For real estate investors who take on value-add construction projects or new developments, the increased cost of construction makes it very challenging to make a project pencil.
For investors seeking to enhance returns, the LERTA program can significantly help boost NOI by providing an abatement of property tax over a period of time.
As most investors have experienced, when significant improvements are made to a building involving permits and revitalization, there may be a property tax increase because the assessed value goes up.
The LERTA program, short for Local Economic Revitalization Tax Assistance, when approved through local government, can provide an abatement or gradual ‘phasing in’ of the added property taxes, which increases the investment return of the property during that time.
Designed to stimulate redevelopment and attract investment in economically distressed areas, LERTA offers temporary property tax abatements for eligible improvements to real estate.
What Is LERTA?
LERTA is a tax incentive program created under Pennsylvania Act 76 of 1977, allowing local taxing authorities — counties, municipalities, and school districts — to offer property tax abatements on the increased assessment value of a property due to improvements.
This means you’ll continue paying taxes on the original value of the property, but the new value added through renovations or new construction may be exempted from taxes for a defined period.
- The exact terms of the abatement (duration, percentage of exemption) vary by locality, since each jurisdiction adopts its own LERTA ordinance.
- LERTA applies tax abatement to the value of the increase in property tax assessment due to rehabilitation or new construction.
- Generally, major improvements to a property will trigger a reassessment by the county assessment office.
- LERTA can provide up to a 10-year abatement that runs with the land, so subsequent owners within the abatement period still benefit from the incentive.
How It Works
Designation of LERTA zones: local governments identify and approve specific areas — often economically depressed neighborhoods or underused commercial corridors — as LERTA zones. Some municipalities permit it across the entire city or township, while others restrict LERTA to certain zones.
For instance, Lancaster city permits applications within the whole city, approved case by case. Each taxing authority — county, municipality, and school district — must approve the abatement for its own portion. The three taxing bodies don’t have to agree, and separate taxing bodies can apply LERTA designation independently of the others.
Approval process: once a property is located in an eligible area, the investor must submit an application for LERTA benefits, typically before construction begins. This usually requires a formal application to the local tax office, project plans, and timelines and cost estimates.
Tax abatement schedule: upon approval, the property owner benefits from a graduated tax abatement. A common structure is 100% exemption on the increased assessment in year one, 90% in year two, and so on down to 10% in year ten. After the final year, the property is fully taxed at its improved value. These schedules vary by municipality — some provide 100% abatement for a full 10 years, others provide 100% for the first 5 years and then phase in years 6-10.
Benefits for Real Estate Investors
- Lower carrying costs: by significantly reducing the property tax burden during redevelopment and the following stabilization phase, LERTA makes holding and developing properties more affordable.
- Improved loan proceeds: especially in the early years, the tax savings can directly impact NOI, which is crucial for leveraged investments — this may support a larger loan for improvements, reducing the cash outlay an investor needs.
- Stronger ROI: since property taxes are usually the largest expense on a property, reducing them leads to a significant increase in NOI. With reduced expenses and a freshly revitalized or newly built property, investors can realize stronger returns on capital.
- Increased property value: LERTA often acts as a catalyst for neighborhood improvement, boosting long-term property appreciation and future resale value as the surrounding area improves.
Ideal Investment Scenarios for LERTA
- Multifamily redevelopment: rehabilitating vacant or underused apartment buildings in designated zones.
- Commercial conversions: turning abandoned industrial or retail space into mixed-use or office facilities.
- New construction: developing new housing or commercial units in revitalization districts.
- Stacking with other incentives: LERTA can often be combined with programs like Keystone Opportunity Zones, New Markets Tax Credits, or Historic Tax Credits for a multi-layered incentive package.
Final Thoughts
For real estate investors focused on value-add or development strategies, LERTA offers a powerful incentive to invest in areas with untapped potential. By easing the tax burden during the crucial early years of a project, it creates a financial runway to stabilize operations and capture long-term appreciation.
If you’re looking to improve property and grow your NOI, contact us to discuss strategies to improve your return and save time.
