker in the9 Commonwealth of Pennsylvania, I'm a10 licensed electrician in the City of11 Philadelphia, I'm a licensed plumber in12 the City of Philadelphia, but what I do13 for a living is develop.14 I'll keep my comments simple. I15 mean, you have a couple of things that you16 might be able to control. I don't know17 whether you guys can control the labor18 costs. I think that it's something you19 can certainly work on, but it might be20 outside of your control.21 Zoning. Quite simply, from a22 development standpoint, time is money. We23 need things to happen quickly in the24 development world. Zoning simply takes25 26 84 4/24/09 - LEG. OVERSIGHT - RES. 0901511 too long and is too complicated. It's2 something that you guys might be able to3 work on.4 The accelerated permit review is5 a great thing. In fact, in many cases, as6 a developer, I'm willing to pay more for7 something if it takes less time. Because8 the difference to me is significant. If9 it takes longer and I have a loan that I'm10 paying on, I'd rather pay someone to be11 there.12 While I'm on that subject, I've13 mentioned to several people in City14 Council -- and I won't mention their15 name -- and to some people in L&I that16 when construction was booming, I've had a17 hard time getting inspections, okay? What18 I'm encountering -- let's just assume --19 and this is a low number -- that I'm20 carrying a $5 million loan, let's assume21 that it costs me at -- well, at 1022 percent, it would cost me, you know,23 $500,000 a year, that's $10,000 a week24 that it would cost me. It's not costing25 26 85 4/24/09 - LEG. OVERSIGHT - RES. 0901511 me 10 percent, it's costing me half. So2 $5,000 a week it costs me to carry a3 $5 million loan. And I have to wait two4 weeks for an inspection from the building5 inspector.6 What's that worth to me if I can7 get it done the next day? I'm willing to8 pay an inspector to show up overtime --9 I'll pay his overtime costs to give me a10 private inspection. I've offered that as11 a solution. No one thinks in L&I that12 it's a real problem. I'm here to tell you13 that when construction was booming, the14 inspectors were overloaded and couldn't15 get to the job on time.16 As was mentioned before by17 Michael, unadopted construction codes cost18 us more money. We had a chance here a19 couple of weeks ago to approve PVC in20 commercial buildings; it wasn't done.21 There were 600 union plumbers in the22 stands here. And there's a reason why it23 wasn't done, and we all know the reason.24 But it's unfair that 250 union plumbers25 26 86 4/24/09 - LEG. OVERSIGHT - RES. 0901511 showing up controls a city of 1.5 million.2 You know, the cost of copper is3 high. That costs my -- it keeps my4 construction costs up.5 Gross-profits tax. Every time I6 sell a building, I pay on what I sold the7 property for, not on what my profit was.8 It's not a good time to change tax9 structures; I understand that. But that's10 one that, when times get better, should be11 looked at.12 And that's about it. That's all13 I'm going to say.14 Thank you very much.15

Thank you16 very much your testimony.17 Please identify yourself for the18 record and proceed.19

21 I want to tell you my story and22 I'm going to make it pretty quick. I'll23 try. I have experienced -- and I'm going24 to try to cover everything that we have25 26 87 4/24/09 - LEG. OVERSIGHT - RES. 2 I started in this business five3 years ago. It was pure luck. You know, I4 was in a different business. 7 I was looking for a house for8 myself. 9 I'm Lebanese, I'm an American with10 Lebanese descent. 14 So I lived in a condo in Old15 City. It was a small condo, a bridge-view16 condominium, two bedrooms. Bought it for,17 like, 160. 19 We needed a big house. Couldn't20 find anything I like. So a friend of mine21 in Northern Liberties was, like, why don't22 you get a lot and build it. So I found a23 nice lot. 25 26 88 4/24/09 - LEG. OVERSIGHT - RES. 5 So I say all right. I build two6 houses with the help of my cousin. 11 I learned the business. Sold12 the one house and kept the other. And I13 loved it. 16 And I love the neighborhood, I17 love Northern Liberties, because I got a18 retired police officer across the street19 that lives from me. I got a teacher and20 her husband that I bought the lot from, my21 neighbor. 22 But I saw University of23 Pennsylvania and I saw what was going on24 as well. I saw how the interaction of the25 26 89 4/24/09 - LEG. OVERSIGHT - RES. 0901511 people -- people were afraid that we were2 going to come and -- like developers3 coming in there and kicking people out of4 there. 7 In my case, that's not what I8 wanted. I wanted to actually bring people9 that have money, that bring a good income10 and bring it to the neighborhood. So what11 I did was, my plan was to build three more12 homes. 13 Now, this is houses nothing going for more14 than $600 [sic]. 16 And these people that bought17 there, they are -- they work for --18 they're bankers from e-counts, another is19 an executive from Comcast. And they end20 up helping the neighborhood, helping the21 kids on the street, on the block right22 there. That was great. 23 So I did another development of24 16 homes around the corner. And I25 26 90 4/24/09 - LEG. OVERSIGHT - RES. 0901511 succeeded. I brought doctors. 4 I realized that Northern5 Liberties is a little village that people6 love to live there. So is Fishtown. Lot7 of artists, a lot of good people. And8 it's a mixture. 11 Now, I learned during that time12 that these people went beyond their need13 to buy a $800,000 home. And my philosophy14 is, I'll give you a five-star service for15 a three-star price. You going to go to Le16 Bec, you going to get the service at Le17 Bec. 19 That's always my -- I've been in the20 restaurant business. 22 Now, these homes, I used union23 carpenters, union excavators. I didn't24 use union finishers, I didn't use union --25 26 91 4/24/09 - LEG. OVERSIGHT - RES. 0901511 I used union electricians because they2 matched my number. 4

No.5

Really?6

Well, of course.7 And I said, "You're not going to scare a8 guy that grew up in Beirut."9 (Laughter.)10

It ain't going to11 happen.12

That was the13 best line of the year.14

Hey, you know, I15 mean, I grew up there, all right? So I've16 seen a lot of things -- no disrespect. I17 understand that, I understand. 19 And it's funny. Actually, I got20 a phone call one time on one of my21 projects. " I said --23 you know, he was giving me an attitude on24 the phone. I said, "I got one where I buy25 26 92 4/24/09 - LEG. OVERSIGHT - RES. " And I'm like, is he going to2 try to sell me something and give me an3 attitude on the phone? " So I said all right. "8 About four weeks later, I'm9 coming back from New York. I'm looking at10 some projects there. I like to look at11 New York, I like to see what's going on12 there and bring it back over here. " I said, "Listen, my17 man. "18 This is what I do. " And I'm not realizing21 what this guy's trying to. 25 26 93 4/24/09 - LEG. OVERSIGHT - RES. " I said, "I'll2 be right there," okay? And him and I went3 at it. I mean, I don't want to go in4 details. "5 I got there; the guy's not6 there. 7 I called him. " I8 mean, I threatened him literally. 10 I didn't realize that there's11 actually hardwood floor guys that are12 union to do your hardwood floors; I didn't13 know that. I didn't realize that there's14 a union for everything. 15 Could I have had been able to16 build these homes for -- and sell them for17 the price that I sold them. 23 Would I have been able to sell24 'em for that? Absolutely not. I'm going25 26 94 4/24/09 - LEG. OVERSIGHT - RES. I built them for $110 a square4 foot. I took three -- I'll give you number so6 you know what I'm talking about. I'm7 selling them as $710,000 homes. 10 If it was John Westrum or Toll11 Brothers building these homes, it would12 cost them $600,000 to build. 15 I was able to work union, but at16 the same time, me and my cousins do other17 work at the same time. So I was able to18 mix them up together. Now, I'm a small19 shop and I'm able to fight. 22 Now, would I have been able to23 sell these houses if I was John Westrum or24 Toll Brothers? No. I would be owing25 26 95 4/24/09 - LEG. OVERSIGHT - RES. 0901511 money to the banks right now. I'd be2 bankrupt 'cause I wouldn't be able to sell3 'em. So I was able to move these houses4 to good people that moved in there. Now,5 if these people could only afford so much,6 I couldn't even -- I was asking 780, 750;7 I couldn't even get that number. 9 Now, what I learned also -- I10 tried to help one of my guys out -- is, if11 it wasn't for the tax abatements, these12 people would not have moved to the City of13 Philadelphia. 18 They won't come here. They'll be19 somewhere else. 24 Why are these rich -- well, they think25 26 96 4/24/09 - LEG. OVERSIGHT - RES. 3 It's not true. You know, we need these4 people here as we need the middle class5 and the, you know, and the bums and6 everybody's. 8 So the bottom line is this: If9 we really want to solve the problem here,10 let's cut the crap and chase. The cost of11 construction the way it is, union, it is12 very, very hard for the regular13 firefighter and the police officer to buy14 around the City. 16 I mean, I'm all for -- I'm pro17 for the right wage; don't get me wrong. 20 You know the way I look at it,21 what's going on -- General Motors is a22 perfect example, man. 23 Why? Because -- I just joined the BIA a24 year ago, and it's been like -- I just got25 26 97 4/24/09 - LEG. OVERSIGHT - RES. 0901511 my MBA literally. I've lost money in real2 estate, I'm walking away from3 (indiscernible). 9 which I just learned that the past three10 months, $56 to pay a carpenter union. 14 Well, that's coming back on me15 as a person who's buying a house or a16 regular teacher or police officer who's17 buying these houses. That's who's paying18 the price for this. That's where it comes19 down to. 24 She wanted to build a, you know, she could25 26 98 4/24/09 - LEG. OVERSIGHT - RES. 0901511 have gotten 150 beds for the homeless;2 instead, she only got 75 beds for the3 homeless, all right? Well, this is4 something good she's doing.

8 See, guys, we need to change9 this. We need the Council, we need the10 Mayor, we need the -- and we need the11 people to understand that, because, you12 know, what? I saw on the news when people13 are going against the tax abatement, and I14 felt them. They felt like, you know,15 they're being cheated. 18 And they're right. But, you know, I don't19 think they understand the whole concept of20 it. 22 So we need to educate the public23 and we need to sit down with all of these24 labor -- with these union heads and figure25 26 99 4/24/09 - LEG. OVERSIGHT - RES. 0901511 out how we're going to do it. I know it's2 going to be tough, but it's got to get3 done. 8 The zoning I agree with all this stuff and9 all these things, but it costs a lot of10 money to build in Philadelphia. 12 And you know what, what Kevin13 said earlier? You're right. We got14 lucky. You're absolutely right. We got15 lucky that we have not flooded the market16 because, you know, we would be like Miami,17 'cause every developer in (indiscernible)18 or different towns would have came here19 and they would have built over here20 because the profit margin would have been21 a lot higher. 22 So let's learn from that. I'm23 not saying -- and I like the zoning, I24 like you to come -- I want to go -- by the25 26 100 4/24/09 - LEG. OVERSIGHT - RES. 0901511 way, I'm partners with Onion Flats on2 other projects. And Johnny came over here3 and said something that was wrong. 6 It's just a fact of life. 8 Your low-e windows cost more money. All9 of this stuff costs more money, and it's10 labor-intensive as well. 12 I wish there was more people13 here. This is just the beginning, but we14 really need to sit down and figure this15 out, because to move our city forward --16 and this is the chance to do it now in17 this economy, the time it is. Let's do it18 right now sit down19

Thank you20 very much for your testimony. Thank you21 very much.22 Mr. Sauer.23 Is there anyone else that wants24 to testify after Mr. Sauer?25 26 101 4/24/09 - LEG. OVERSIGHT - RES. 0901511 (No response.)2 (Witness comes forward.)3

Hi. Please4 identify yourself for the record.5

9 Thanks for the opportunity to10 testify. 12 I think we've already heard13 quite clearly that we have high14 development costs here in the City. 20 It also is a result of reducing21 the availability and sort of moderate-22 priced housing to more moderate-priced-23 income households. It increases the24 amount of public subsidy that is needed to25 26 102 4/24/09 - LEG. OVERSIGHT - RES. 3 So if you have the development4 cost up to $200 a square foot and you're5 building a home and it's only going to6 sell for 150 or a very affordable rent to7 special-needs household, you have to put a8 lot more of those limited public subsidies9 into each unit to make them financially10 work. 14 There's been quite a bit talked15 about the contributing factors to the high16 cost of development here, and clearly, the17 labor-cost issues come up. 23 And there's also inefficiencies24 in the City's development process we've25 26 103 4/24/09 - LEG. OVERSIGHT - RES. 0901511 heard about, whether it's the zoning, the2 outdated zoning code. 8 We're certainly supportive of9 paying workers a fair wage to do work. 13 There's more of a residential rate in14 place versus a commercial rate. 25 26 104 4/24/09 - LEG. OVERSIGHT - RES. 5 And we're encouraged by the6 beginning stages that the City is7 undertaking to make improvements to the8 City's property acquisition/disposition9 system. 12 And it's something that we need to take13 advantage of the opportunity we have now,14 especially given the financial crisis the15 City has. 18 I think if we can reform these19 systems, we can reduce the cost and time20 and cost of development, enable more21 efficient use of the limited resources we22 have and expand the range of housing23 options, create some more moderate-income24 housing here in the City, and also help25 26 105 4/24/09 - LEG. OVERSIGHT - RES. 2 One final comment. There was a3 lot of discussion around the tax4 abatement. 9 We do have a citywide policy,10 though, and I question if that's the best11 policy to have. 17 And the other side of that, what18 a lot of folks are complaining about, sort19 of the equity issue, that it's the newer20 homeowners coming in and benefiting, there21 are ways to tap into the revenue stream22 coming out of tax-abatement properties,23 especially as those abatements expire, to24 use a portion of that revenue stream, to25 26 106 4/24/09 - LEG. OVERSIGHT - RES. 8

Councilman9 Jones?10

That may well11 be a entrée and a means by which to12 accomplish what the Chairman was talking13 about by way of incentivizing that14 middle-class construction and stimulate15 that. And then, as these properties come16 off of line from the ten-year tax17 abatement, which increasingly more of them18 are, that a portion of that money be19 dedicated to kind of kick-start, prime the20 pump, if you would, for middle-class and21 affordable housing.22 Just a couple of points that I23 want to put on the record.24 The most expensive thing in25 26 107 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Philadelphia is being poor.2

Mm-hmm.3

The most4 expensive thing in Philadelphia is being5 poor, because as we start to build these6 homes that don't have the proper7 insulation, you have the Water Department8 that wants to increase its rates over the9 next year, you have deregulation of10 electricity, which will occur in 2010, you11 have -- I am on the Philadelphia Gas12 Commission and I know they are screaming13 for a increase because of some of the cost14 of doing business.15 So all of these three things are16 converging on the 24 percent of people who17 live in the City of Philadelphia under the18 poverty guidelines in a way that19 energy-efficient housing isn't a20 tree-hugger's idea; it will become a21 necessity in order for them to maintain22 their own homes.23 So my pushing of these programs24 for green is not an attack on the poor but25 26 108 4/24/09 - LEG. OVERSIGHT - RES. 0901511 a lifeline to the poor going forward. My2 attempt to do green for development is not3 an attack on development. It is what the4 market is mothering towards anyway. More5 people every day are talking about energy6 efficiency of their lifestyle. And as we7 start to throw on top of that transit-8 oriented development, we need to come9 together, change our way of thinking, and10 try to move forward in a mutually11 beneficial area.12 And I'm going to take Councilman13 Kenney and Councilman DiCicco up on14 bringing us all together so that we can15 find a common way out of it. And I got16 it, fellows. I don't want to17 disincentivize development; I want to18 incentivize green. Got it. You don't19 have to tell me again. I got it.20 All right. Thank you.21

Energy costs are22 clearly a critical issue. And I think we23 do have some opportunities with the new24 Weatherization Funds and the Energy25 26 109 4/24/09 - LEG. OVERSIGHT - RES. 0901511 Efficiency Block Grant to help provide2 some of those incentives or offset that3 upfront cost of addressing those issues.4 So we certainly welcome the5 opportunity to work with you around that.6

Thank you7 very much.8 Thank you for your testimony and9 thank you for your attendance here. The10 hearing is now in recess.11 (Proceedings end at 4:10 p.m.)12 * * *13 14 15 16 17 18 19 20 21 22 23 24 25 26 110 C E R T I F I C A T E2 I HEREBY CERTIFY that the4 proceedings of the City of Philadelphia5 Council Committee on LEGISLATIVE OVERSIGHT are6 contained fully and accurately in the7 stenographic notes taken by me on Friday,8 April 24, 2009, and that this is a true and9 correct statement of same.10 11 12 13 __________________________________ 14 JOSEPHINE CARDILLO Registered Professional Reporter15 16 17 18 19 (The foregoing certification of20 this transcript does not apply to any21 reproduction of the same by any means, unless22 under the direct control and/or supervision of23 the certifying reporter.)24 25