City Councilman Al Taubenberger introduced legislation Thursday to close the loopholes used by parties in some of Philadelphia's biggest commercial real estate transactions to avoid or lessen the transfer tax on those deals.

The measure seeks to end a practice that has allowed the real estate transfer tax  — now 4 percent, but set to increase — to be paid against a sum that is less than a property’s actual purchase price. It also would make it more difficult to avoid the transfer tax by having former owners keep a partnership stake in a property, rather than selling it outright.

Taubenberger said his bill aimed to level the playing field between everyday buyers and sellers of real estate — who pay the transfer tax in full as a matter of course — and parties in big transactions that have the resources to avoid doing so.

"What I'd like to see happen is that the guy or lady in their rowhouse is really paying the same percentage that the really powerful corporations are," he said. "What we want here is fairness."

The proposal comes a month after an Inquirer analysis found that in some of the city's biggest commercial real estate transactions, the transfer tax  is regularly paid on a property value less than the purchase price, if it is paid at all.

Of the nine commercial real estate deals valued at more than $100 million since the start of 2015, the transfer tax was paid on the full purchase price only twice. The seven times in which it was not paid cost Philadelphia and Pennsylvania as much as $28.4 million.

The tax-avoidance strategies targeted by Taubenberger's bill are legal and are used at various levels of the commercial real estate market, though they are thought to be most prevalent at the high end, where the tax savings can be most pronounced.

In Pennsylvania, transfer taxes are set by municipalities, which add their own levies to a 1 percent fee charged statewide. Payment is generally divided evenly between buyer and seller.

Currently, Philadelphia charges 3 percent on top of the state levy, resulting in what is said to be the highest transfer tax of any major U.S. city. It's at least the highest among the 10 most populous U.S. cities, an Inquirer comparison showed.

In June, City Council voted to raise the transfer tax by an additional 0.1 percent effective Jan. 1, to help fund home repairs for low- and middle-income residents, among other housing-preservation initiatives.

Some say boosting the already-high tax could encourage even more avoidance, which would be a net negative for public coffers. 

"The transfer tax in Philadelphia is so high that people look for ways around it," said real estate broker and investor Allan Domb, who was elected to an at-large Council seat last year. "I think it would be revenue-neutral or revenue-gaining to lower this tax."

Taubenberger said his legislation could clear the way for lowering the tax if it brought in enough new revenue to offset a reduction.
One part of the councilman’s bill takes aim at the practice of structuring deals so the transfer tax is paid against a property's assessed value, which is often much lower than its actual purchase price.
Big commercial property owners can do this because they generally don’t directly own their real estate, instead setting up special subsidiary companies to hold it for them.
By buying and selling those property-owning subsidiaries, rather than the properties themselves, they’ve been able to avoid filing deeds that document actual purchase prices, leaving tax collectors to rely on assessed values.
Taubenberger’s legislation would end this practice by having the city assess the transfer tax on the actual amount paid for the corporate entity, rather than the value of the real estate.
The legislation also cracks down on so-called 89-11 transactions, in which the transfer tax is avoided by having sellers retain a stake of 11 percent or more in a property for four years or longer, so no deed is recorded at the time of sale and no tax is paid.

Under Taubenberger's bill, sellers would have to retain a stake of more than 25 percent in a property, and hold it for more than six years.

If passed, the legislation would make that strategy less useful in many commercial deals, though it is already seldom deployed because it keeps sellers locked into investments longer than they might like, said Kevin Greenberg, an attorney with the Philadelphia firm Flaster/Greenberg who specializes in corporate and real estate law.

But the provision calling for payment against actual purchase prices will be harder for officials to enforce, Greenberg said.

"Buyers and sellers who are dedicated enough to an aggressive tax-driven structuring will likely find another strategy to try to navigate the new language, whatever that ends up being," he said.

The bill was introduced with eight cosponsors in addition to Taubenberger, including Council President Darrell L. Clarke and Councilwoman Jannie L. Blackwell, who chairs the Finance Committee, where the legislation is expected to be sent first for consideration.

City spokesman Mike Dunn said the Kenney administration worked closely with Council members on the bill and supports "closing these loopholes."

Domb called the legislation an "excellent bill aimed at making government more efficient," but he said a better solution would be to reassess the city's commercial properties so their value on city tax rolls is closer to their actual worth.

"That's the elephant in the room," Domb said.