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Testimony of Kevin Gillen

Esteemed members of Council, thank you for the opportunity to be here today. My name is Dr. Kevin Gillen. I am an economist who currently holds a position as a Vice President with the Econsult Corporation, and also retain an affiliation with my alma mater as a Research Fellow with the University of Pennsylvania’s Institute for Urban Research.

I have been asked to testify today on the issue of “vacant properties and problem properties” in Philadelphia, and the economic and fiscal implications for both individual neighborhoods and the City as a whole.

I will begin with some basic numbers to help frame the discussion. According to the City’s own Office of Property Assessment:

• There are 54,769 parcels in Philadelphia that are either vacant land, or have an abandoned or significantly distressed structure on it.

• There are 579,360 total parcels in Philadelphia, implying that 9.5% of properties in Philadelphia could be classified as “problem properties”.

• There are 9.4 square miles of vacant or distressed properties in Philadelphia, out of 134 square miles of land in total.

• This implies that 7% of Philadelphia’s land area is vacant, or occupied by abandoned or distressed properties.

While this may not seem high, these properties are not distributed randomly throughout the city. But rather, are concentrated in specific neighborhoods.

For example, of Philadelphia’s 48 Zip codes, just 10 Zip codes contain nearly 2/3 of these properties. Moreover, these Zip Codes are themselves concentrated in just the three neighborhoods of North, West and South Philly. In these 10 Zip codes, the average number of problem properties is over 23,000.

To understand the implications of both the existence and concentration of these properties, I estimated a regression of recent house prices on their characteristics, such as size, age and location (among others), plus the number of properties in their neighborhood1

Using nearly 160,000 sales that occurred in Philadelphia over the last ten years, the regression results indicate that the presence of a single problem property in a neighborhood reduces nearby house values by an average of 1%. Given a current median house price of approximately $100,000 in Philadelphia, these results indicate that homeowners near problem properties suffer a loss in their dwelling’s value of $1,000.

that met the aforementioned definition of “problem properties”.

While this initially may or may not seem like a large number, it quickly becomes one when you consider the aforementioned high concentration of problem properties in just a few neighborhoods. In these

1 Defined as a dwelling’s Census Tract

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neighborhoods, the median number of problem properties is 45. So, the homes in these neighborhoods are worth, on average, 45% less, or approximately $45,000 less than they would be otherwise if the problem of blighted and abandoned properties didn’t exist. Further support for this result is provided by the median house price of $54,000 in North and West Philadelphia, which almost exactly 45% less than the median house price in the entire city.

This has larger fiscal implications beyond just the loss of wealth to affected homeowners in these neighborhoods. If we examine just those neighborhoods that had a relatively high concentration of problem properties, defined as having a number of problem properties that exceed the city’s average across neighborhoods, there is a total of 268,000 homes in these neighborhoods; or approximately half of the city’s entire housing stock.

Multiplying the average loss of $45,000 per home times the 268,000 homes yields a total loss in housing wealth of $12.1bn in the City’s tax base. Applying the City’s taxation formula to this number predicts that Philadelphia forgoes additional revenue collections of $347m per year as a result of these depressed property values caused by both the high number and concentration of problem properties.

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Of course, measuring the magnitude of the current problem may help move the policy debate forward over how to address this problem. However, recent research may also help make a more positive contribution by suggesting what to do about the problem.

This past spring, a team of economists from Penn and Econsult, of which I was a part, was contracted by the City’s own Redevelopment Authority to determine the individual values of the City holdings of vacant land. One of the more practical findings of our research was that adjacent parcels that had been assembled into one parcel had a market value that was, on average, 28% greater than equivalently-sized comparable parcels. This is presumably driven by the fact that it saves developers both time and money from having to assemble parcels themselves, especially if the different parcels are owned by different city agencies. These results suggest that the City has it within its own power to increase the market value of its vacant land, thus better positioning this land for redevelopment, if it undertakes the assemblage process itself before selling or disposing of this land.

Of course, one of our other findings is that much of the City’s vacant land currently has little to no market value at all. So, there is the natural question of what to do with this land in the interim if it currently has no development potential. Some very encouraging—albeit preliminary—results can be found in a recent study of the Pennsylvania Horticultural Society’s “Clean and Green” program.

Completed by Professor Susan Wachter of the Wharton School and myself, this study examined the effect on neighborhood property values of converting vacant and abandoned parcels to pocket parks, community gardens and other forms of green space. We examined the conversion of approximately 4,700 parcels over the course of 14 years from 1996 through 2010, using the universe of all home sales that occurred in these neighborhoods.

Our findings—which we stress are preliminary and not yet official—are as follows: the local presence of a vacant property is associated with nearby homes being worth an average of nearly 16% less than comparable dwellings in these neighborhoods. Note that this exceeds the previously mentioned 1% discount because it only looks at vacant land, and this program focuses primarily on the most distressed neighborhoods in Philadelphia where there is a high concentration of vacant parcels. Following conversion of a vacant lot to maintained green space, nearby homes are estimated to command a price premium of 2 to 5%, compared to other, similar homes in these neighborhoods. After five years, the median gain in housing wealth to the affected households was estimated to be approximately $35,000 while the median citywide house price during the study period was approximately $100,000; a significant gain.

We then examined the fiscal impact of the Horticultural Society’s “Clean and Green” program. First, we had computed that the average increase in the value of homes within a ¼ mile of a greened lot, net of any general house price appreciation, in the five years following conversion is approximately $35,000. Currently, 22% of Philadelphia’s housing stock of approximately 457,000 dwellings is within a ¼ mile of a greened lots; which implies that a little over 100,000 dwellings are positively impacted by this program. Multiplying the number of affected homes time the dollar gain in home values yields $3.5bn in additional housing wealth accruing to owners of homes within ¼ mile of a greened lot. Applying the

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city’s taxation formula to this incremental housing value estimates that an additional $100m in property tax revenue would be generated by the conversion of these vacant lots, if assessments accurately capture this increase in value.

Lastly, the net benefits of converting vacant land to green space can be computed by comparing the benefits of conversion to its costs.

According to the Pennsylvania Horticultural Society, the total cost of converting a vacant lot(much of which is supported with public funds from the City) includes cleaning, top soil, grading, tree planting, grass seed sowing, and installation of post and rail wood fence is estimated to be $1.20 per square foot. After conversion, ongoing maintenance, which includes 14 bi-weekly cleaning and mowing visits from April through October, is $0.12 per square foot. Both installation and maintenance costs include all PHS contractor management, quality control, and monitoring costs. Thus, the total cost of converting and maintaining a typical 900 square foot former row house property for ten years will cost around $2.40 per foot, or $2,160.

Multiplying the cost of $2.40 per square foot times the 6.4m total square feet of the cleaned and greened lots gives a total cost of the program of approximately $15.3m. So, when the total housing gain of $3.5bn is netted against the total cost of $15.3m, this yields a whopping cash-on-cash return of over 22,000%. Or, more simply, every dollar spent to clean and green a vacant lot increases housing wealth by $224; a significant return to say the least.

Since PHS does receive public funds for this program, we can also perform this same computation to see what the return to city taxpayers is, if we are allowed to assume accurate assessments. Netting the additional $100m in annual property tax revenues against the $15.3m cost of the program yields a cash-on-cash return of 643%. Or, more simply, every dollar spent to clean and green a vacant lot yields additional property tax revenues of $7.43. Lastly, this number likely understates the true return since we are only netting one year of benefits against the total cost of the program, which occurred over 14 years.

In summary, the economic and fiscal implications of problem properties are significant; both in allowing them to persist and in converting them to other uses. Recent research has found that:

• 9.5% of Philadelphia’s real estate stock could meet the definition of being “problem properties”. • 7% of Philadelphia’s land area is either vacant or occupied by abandoned or distressed

properties. • The presence of a single problem property is estimated to reduce the value of a nearby home by

an average of $1,000. • In those neighborhoods where these properties are disproportionately concentrated, the

reduction in house values can be as much as $45,000, or even more. • The total reduction in house values is estimated to reduce property tax revenues by $347m from

what they would be otherwise.

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• In those neighborhoods with high concentrations of vacant lots, the average discount in house values is 16%.

• For those vacant lots with potential market value, assemblage of these parcels increases their value by an average of 28%.

• Following conversion of a vacant lot, the median gain in housing wealth to the affected households was estimated to be approximately $35,000.

• PHS’s “Clean and Green” program is estimated to have generated a $3.5bn increase in the value of the City’s housing stock.

• If accurately assessed, this would generate an additional $100m per year in additional property tax revenues.

• The return to improving vacant lots is estimated to be quite high: every dollar spent on cleaning and greening generates an additional $224 in housing wealth and $7.43 in property tax revenues.

In closing, I thank Council for its time, and would be happy to take any questions at this time.