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Bethlehem wants to boost affordable housing. How much should developers pay to opt out?

Amid the Lehigh Valley’s housing shortage, Bethlehem’s considering creating a special tax abatement zone to entice developers to build more affordable housing in the Southside.

Mayor Bob Donchez wants to create a new Local Economic Revitalization Tax Assistance — or LERTA — zone covering vacant lots in South Bethlehem that would offer developers a tax abatement and force them to make 10% of their new residential development on the lots affordable housing.

The proposed program would allow developers to pay into an affordable housing fund in lieu of building affordable units, but some Bethlehem City Council members believe the proposed fee of $25,000 per deferred unit is way too low.

“If we do a tax incentive abatement we must ask (developers) to give back because this is taxpayer money they are getting assistance with,” said Councilwoman Grace Crampsie Smith, who led the city’s affordable housing task force and supports mandatory inclusionary housing. “... In Pittsburgh, their average fee per unit is $200,000 and State College is $129,000 and that is a far cry from the $25,000.”

Bethlehem proposes funneling those opt-out fees into an affordable housing fund that could be used to rehab housing, acquire blighted properties, build affordable housing and support low-income populations.

City Director of Community and Economic Development Alicia Miller Karner said there are many opinions on what the in-lieu-of fee could be.

“We had pushback from the development community,” she said. “They wanted to pay something very small.”

She acknowledged $25,000 may not complete one unit, but it is in the ballpark of what is spent on the city’s owner-occupied housing rehab program.

“I thought you dropped a zero there,” Councilwoman Dr. Paige Van Wirt said bluntly.

If the city sets the fee too high, developers won’t do the project, Karner said. She noted most of the properties have been vacant for more than two decades.

“If it’s a numbers game and if the numbers get too high it is not affordable,” she said.

Crampsie Smith counters that developers could save $1 million to $2.5 million over the 10 years of the abatement. She wants the city to create a standardized formula.

“I have to be an advocate for the taxpayer and those who need affordable housing,” Crampsie Smith said.

State law allows municipalities to create LERTA zones with the cooperation of local school districts and the country government. Once a zone is enacted, the property owner gets a 10-year phased tax abatement on any increased property assessment, where 100% is exempted in the first year and then it decreases 10% annually. The law gives cities flexibility to craft LERTA zones to solve unique community challenges.

“We know when we put LERTA on buildings it incentivizes demolition,” Karner explained.

Bethlehem proposes targeting vacant Southside parcels, like the SteelStacks ruins lots and Peron Development’s Flats urban infill project, for the zone but excludes buildings like the No. 2 Machine Shop. The only two buildings included are the former Martin’s Furniture, 414-416 E. Third St., and Cutters Bike Shop building, 418 E. Third St., at the request of the owner, Karner said. A Peron subsidiary bought the former Martin’s building for $440,000 in September of 2020.

Any new residential development of 10 or more units in the zone would need to make 10% affordable, defined as homes where all rent and utilities do not exceed 30% of the resident’s gross income, according to the proposal. Developers would need to follow the federal Department of Housing and Urban Development income and rent limits for the Bethlehem area.

“The life of the LERTA is 10 years and we want those units to remain affordable for 10 years,” Karner said.

Bethlehem proposed LERTA

Bethlehem is considering creating a LERTA tax abatement zone on vacant Southside lots to encourage developers to build affordable housing.Courtesy City of Bethlehem

Bethlehem currently has a LERTA covering a portion of the city north of the Lehigh River and Southside, and saw success using it in the central business district previously.

The Lehigh Valley’s regional housing shortage means a lack of affordable housing and high-end housing is creating a property deficit that leaves lower-income residents competing against more affluent folks for the same housing. Rent increases outpace many people’s salary growth and limited inventory is causing home sales prices to skyrocket.

Rents in Bethlehem increase about 4% annually. Currently the average one-bedroom costs $1,500 a month to rent, while two-bedrooms go for $1,725, Karner said. Nearly half of city residents are low-to-moderate income and 48% of households make less than $50,000.

The median city resident makes $45,850 a year and can afford to pay $1,146 a month in rent based on the rule that one should devote 30% of their income to housing costs, Karner said. This disconnect is why 41% of tenants are cost-burdened and 18% of homeowners are cost-burdened.

“I am really scared it is getting worse and we don’t want to lose what our city is all about,” Crampsie Smith said. “We don’t want people born and raised here to feel that they have to leave. It is a real pervasive problem.”

With rents so high, some homeowners interested in downsizing can’t afford to sell their homes contributing to the region’s housing crunch, she said, noting she knows many people in that boat.

Since 2012, city zoning has allowed developers to build more densely if they include affordable housing, but none has been built. Crampsie Smith supports the idea of inclusionary zoning — where a city requires or incentivizes developers to provide affordable housing to promote mixed-income neighborhoods.

Bethlehem opted to pursue a LERTA zone with some of the same principles since the legality of inclusionary zoning in a Pennsylvania third-class city like Bethlehem remains unclear, Karner noted in a July 27 memo to city council drafted on the heels of a July 20 meeting of council’s finance committee.

The proposed program was first presented to council at the finance meeting, where it was met with a mixed reaction. Crampsie Smith, Van Wirt and Councilman J. William Reynolds all agree the city must tackle affordable housing, but the cost of the fee came under fire and the proposal could not get enough backing to go to the full council.

Reynolds praised the administration for linking economic development incentives with the city’s affordable housing goals. The Democratic mayoral candidate emphasized Bethlehem is the first in the Lehigh Valley to do so.

Both Van Wirt and Crampsie Smith criticized the $25,000 fee for being too low. Van Wirt requested a second committee meeting where Councilman Michael Colon, who missed the July 20 meeting due to a personal emergency, could attend.

There are three models of payment in-lieu of affordable housing the city considered, Karner said. With the affordability gap model, you take the market value rent of a unit and subtract what a low-or-moderate-income household can afford. The gap is calculated per unit and then multiplied by the number of units a developer would’ve built.

In Bethlehem, the calculation generates a cost of $42,450 per unit, based on a $354 affordability gap from the average $1,500 rent, Karner’s memo notes.

But this ignores that the land in the proposed LERTA largely rests on former Bethlehem Steel Corp. land presenting unique redevelopment hurdles, Karner said. Height restrictions in the Southside Historic District as well as parking limits are other limiting factors, she notes in her memo.

“We’re incentivizing development on a brownfield. The parking lots may look pretty innocent, but every parking lot on Third Street has had problems with hazardous materials or poor materials,” Karner said in an interview. “You have to balance that. It is not just they should pay $100,000 a unit because they get a $1 million abatement.”

The production cost method sets the in-lieu fee by finding the difference between the cost of developing a similar affordable unit and the income it generates and then multiplies it by the total units the developer must build. This requires surveys of recent affordable housing projects, which are often built by nonprofits.

“We do not have nonprofits doing developments of this scale to share with us,” Karner explained.

The third option is to set fees based on project density or location or other priorities based on a square-foot charge and the gross floor area. The environmental factors and potential height limitations in the Southside Historic District could all factor into this, she said.

“We used a bit of a combination of those three when trying to set what that fee should be,” she said. “We set the fee at $250,000 we don’t have projects. ... We wouldn’t get a program off the ground if we set a fee that was so high it was a deterrent.”

Karner said she heard varying viewpoints from council on who should be prioritized for affordable housing from the lowest-income earners to residents getting priced out of the rental market. Her job is to balance all of these concerns.

“We are confident we can find a workable solution for everybody,” Karner said.

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Sara K. Satullo may be reached at ssatullo@lehighvalleylive.com.