Dechert LLP, one of Philadelphia’s wealthiest law firms, where partners made $3 million each in profits last year, wants to move its headquarters into a virtually tax-free zone in the city.
No way, responded officials who regulate Pennsylvania’s so-called Keystone Opportunity Zones, where businesses pay virtually no state and local business taxes.
Why is the state so opposed to Dechert’s proposed move into such a designated zone in West Philly’s Schuylkill Yards? Because Dechert did the same thing back in 2005, when it moved from Center City into Cira Centre and reaped more than a decade’s worth of tax breaks.
Now, with Cira Centre’s tax breaks having expired in 2018, Dechert is looking for another decade of tax breaks. And, the law firm contends there’s nothing in the law that stops businesses from such “zone hopping.”
Jeff Hornstein, executive director of the Economy League of Greater Philadelphia, blamed the system. “I don’t think Dechert’s being greedy. Dechert is doing exactly what a rational, self-interested actor would do. They’re lawyers. They know exactly how to play the law.”
So, Dechert has taken the state to court over its refusal.
“They can go wherever they want, but they shouldn’t be rewarded for leaving the zone,” said J. Michael Adams Jr., an attorney for the state’s Department of Community and Economic Development, speaking last month to a panel of Commonwealth Court judges considering Dechert’s appeal of the denial.
The fight, experts say, exposes a critical flaw in a program created more than two decades ago to spur investment in economically distressed areas with “abandoned, unused or underutilized” properties.
In Philadelphia, businesses have benefited to the tune of hundreds of millions of dollars — including an estimated $400 million at Cira Centre alone. Officials can’t say how the city is benefiting because there’s no system to evaluate the cost relative to job growth and incremental tax receipts.
The last time there was any rigorous stock-taking was in 2014 when Hornstein was director of policy and financial analysis for former City Controller Alan Butkovitz. At the time, the agency looked at how much these zones have cost the city. It found that 617 businesses received city tax credits worth $384.7 million from 1999 through 2012. Two-thirds of them were partnerships or limited liability companies with no employees paying wage taxes, the city’s main short-term payoff.
In 1999, Pennsylvania was the second state in the nation, behind Michigan, to create such tax-free zones.
One problem for state regulators is that the law setting up these zones does not say a company can get the tax breaks only once. The benefits are tied to a place (such as a land parcel or property), not a company. The omission exists not just because the benefits were originally aimed at “areas of economic distress” rather than specific companies, but also because the entire incentive program was conceived as a one-time bonanza.
“It was originally a once-and-done thing,” Joseph Gladeck, a former state House member and primary sponsor of the bill that created the Keystone Opportunity Zones, said last week.
But pressure soon mounted to do more zones, and Gladeck said he favored a second round, which happened in 2000. So, lawmakers kept going, creating more zones eligible for tax breaks.
The land where Cira Centre stands was designated as an opportunity zone in 2002. .
Not long before Cira Centre opened at 2929 Arch St., lawmakers also made it easier to qualify for the benefits.
Originally a company had to either boost employment by 20% or invest at least 10% of its total revenue from the previous year. The new way to qualify just required a company to sign a lease covering the duration of the zone and to spend at least 5% of the previous year’s revenue on rent.
That’s how Dechert qualified when it moved from what was then called the Bell Atlantic Tower at 1717 Arch St.
Hornstein describes Cira Centre, which opened in 2005, as Philadelphia’s Cayman Islands because it is home to so many investment entities.
The building, open for just eight of the 14 years covered by the city controller’s 2014 report, accounted for $6.7 million in new wage taxes, or 17% of the $39.2 million total, according to the analysis. Benefit to businesses was $200 million in tax credits, or 77% of the total, the report said. Updated figures were not available, but state officials said in a court filing that “it is reasonable to assume that the City made a roughly equivalent investment in Cira Centre from 2013 to 2018 as it did from 2006 to 2012."
In other words, Cira Centre businesses received at least $400 million in tax breaks, not including the property-tax exemption for the landlord.
Even as it enjoyed the tax breaks, Dechert’s employment at the Cira Centre headquarters fell to 461 last year, down from 700 when it moved there in 2005. The firm did not respond to a request for comment.
Founded here in 1875, Dechert, now with 60 offices globally, had $1.14 billion in revenues last year, according to the Legal Intelligencer, an industry journal.
Dechert is now looking to move to Brandywine’s planned JFK Towers at 3001-03 and 3025 John F. Kennedy Blvd. in Schuylkill Yards, which were made eligible for tax benefits in 2012.
Philadelphia Councilmember Helen Gym described the law firm as “an object lesson” in why the program needs to be changed.
“Last time they netted a decade of tax breaks for moving just a few blocks up Arch Street," Gym said "Their current attempt to game the system is nonetheless shocking — there is no excuse for the public to be subsidizing tax-free profits that reached an average of $3 million a year for each of the firm’s [equity] partners, while their cleaners and assistants are responsible for paying full wage taxes.”
The tax breaks for the vacant land west of 30th Street Station, where the new towers are expected to rise, is set to expire in 2022.
“It is likely that the respective property owner will request an extension of KOZ benefits before the current expiration date,” a spokesperson for the Philadelphia Commerce Department said. Brandywine, which is leasing the land from Drexel University, did not respond to a request for confirmation that it will request the extension.
Gladeck said he had been proposing the establishment of economic development zones for “bombed out” areas since the 1980s, and never contemplated what officials are now calling “zone hopping.”
"We never thought somebody would go from one zone to another,” he said.
The Community and Economic Development Department wouldn’t say how many companies have moved from one zone to another.
But as Cira Centre was nearing the end of its designation in 2018, "the department noticed an uptick in relocation applications, which could potentially undermine the purpose of the program,” regulators said. And, that is why the department instituted its “no zone hopping policy.”
While the law is silent on whether a company can get the benefits a second time, it does have a provision to claw back benefits from companies that leave a zone within five years. The state has recouped benefits from five companies, a spokesperson for the economic development department said.
In other cases, companies have moved from one active zone to another. FS Investments, for example, in 2015 moved its headquarters from Cira Centre to South Philadelphia’s Navy Yard, another popular KOZ. To get the tax benefits at the new location, “the company was subject to enhanced relocation requirements,” the state said.
It’s not clear when Commonwealth Court will rule in the closely watched Dechert case.
At the hearing, judges seemed split into groups. Some focused on whether the law explicitly prohibits “zone hopping.” “What is your statutory foothold for your interpretation?” Judge P. Kevin Brobson asked.
Other judges were more interested in how Dechert’s move into a new zone with a new round of benefits would undermine the legislature’s goal of promoting economic development in particular places.
“I think there could be a very detrimental unintended consequence,” said Judge Ellen Ceisler.
Joseph C. Bright, a Cozen O’Connor attorney representing Dechert, discounted that notion: “Once you build a Cira Centre, a handsome, attractive building, it’s going to attract other tenants, and in fact it does.”
Still, Rich Hudic a former state official who was the first manager of the KOZ program, was shocked to hear that Dechert might be able to move its headquarters to a new zone and get the benefits again.