Economic Analysis of Stormwater Fee Changes on Philadelphia Businesses

Transcription

1 Economic Analysis of Stormwater Fee Changes on Philadelphia Businesses Report Submitted To: Philadelphia Water Department 1101 Market Street, Suite 500 Philadelphia PA Report Submitted By: Econsult Corporation 1435 Walnut St., Suite 300 Philadelphia PA 19102

2 Page 1 EXECUTIVE SUMMARY As requested by the Philadelphia Water Department (PWD), Econsult Corporation (Econsult) has analyzed five related aspects of the shift from a meter-based to parcel area-based stormwater billing system: 1. The impact on individual parcels and entities, and aggregate statistics by owner type and use; 2. The property value and property tax implications of the transition; 3. The economic incentives firms may have for relocating outside of the City; 4. The impact of PWD s incentives programs for stormwater management retrofits; and 5. The potential for a tradable credits program. STORMWATER CHARGES We have calculated stormwater charges for all 56,974 non-residential parcels using 2012 parcel based rates and 2012 meter based rates. We have calculated the raw fees, which are based on Final Gross Area, Final Impervious Area, and billing charges, as reflected in the PWD database and our analysis does not include D-Permits, use-specific discounts, phase-ins, or allowances for difference between billings and collections, and therefore our numbers are different from numbers used for rate-setting purposes. The fee for non-residential parcels in this analysis would be $58 million dollars under the meter-based billing system in 2012 and would be $84 million under the parcel area-based billing system in Approximately half of the difference is due to fees imposed on parcels that previously did not receive stormwater bills. Table ES- 1 provides a breakdown of parcels by type of change. In addition, approximately 1,117 private nonresidential parcels experience an annual increase of $5,000 or more, and 95 percent of these parcels experience an increase of $1,867 or less per year. Data are as of October 11, Table ES-1: Stormwater Charges for All Owners (by parcel) Net Decrease Net Increase TOTAL Existing Account Existing Account New to SW charges All Accounts Number of accounts 5,922 27,610 23,442 56,974 Meter-based charges ($m) $38.9 $18.8 $0 $57.7 Parcel Based Charges ($m) $15.1 $54.4 $14.9 $84.4 PROPERTY VALUE IMPACTS Property owners are ultimately responsible for paying the stormwater fee, as it is based on the characteristics of the land that they own. Consequently, an increase in stormwater fees will impact the market value of the parcels. Our analysis indicates that the market value of private, non-residential parcels will decrease by approximately $190 million, causing a decrease of property tax billings of approximately $3.9 million for these parcels. However, citywide property tax receipts will not decrease significantly because properties that benefit from the shift to the parcel-area based system increase in value, and because stormwater credits that a property earns will increase property values and hence tax collection. BUSINESS RELOCATION POTENTIAL Theory suggests the stormwater fee will have no impact on business location decisions in the long run, even though it will impact the value of existing businesses that own their land. As the stormwater fee is based on characteristics of the land, it will not change the incentives regarding the location of a business. Though some businesses will have to pay the fee in the short-term (because many commercial leases pass fees/taxes associated with the land along to tenants), at lease renewal time tenants will negotiate their rent

3 Page 2 payments downward to compensate for any higher stormwater fee. Similarly, if the business owns the land and decides to sell the owner will find that the fee has diminished the value of the land, again removing the incentive to relocate. The fee will not affect the ability of the City to attract new businesses because new businesses will pay lower rent. We also examined the change in stormwater fee relative to other costs of doing business in Philadelphia. In all cases it is either less expensive to locate in Philadelphia with the new fee, or is already less expensive to locate elsewhere. It is unlikely businesses with the potential to relocate will choose to leave the City of Philadelphia in direct response to the change in the stormwater fee structure. Table ES-2: Annual Operating Costs Compared to Current Philadelphia Location (000s) County State Increase Bucks PA Bucks PA Delaware PA Burlington NJ Gloucester NJ N. Castle DE City In Fee Bristol Bensalem Folcroft Florence Logan N. Castle Medium Sized Distribution Center $18 ($54) ($78) $198 ($13) $2 $49 Large Sized Distribution $25 ($1,302) ($1,469) $522 ($706) ($1,441) ($490) Large General Manufacturer $252 $995 $547 $5,897 $2,829 $224 $3,331 Specialty Manufacturer $110 $2,105 $1,934 $1,136 $1,256 $2,514 $980 Dealer Related Auto Body Shop $23 ($47) ($53) $37 ($32) ($54) ($64) INCENTIVES Because the monetary benefit of reducing stormwater fees is too small to induce retrofits for many properties, PWD offers several retrofit incentives and is considering others. Direct subsidies or tax credits are most effective but they are also expensive, which means relatively few properties can be treated. Other incentives, such as reduced parking requirements, are inexpensive but of limited effectiveness. The most effective inexpensive incentives are Decreased Stormwater Plan Review Standards and Fast Track Development Project Review, both of which speed review for development projects, which can be worth a considerable amount to developers. Incentives should be structured so they encourage owners just on the cusp of deciding to retrofit to invest, which will likely maximize the amount of land that gets retrofitted and at the same time efficiently use the money set aside to fund retrofits. Two ways to efficiently use funds are to needs-test the incentives, or to rank applicants by subsidy per square foot of retrofitted land. TRANSFERABLE STORMWATER CREDITS Transferrable stormwater credits offer the potential to improve stormwater management more economically than a system in which all stormwater management has to be performed on site. Property owners can satisfy stormwater management goals by building or funding stormwater infrastructure on other sites, and credit for the stormwater benefit from the other sites then transfers to the owner s site. Philadelphia s fee structure provides the same incentive to every property owner, which is an economically sound approach, but it also limits the ability to generate credits precisely because every property owner faces the same incentive. If a property is inexpensive to remediate, then the owner will retrofit for his or her own benefit, not for the purpose of generating transferrable credits. The only potential ways to generate credits for transfer are for an owner to build infrastructure that goes beyond current requirements, with the surplus being available for credits, for a residential property owner to build management infrastructure, or for an owner to do stormwater management on City streets, which do not pay stormwater fees. The potential for these credit mechanisms warrants a more detailed investigation of credits.

4 TABLE OF CONTENTS 1.0 INTRODUCTION DATA Data Acquisition Parcels And Entities STORMWATER CHARGES Private vs. Public vs. Institutional/Non-Profit Use Greatest Impacts: Positive And Negative Parcels/Entities Large Percentage and Dollar Fee Increases The 100 Parcels / Entities with the Largest Increases And Decreases PROPERTY VALUE IMPACTS Data Analysis BUSINESS RELOCATION POTENTIAL Theory Approach Data Analysis Warehouse/Distribution and Manufacturing Retail Business Relocation Conculsions INCENTIVES Current Incentive Programs Planned Incentive Programs Other Incentive Programs Conclusions Regarding Incentive Programs TRANSFERRABLE STORMWATER CREDITS Tradable Credit programs Transferrable Credits in Philadelphia Conclusion APPENDIX... 32

5 Page INTRODUCTION The Philadelphia Water Department (PWD) asked AMEC and subconsultant Econsult Corporation (Econsult) to analyze how the shift from a meter-based to parcel area-based stormwater billing system impacts properties and businesses in the City of Philadelphia (the City). We investigated the magnitude of the impact on individual parcels and entities, identified the industries and specific types of businesses that will be most heavily impacted by the fully phased-in parcel area-based stormwater fee structure, the economic incentives specific firms may have for relocating outside of the City, and the property value and property tax implications of the transition. The analysis followed several broad steps: Acquiring data on all parcels subject to the stormwater charge; Adding use, ownership type, and other information, grouping parcels under common ownership together; Analyzing the data to determine which parcels and owners were affected the most; Analyzing how the fee may potentially impact property values in the long-term; and Analyzing how the fee may influence business location decisions. In conjunction with PWD, we identified six representative businesses for a detailed investigation regarding their incentives to relocate outside of the City as a result of the transition. We were also asked to review and comment on existing and proposed incentives for non-residential property owners to invest in retrofits. 2.0 DATA The analysis is based on the data that PWD uses to calculate stormwater billing amounts. The complete data set includes information on the approximately 611,500 water accounts and 546,000 parcels in the City including single-family residential parcels, condominiums, apartments, disconnection or D-permit holders, nonresidential parcels, and various exempt parcels. 1 This analysis covers the approximately 56,974 nonresidential parcels. 2 The PWD data were supplemented with information on use, ownership, and property values as described below. 2.1 DATA ACQUISITION The basic data are from the PWD billing system, which provides the stormwater charges for each account under the pure meter-based system, the pure parcel area-based system, and for each year of the transition 1 A D-permit is a parcel that once had water service and a water meter, but the meter has now been disconnected. The property owner holds a disconnect permit, and the parcel no longer has service. At the time of this analysis, D-permit holders were not billed the stormwater fee. 2 Residential ratepayers pay approximately 50% of the Stormwater costs via a uniform charge for each parcel ($13.66/month in 2012).

6 Page 2 to the full parcel area-based system, after taking into account credits or exemptions. 3 PWD updates its database daily to reflect changes to the gross area and impervious surface amounts used to calculate the parcel area-based stormwater charges, the addition of credits, and ownership information. The data are the basis for PWD s monthly bills, and it is important to keep them as current as possible. The information contained in this report is current as of October 11, 2011, and any changes made by PWD after this date would not be reflected. The Office of Property Assessment ( OPA ) divides land in Philadelphia into a system of parcels which are each identified by a unique parcel id. PWD uses the same unique identifying number to identify each parcel in the stormwater fee database. This link makes it possible to incorporate data from OPA property records into the PWD data for analysis purposes. Information on property value, real estate taxes, land use, and owner of each parcel was merged into the aggregated stormwater charge database. 4 We categorized each parcel owner as being a Private, Public, or Institutional/non-profit entity. Private entities include individuals, groups of individuals, corporations, LLC s, and LLP s. Public entities are the federal, state, and local governments and/or bodies they directly control. Institutional/non-profit entities include academic, healthcare, and charitable organizations whose operations are not profit-seeking. All three types of entities are responsible for paying stormwater fees for their parcels. However, because public and institutional/non-profit entities pay few or no taxes, and have a different organizational purpose, this analysis is focused primarily on private entities, which account for approximately 90 percent of all owning entities. Table 1 provides a breakdown of the non-residential parcels by ownership type. Table 2: Non-Residential Parcels by Type Parcel Type Number Private 50,625 Public 2,877 Institutional/Non-Profit 3,472 Total 56,974 Each private parcel was classified in terms of its use with a primary and secondary (where applicable) industry type. The parcels uses were based on the building code and building description provided by OPA data. In cases where information provided by the OPA was incomplete or ambiguous, use was determined in a case-by-case investigation. Table 2 provides a breakdown of the 56,974 non-residential parcels. 3 Using the unique parcel identifying number, each parcel was matched with associated water account(s) 3 ; which resulted in the stormwater charges for each parcel under the old meter-based system as well as each year of the transition to the parcel areabased billing system. The calculated charges for each parcel were compared to the amounts that each parcel was actually billed by PWD to confirm the calculations. As a final check, we compared our calculations for a subset of parcels to the data found on 4 OPA data are as of November 2011.

7 Page 3 Table 3: Non-Residential Parcels by Use Use 5 Private Public Institutional / Non-Profit TOTAL Manufacturing 1, ,854 Mixed Use 6, ,615 Office Space 1, ,130 Other 1,921 1,118 1,938 4,977 Other Industrial 1, ,278 Parking 2, ,265 Residential (Apt./Mixed) 12, ,483 Retail 4, ,595 Vacant Land 15,714 1, ,408 Warehouse/Distribution 2, ,369 TOTAL 50,625 2,877 3,472 56, PARCELS AND ENTITIES Each parcel, in turn, is owned by and registered to an entity. Many entities own multiple parcels, both adjacent and separate. Many plots of land that seem to be individual parcels are in fact collections of multiple adjacent parcels owned by one entity. As they function together, and the owning entity experiences the aggregate change to its parcels bills, it follows they should be analyzed together. To perform analysis at the entity-level, parcels owned by the same entity have been combined. In particular, parcels were sorted by their primary and secondary listed owners and appropriate information (stormwater fee information, property tax bills, market values, square footage, etc.) was aggregated for each unique owner/set of owners. In total we identified 40,623 unique owners/sets of owners for the 56,974 parcels in this analysis. Table 3 below provides a breakdown of the total number of parcels and owners. Table 4: Parcels and Entities Parcel Type Number Entities Private 50,625 38,591 Public 2, Institutional/Non-Profit 3,472 2,002 Total 56,974 40,623 5 Use information is from OPA records. Residential uses include apartment buildings and single-family homes with commercial uses, such as offices or retail stores. For PWD billing purposes these types of uses are classified as non-residential and pay non-residential rates. Most Vacant uses have some impervious surface and some vacant uses are 100 percent impervious. Other Industrial uses are classified as Industrial by the OPA and are not Manufacturing or Warehouse/Distribution uses. Other Industrial includes auto repair, refineries, shops, lumber yards, and others.

8 Page STORMWATER CHARGES To illustrate the effect of the change from meter to parcel based billing, we have calculated stormwater charges using both calculation methods for all 56,974 non-residential parcels using 2012 rates. We have calculated the raw fees, which are based on Final Gross Area, Final Impervious Area, and billing charges, as reflected in the PWD database, and have not accounted for use-specific discounts or for differences between billings and collections. The fee for non-residential parcels in this analysis would be $58 million dollars under the meter-based billing system in 2012 and would be $84 million under the parcel area-based billing system in Approximately half of the difference is due to fees imposed on parcels that previously did not receive stormwater bills. Table 5 provides a breakdown of parcels by type of change. Table 5: Stormwater Charges for All Owners (by parcel) Net Decrease Net Increase TOTAL Previously Previously paid SW charges paid SW charges New to SW charges All Accounts Number of accounts 5,922 27,610 23,442 56,974 Value of charges Meter-based charges $38,909,580 $18,763,306 $0 $57,672,886 Parcel Based Charges $15,104,657 $54,381,280 $14,886,491 $84,372,428 Change -$23,804,923 $35,617,974 $14,886,491 $26,699,542 Average Value Meter-based charges $6,570 $680 $0 $1,012 Parcel Based Charges $2,551 $1,970 $635 $1,481 Change -$4,020 $1,290 $635 $469 Gross Land Area 202,295, ,808, ,474,500 1,277,577,500 Impervious Area 122,481, ,850,000 96,465, ,796,000 Change Per Sq. Foot (Gross Land Area) -$0.12 $0.05 $0.05 $0.02 Change Per Sq. Foot (Impervious) -$0.19 $0.08 $0.15 $0.01 Relative to fees billed under the wholly meter-based fee, 5,922 non-residential parcels will see a decrease in their stormwater fees and 27,610 will see an increase in their stormwater fees after the transition to the parcel area-based system. Additionally, 23,442 parcels 7 that were not assessed a stormwater fee under the meter-based system will receive a parcel area-based stormwater bill. 8 Approximately 1,117 private 6 These amounts do not include the delayed phase in period for some properties, nor discounts given to some types of properties. Property value impacts, which are relevant only for privately owned parcels, depend on the fully-phased in fee. Further, the focus of this report is on Private, Non-Residential parcels and entities, while most discounts are for Government or Institution / Non-Profit users. Therefore our numbers are different from numbers used for rate-setting purposes. 7 This amount does not include the more than 20,000 D-permits, which were not being charged as of October 11, Under the meter-based system, only parcels with water service were billed. Parcels such as vacant lots or parking lots do not have active water meters and were thus not being billed. Throughout the remainder of this analysis, parcels experiencing an increase in stormwater fees include parcels that were not being charged stormwater fees until the change to parcel based billing.

9 Page 5 parcels experience an annual increase of $5,000 or more, and 95 percent of the private, non-residential parcels experience an increase of $1,867 or less per year. 3.1 PRIVATE VS. PUBLIC VS. INSTITUTIONAL/NON-PROFIT To facilitate better comparison and analysis of the impact of the change in the stormwater fee structure, the parcels have been sorted by ownership type (private, public, or institutional/non-profit) and the type of impact the shift to parcel area-based stormwater fees will have on them (increase in charge, decrease in charge, or being charged a stormwater fee for the first time). Table 6 below provides a breakdown of entities/parcels by ownership type and their respective changes in stormwater fees. Stormwater charges on private non-residential parcels increase by approximately $19.1 million, charges on institutional / non-profit parcels will decrease by more than $1.5 million, and charges on publicly owned parcels will increase by approximately $9.1 million. Note that although there are only 30 public entities, they account for $9.1 million of the changes, which is a large average amount per entity. Table 6: Stormwater Charges for Entities by Ownership Type Public Private Public Institutional/ Non-Profit Total Number of accounts 38, ,002 40,623 Value of charges Meter-based charges $32,947,473 $14,848,908 $9,876,506 $57,672,886 Parcel Based Charges $52,033,805 $23,968,844 $8,369,779 $84,372,428 Change $19,086,333 $9,119,936 -$1,506,727 $26,699,542 Average Value Meter-based charges $854 $494,964 $4,933 $1,420 Parcel Based Charges $1,348 $798,961 $4,181 $2,077 Change $495 $303,998 -$753 $657 Gross Land Area 694,940, ,482, ,154,500 1,277,577,500 Impervious Area 405,024, ,580,500 67,191, ,796,000 Change Per Sq. Foot (Gross Land Area) $0.027 $ $0.013 $0.021 Change Per Sq. Foot (Impervious) $0.047 $ $0.022 $ USE We analyzed the parcel data according to use. For each use (industry), we analyzed the number of parcels impacted and the total value of parcel area-based stormwater fees for each industry (after complete phasein). Industrial classifications have been disaggregated because several of these sub-industries account for Meter based billing and parcel based billing have different anticipated collection rates e.g. customers with water meters are more likely to pay their bills as water service may be shut off if bills are delinquent whereas parcel that only receive stormwater service may not choose to pay their bill as there is no immediate impact to the service provided by PWD. Unpaid bills may result in a future increase the parcel area based fee unit rates as the Department must collect sufficient funds to maintain their program and meeting debt obligations.

10 Page 6 very large percentages of total fees. Table 7 and Figure 1 offer a total picture of stormwater collections for private parcels across all industries and applicable industries. See the footnote of Table 3 for an explanation of Residential. Use Table 7: Privately Owned Non-Residential Parcels by Use Net Decrease Previously Billed SW Fees Net Increase Not Previously Billed SW Fees Total Total SW Fees Billed Manufacturing 118 1, ,760 $7,651,727 Mixed Use 553 5, ,489 1,787,570 Office Space ,000 2,344,117 Other 450 1, ,921 4,733,484 Other Industrial ,256 1,671,714 Parking ,194 2,859 1,642,131 Residential (Apt./Mixed) 1,912 9,587 1,406 12,905 8,055,310 Retail 668 3, ,484 10,016,553 Vacant Land ,672 15,714 4,640,423 Warehouse/Distribution 124 1, ,237 9,500,316 TOTAL 4,497 25,148 20,980 50,625 $52,043,345 Figure 1: Share of Stormwater Charges by Dollar Value of Charge Warehouse/Distribution 18% Manufacturing 15% Vacant Land 9% Mixed Use 3% Office Space 5% Other 9% Other Industrial 3% Retail 20% Parking 3% Residential 15%

11 Page 7 Of the remaining industries and sub-industries the three with the highest percentage of total stormwater fee collections are Industrial-Manufacturing, Industrial-Warehouse, and Retail. Combined, these three industries account for half of total private parcel collections. In total, 93 percent of industrial manufacturing parcels, 94 percent of industrial warehouse parcels, and 85 percent of retail parcels will experience a net increase in stormwater charges because of the transition to the parcel area-based billing system. We analyzed these three industries to assess whether businesses may seek to leave the City as a result of increased stormwater fees. 3.3 GREATEST IMPACTS: POSITIVE AND NEGATIVE We have examined four major subsets of private parcels/entities greatly impacted by the change in stormwater fees. We have identified separately the parcels and entities which: Will experience a stormwater charge increase greater than 100% AND $10,000 annually; Will experience a stormwater charge increase greater than 500% AND $25,000 annually (in both cases, relative to the fees they were charged under the meter-based billing system); The 100 parcels/entities with the largest dollar increase in stormwater charges; and The 100 parcels/entities with the largest dollar decrease in stormwater charges. Increases apply to parcels and entities that will experience an increase in fees and those who will be paying stormwater fees for the first time (e.g. those who did not previously have a water meter upon which to base fees) PARCELS/ENTITIES LARGE PERCENTAGE AND DOLLAR FEE INCREASES Though many parcels are impacted, most have relatively minor increases in fees, either on a percentage basis or on an absolute dollar amount basis. The parcels most impacted are those that will experience large increases on an absolute dollar basis and on a percentage basis. A $20,000 increase for an entity now paying $5,000 represents a five-fold increase, whereas the same increase for an entity paying $100,000 is only a 20 percent change. The first cut of the most impacted parcels and entities examines those that will experience parcel areabased stormwater fee increases greater than $10,000 annually and greater than 100% of their former meter-based stormwater fees. There are 445 individual parcels and 535 entities that experience this type of increase. 9 The second cut of the most impacted parcels and entities examines those which will experience increases are greater than $25,000 annually and greater than 500% of their former meterbased stormwater fees. There are 93 individual parcels and 113 entities that experience this type of increase. Table 8 provides detailed information about the parcels/entities within these categories of increases. 9 The number of entities experiencing larger impacts is greater than the number of parcels experiencing these impacts because there are numerous entities that own several parcels that individually do not experience large increases. However, when the increases for the parcels are added up, the entity-wide increase is large.

12 Page 8 Table 8: Greatest Private Stormwater Fee Increases by Percentage and Dollar Amount Increase Greater than 100% and $10,000 Increase Greater than 500% and $25,000 Parcels Entities Parcels Entities Parcel Count Market Value of Property ($) 1,616,073, ,124,000 Property Tax (Annual) ($) 45,563,127 12,355,150 Annual Stormwater Charge Meter Based ($) 2,560,287 3,205, , ,772 Annual Stormwater Charge Parcel Based ($) 14,632,692 18,656,238 5,286,673 6,789,655 Difference in Annual Stormwater Charge ($) 12,072,405 15,450,250 4,867,027 6,285,883 Percent Increase in Annual Stormwater Charge* 472% 482% 1160% 1248% Market Value Impact ($) 146,326,917 52,866,729 Market Value Impact (%) 9.05% 12.35% Annual Difference as % of Property Tax 26.50% 39.39% Gross Area 205,288,500 84,757,000 Impervious Area 120,370,000 42,339,000 Impervious Gross Area Ratio 59% 50% * Includes parcels/entities new to fee THE 100 PARCELS / ENTITIES WITH THE LARGEST INCREASES AND DECREASES Another approach to identifying the parcels and entities most heavily impacted by the change in the stormwater fee billing structure is to identify those parcels and entities with the greatest stormwater fee increases or decreases by absolute dollar amounts. This section examines the top 100 impacts first by entity and parcel, then by subsets that take into account the type of ownership, type of fee change, and value of the fee billed versus the value of the increase in fee. When examined by entity, publicly owned parcels comprise the majority of the top 100 impacted in each subset and public entities experienced the majority of fee increases and decreases. However, most of the entities on the top 100 list are private entities, not public entities. This means that the public entities that are most impacted own a large number of parcels. The entities include the City of Philadelphia (887 parcels), Philadelphia School District (334 parcels), and the Philadelphia Housing Authority (483 parcels), and others. Please see Table 9.

13 Page 9 Table 9: Top 100 Entities Impacted by Stormwater Fee Changes Top 100 Net Differences (increase or decrease) Top 100 Charge Increases Top 100 Charge Decreases Top 100 Charges Billed Top 100 Charges -- Private Entities Top 100 Private Entity Charge Increases Parcels Owned 3,654 2,451 1,772 3, Private Public 2,594 1, , Institutional/Non-Profit Value of Charges Meter Based Charges ($000s) $21,099,167 $11,194,799 $14,126,542 $22,618,765 $3,394,893 $2,567,403 Parcel Based Charges ($000s) $34,289,276 $28,786,931 $8,144,561 $36,096,761 $10,846,090 $10,432,364 Change ($000s) $13,190,109 $17,592,132 ($5,981,980) $13,477,996 $7,451,197 $7,864,962 Average Value Meter Based Charges $210,992 $111,948 $141,265 $226,188 $33,949 $25,674 Parcel Based Charges $342,893 $287,869 $81,446 $360,968 $108,461 $104,324 Change $131,901 $175,921 ($59,820) $134,780 $74,512 $78,650 Gross Land Area (000s S.F.) 648, , , , , ,567 Impervious Area (000s S.F.) 258, ,205 66, ,328 84,383 81,137 Change per Gross S.F. $0.02 $0.03 ($0.06) $0.02 $0.04 $0.04 Change per Impervious S.F. $0.05 $0.08 ($0.09) $0.05 $0.09 $0.10 Ownership Type (entities) Private Public Institutional/Non-Profit Total Ownership Type (net change $) Private $5,986,119 $7,160,665 ($2,225,058) $6,101,149 $7,451,197 $7,864,962 Public $9,183,343 $10,146,742 ($994,165) $9,139,926 $0 $0 Institutional/Non-Profit ($1,979,354) $284,725 ($2,762,757) ($1,763,079) $0 $0 Total $13,190,109 $17,592,132 ($5,981,980) $13,477,996 $7,451,197 $7,864,962 Examination of the top 100 impacted parcels revealed a more even split between private and public ownership structures in terms of the number of parcels experiencing a significant change. However, the 45 public parcels in the list of the Top 100 Charge Increases that experience a significant increase (compared to the 50 private parcels) accounted for almost twice as much in charges: 50 private parcels will realize a fee increase of $4.3 million and 45 public parcels will realize a fee increase of $8.4 million after the transition to the parcel area-based stormwater fee billing structure. Analysis of the Top 100 private parcel

14 Page 10 stormwater fee increases revealed a total net increase of $6.5 million. The Top 100 private parcels in this analysis are owned by 94 unique entities. Table 10: Top 100 Parcels Impacted by Stormwater Fee Changes Top 100 Net Differences (increase or decrease) Top 100 Charge Increases Top 100 Charge Decreases Top 100 Parcel Charges Billed Top 100 Parcel Charges -- Private Entities Top 100 Private Entity Parcel Charge Increases Value of charges Meter Based Charges $4,369,636 $2,759,017 $6,276,619 $4,369,805 $1,972,910 $1,202,709 Parcel Based Charges $14,973,402 $15,798,962 $1,674,036 $16,508,197 $8,089,454 $7,741,004 Change $10,603,766 $13,039,945 ($4,602,583) $12,138,391 $6,116,544 $6,538,295 Average Value Meter Based Charges $43,696 $27,590 $62,766 $43,698 $19,729 $12,027 Parcel Based Charges $149,734 $157,990 $16,740 $165,082 $80,895 $77,410 Change $106,038 $130,399 ($46,026) $121,384 $61,165 $65,383 Gross Land Area (000s S.F.) 301, ,609 31, , , ,697 Impervious Area (000s S.F.) 111, ,196 12, ,726 63,001 61,020 Change per Gross S.F. $0.04 $0.04 ($0.15) $0.04 $0.04 $0.05 Change per Impervious S.F. $0.09 $0.11 ($0.36) $0.10 $0.10 $0.11 Ownership Type (entities) Private Public Institutional/Non-Profit Total Ownership Type (net change) Private $3,375,791 $4,303,245 ($1,578,360) $3,684,582 $6,116,544 $6,538,295 Public $7,732,201 $8,406,952 ($1,437,057) $8,279,163 $0 $0 Institutional/Non-Profit ($504,225) $329,748 ($1,587,166) $174,646 $0 $0 Total $10,603,766 $13,039,945 ($4,602,583) $12,138,391 $6,116,544 $6,538, PROPERTY VALUE IMPACTS The stormwater fee is, and will continue to be, an ongoing fee that property owners are ultimately responsible for paying, as the fee is based on the characteristics of the land that they own. If the user of the parcel disappeared and the parcel became vacant, the fee would not change. This situation is in contrast to an electric bill, which is based on the use of the parcel. If the user disappeared, so would the electric bill, but the stormwater fee would remain. Because the stormwater fee is associated with the land, it impacts the value of the parcel, as explained in more detail below. Because parcel owners will bear the

15 Page 11 burden of the increased stormwater fees after the transition to the parcel area-based billing system, the market value of parcels with significant stormwater fee increases will be diminished. A commercial parcel s land value is based on the monthly net income it can generate for its owner, which is based on how much rent can be charged to a tenant, less expenses for owning the land. The stormwater fee is an expense, which decreases monthly net income. When a lease says the owner is responsible for stormwater fees, and stormwater fees increase, the owner might try to pass the increase in fee to the tenant, but the tenant would resist the fee as it would resist a rent increase. Because rent has not changed and expenses have increased, there is lower annual net operating income for the parcel, which in turn will result in a lower valuation of the parcel. Many commercial leases make the tenant responsible for stormwater fees, not the owner. From a tenant s perspective, a stormwater fee is just like rent, it is money that must be paid to use the land. An increase in stormwater charges decreases the amount tenants would be willing to pay in rent on a dollar for dollar basis, as tenants will pay no more (rent + stormwater) than they do now. Once the lease expires, the tenant will demand a rent reduction. Again, this lowers the net income to the owner. An example will help illustrate this effect. A tenant able to spend $1,100 per month conducts a search, and ultimately leases a parcel with rent of $1,000 per month and stormwater fees, payable by the tenant, of $100 per month. To the tenant, using the land costs $1,100 per month ($1,000 in rent to the landlord and $100 for the stormwater fee). To the landlord, income is $1,000 per month, or $12,000 per year. If the capitalization rate (discussed in the following section) is 10%, then the value of the property is $120,000. Now suppose that the stormwater fee increases to $200 per month, which this increases effective rent to $1,200 per month for the tenant. During the term of the lease, the tenant will have to pay this amount, but when the lease is finished the tenant will demand a rent reduction of $100 so that total rent is again $1,100 (now $900 in rent to the landlord and $200 for the stormwater fee). The rent to the landlord is now $900 per month, or $10,800 per year, which implies a property value of $10,800, which is 10 percent lower than before the stormwater fee increase. 4.1 DATA The total assessment of private, non-residential properties is $4.4 billion. Their total market value in the OPA system is $16.2 billion. However, the total market-value as reported by OPA is not equal to the value that the parcel would sell for in the open market. Estimates indicate that for non-residential parcels, the OPA value is approximately 70% of the actual market value (the value the parcel would actually sell for in the open market). Adjusting for this 70 percent factor, the total actual market value of these 50,623 parcels is $23.7 billion. It should be noted that the City is currently in the process of reassessing all of its properties and is changing how it assigns assessed value. Once the process is complete, assessed value will be set at the true market value.

16 Page ANALYSIS If the shift from meter to parcel-area based fees is revenue neutral across the city, then in the aggregate, there is very little change in property value across the city. However, individual properties will experience property value increases or decreases as discussed above. 10 We can calculate the impact increased stormwater fees will have on the value of private non-residential parcels using the same method used to calculate the property value of income generating properties. Under the direct capitalization approach the net operating income of a property is divided by the capitalization rate to calculate the property s value. The standard method for converting an annual amount, such as rental income or a stormwater charge, into a market value is through the use of a capitalization (cap) rate. 11 Assuming the increased stormwater fees decrease the net-operating income of the property on a dollar for dollar basis (because the increase in stormwater fees leads to a dollar for dollar decrease in a property s rental income), the property value impact of the increased stormwater fees is calculated by dividing the increase in the stormwater fee for each parcel by the capitalization rate. As illustrated in Table 11, the increase in stormwater fees will lead to a lead to an aggregate property value decrease of $190 million for private, non-residential properties, assuming all eligible properties apply for reassessment after the shift to parcel area-based stormwater fee billing has been fully implemented. Table 11: Private, Non-Residential Property Value and Tax Implications Decrease Net Increase Totals Not Industry / Use Type Previously Billed SW Fees Previously Billed SW Fees Previously Billed SW Fees All Properties Increase Only Property Value in OPA Data $14,797,835 $10,441,294 $2,806,675 $28,045,804 $13,247,969 OPA to market conversion factor 70% 70% 70% Current Property Value (000) $21,139,764 $14,916,134 $4,009,536 $40,065,434 $18,925,671 Increase in stormwater fees (000) -$13,557 $22,817 $9,832 $19,092 $32,649 Cap rate 10.0% 10.0% 10.0% Change in market value of property (000) $136,000 -$228,000 -$98,000 -$190,000 -$326,000 Percentage Change 0.6% -1.5% -2.4% -0.5% -1.7% Owners of properties that receive an increase in stormwater management fees, and thus experience a decrease in property values, can request that their properties be reassessed. Reassessment would reduce the individual s property tax, and thus the City s property tax base. On the other hand, a decrease in stormwater fees will lead to an increase in property value, and thus an increase in property taxes. The aggregate change in property taxes brought on by the shift in stormwater fees for non-residential properties 10 There will be a minor change in aggregate property values because tax-exempt properties benefit disproportionately from the switch from meter based to parcel based fees. Since non-profits pay little to no property tax, the increase in their property values does not lead to as much new tax revenue as is lost from the reduction of tax revenue coming from private property owners whose properties lost value. 11 A cap rate is the ratio of Net Operating Income (NOI) from a development to the market value of the property. The cap rate is determined in the market. If the NOI decreases, the market value decreases proportionately.

17 Page 13 is shown in Table 12. This table is not an estimate of total property tax changes because it does not include residential properties. Figure 2 shows the change in property value for non-residential parcels valued $5,000 or more. Table 12: Property Value and Tax Changes Decrease Net Increase Totals Previously Billed SW Fees Previously Billed SW Fees Not Previously Billed SW Fees All Increase Industry / Use Type Properties Only Change in market value of property (000) $136,000 -$228,000 -$98,000 -$190,000 -$326,000 Property tax as a percent of market value 2.03% 2.03% 2.03% Implied change in property tax (000) $2,767 -$4,638 -$1,994 -$3,865 -$6,632 Figure 2: Change in Property Values for Non-Residential Properties

18 Page 14 Total tax receipts would not be significantly harmed because properties that benefit from the shift to the parcel-area based system will see an increase in property value and thus an increase in taxes, and because any stormwater credits that a property earns will increase property values and hence tax collection. After accounting for these factors, the citywide property tax impact of the fees is minimal. 5.0 BUSINESS RELOCATION POTENTIAL 5.1 THEORY As previously discussed (Section 4.0, Property Values), the stormwater fee is based on characteristics of the land (parcel) and will not change the incentives regarding the location of a business. In principle, the fee should not cause businesses to relocate; though it is true some businesses will have to pay the fee in the short-term (because many commercial leases pass fees/taxes associated with the land along to tenants), when leases become due for renewal tenants will have an opportunity to negotiate their rent payments downward to compensate for the higher parcel area-based stormwater fee. Similarly, if the business owns the land and decides to sell that land and move the owner will find that the fee has diminished the value of the land, again removing the incentive to relocate. Generally the industries most affected by the change in the stormwater fee billing structure - retail, warehouse/distribution, and manufacturing - enter into Triple Net (NNN) leases with property owners if they do not own their properties. In a NNN lease, the tenant is responsible for paying all taxes/associated fees, insurance, and maintenance for the property, thereby relieving the owner of these burdens and passing them along to the occupant(s). Businesses leasing their buildings/property from an outside entity will be responsible for paying the increased stormwater fees and generally will not have opportunity to relocate in response to the fee increase until the end of the lease term. (Potential) tenants may have the chance to negotiate with property owners to lower their stormwater burden during lease negotiations but any such instances will be highly circumstantial. In the case of businesses that own their properties, the increase in stormwater fees reduces the value of the business (and land), but it does not change the incentive for the business to relocate. Businesses that are located in Philadelphia are presumably located there because it is the most profitable place for them to be located. 12 Otherwise, a firm would sell its land and move the business elsewhere. After the stormwater fee increase, the business has two choices stay or leave. If the business stays, it pays the increased stormwater fee every year. If the business decides to leave, it would save on the stormwater fee but discover that the value of its land has decreased by the present value of the savings in the stormwater fee, which offsets the value of annual savings. Thus, the business is impacted either way, and cannot increase its value by moving. 12 If this is not true, then there is some other reason the business is located in Philadelphia. In this case the economically rational thing to do is relocate. If the stormwater fee increase sufficiently angers the owners of a business that already would be more profitable to operate elsewhere, then the fee could have an impact on relocation decisions.

19 Page 15 Consequently, theory suggests the stormwater fee will have no impact on business location decisions in the long run, even though it will impact the value of existing businesses that own their land. 5.2 APPROACH To the extent an appeal to theory is not persuasive; an analysis of specific examples can shed light on the influence of the stormwater charge. This analysis examines archetypal firms from the three most heavily impacted industries to assess the impact the stormwater fee change has upon them. These firms include two warehouse/ distribution firms, two manufacturing firms, and several retail firms. Three of the retail firms are examined separately because of significant differences in retail market structures. For each of these firms, the following question is asked: How does the increase in stormwater charges influence a decision about where to locate? We have analyzed the business needs of these companies, operational land and structure requirements, and their relative costs of doing business to determine the municipalities where these firms would likely consider relocating as well as the likelihood they would do so as a result of the shift to the parcel areabased stormwater fee billing structure. Businesses likely to move outside Philadelphia in response to the change in the stormwater fee structure are those for whom there are economic incentives/advantages to moving - namely lowered costs of doing business relative to those currently realized in the City of Philadelphia. Where pertinent, it is indicated whether the economic incentive or advantage to relocation is a direct result of the stormwater fee in Philadelphia or a result of a different factor or combination of factors. Through extensive research on the costs of doing business in the region, analysis of commercial real estate, and discussions with commercial real estate brokers we have identified several municipalities in the greater Philadelphia region where businesses from the three targeted industries leaving Philadelphia would likely move to. These jurisdictions are located in five different counties across Pennsylvania, New Jersey, and Delaware. They were selected for this analysis because of the availability of suitable commercial/industrial real estate (including size, cost, and class), the proximity to transportation infrastructure, particularly the Interstate-95 corridor and Delaware River, and other factors. Our analysis looks at these alternative locations: Bensalem, PA; Lower Bucks County Bristol, PA; Lower Bucks County Folcroft, PA; Delaware County Chester City, PA; Delaware County Chester City, PA was identified by commercial real estate agents as being a prime a location for afflicted businesses to move. Further research indicated that over the last 10+ years there has a been a significant amount of industrial investment in Chester City largely as a result of the Keystone Opportunity Zones (KOZs) established in parts of the city in Businesses operating in KOZs or those that choose to move into them enjoy a substantial program of credits, waivers, and broad-based tax abatements on the state and municipal level that significantly reduce the costs of doing business. In return for these incentives, businesses moving into the area are required to commit a significant amount of capital to the land/building/labor force/etc. (specifications vary case by case and year by year). The KOZs in Chester City are currently set to expire in 2013 meaning the incentives will cease (as will the required capital commitments).

20 Page 16 Logan Township, NJ; Gloucester County Florence Township, NJ; Burlington County New Castle City, DE; New Castle County 5.3 DATA To compare the costs of doing business in these municipalities, we first gathered sets of data for each of the representative companies (see Table 11). We then collected information and developed estimates for each of the following statistics to estimate the total costs of doing business in: Parcel size; Building size; Water usage; Electricity and gas usage; Number of employees; and Wage rates for employees. We collected data on the following costs in each potential municipality 14 : Lease rates and building occupancy costs; Property taxes; Local and State Business taxes; Utility costs/fees, including gas, electric, and water; and Labor pool / labor costs. In addition, we obtained data from various sources on the average number of square feet per employee, electricity usage per square foot by industry, natural gas usage per square foot by industry, and water usage per employee by industry. 15 Detailed business information for each sample firm is available below in Table 13: 14 All tax rates were obtained from each municipality and state s publicly available websites. Utility, water, and sewer costs/rates were determined after identifying the utility providers in each municipality and obtaining their rate information through their publicly available websites or through verification via telephone. 15 Statistics regarding the average electricity and natural gas usage by industry were obtained through the U.S. Energy Information Administration; average wage rates by industry in each municipality were obtained through the United States Department of Labor Bureau of Labor Statistics website, where this data is publicly available at the county level.

21 Page 17 Table 13: Business Statistics for Representative Firms Medium Scale Distribution Center Large Scale Distribution Center Large General Manufacturer Specialty Manufacturer Dealer Related Auto Body Shop Building Sq. Ft. 141,000 1,000,000 2,700, ,225 28,396 Impervious Surface 163,500 2,233,615 2,621,500 1,139, ,000 Gross Area 241,500 3,071,500 2,881,500 1,564, ,500 Property Market Value $900,000 $39,820,000 $8,056,600 $14,285,714 $1,157,780 Market Value per Sq. $6.38 $39.82 $2.98 $20.79 $25.74 Property Tax Bill (Annual) $26,156 $1,157,265 $121,161 $290,624 $21,245 Size of Workforce 85 1,200 3, Parcel area-based Stormwater Fee $19,451 $39,354 $298,907 $133,935 $23,306 Stormwater Fee Increase $17,975 $24,807 $252,410 $110,063 $23,142 % SW Fee Increase 1,217% 171% 543% 461% 14,118% While operating within the city of Philadelphia, these businesses are subject to the city s tax structure. In addition to federal and Pennsylvania state taxes, businesses in Philadelphia must pay business privilege (which includes taxes on net income and gross receipts) and use and occupancy taxes. The majority of these tax rates vary by industry. The stormwater fee, sewer fees, and water bills are all paid to the Philadelphia Water Department (PWD), which supplies and treats water for the entire city as well as some outside municipalities. Gas and electric in Philadelphia are supplied by the Philadelphia Gas Works (PGW) and PECO Energy (PECO) respectively. A detailed list of the tax rates and utility rates unique to the City of Philadelphia is provided in the Appendix. These are the published city-wide rates, and many businesses in Philadelphia have been/can be granted significant subsidies and/or exemptions that relieve them of a significant portion of these burdens. 5.4 ANALYSIS For each industry (retail, warehouse/distribution, manufacturing), we developed a pro-forma model to compare the estimated costs currently incurred by the firm in Philadelphia to what costs would be in each of the alternative jurisdictions. The results are presented in Table 13 and Table 14 below. Negative values in the tables below indicate a firm can save money by moving their operations from the City of Philadelphia to an alternative jurisdiction, and positive values indicate that even after the full stormwater fee increase has been taken into account, it is cheaper for the firm to remain in the City of Philadelphia WAREHOUSE/DISTRIBUTION AND MANUFACTURING We have classified parcels use as warehouse/distribution or manufacturing based on their primary and secondary descriptions as provided by PWD and OPA data. As previously mentioned, these two subindustry classifications are among the top three most negatively impacted industries. In total, the transition from meter to parcel area-based stormwater fees for warehouse/distribution and manufacturing parcels will account for $17.1 million or approximately 33% of all stormwater fees under the parcel based system.