Wednesday, October 11, 2006

The Joy of UCIA (Park - Madison: The PILOT)

NOTE: Now that the Administration's love affair with the UCIA is being consummated, it's time to look a little more closely. Tuesday: The UCIA and Park-Madison. Today: PILOTs - The Money Shot. You will also want to read Bernice's post "City Presses Developer On Occupancy Issues".
First came 'The Joy of Cooking' (1931), which was about the joy of cooking. Then came 'The Joy of Sex' (1972). The title was a riff on the cookbook, but the subject was about getting -- uh, well, uh -- screwed. Then came 'The Joy of UCIA' (2000s). The title is a riff on the 1972 book, and the subject is about getting -- uh, well, uh -- screwed.
Tax abatements have been used across the country for decades to encourage development in what were once referred to as 'decaying inner cities.' The reason being, the argument went, that cities were a less attractive place than alongside highways or in open land formerly farmed or left to nature.

So, developers were offered a variety of incentives in which taxes were reduced or replaced for a number of years by formulas known as PILOTs (or PILTs) -- payments in lieu of taxes.

Economic development -- new offices, stores, industrial facilities -- is supposed to help the local economy by INCREASING the tax ratables of a community. In 'First Suburbs' like Plainfield, it is also hoped that economic development will rectify the long-term DECLINE in the share of the total tax base shouldered by the commercial, retail and industrial sectors. (Research I did at City Hall a number of years ago showed that this segment's share of Plainfield ratables declined from 34% in the mid-1960s to 18% in the mid-1990s.) It has been the residential property owners who have borne the brunt of this increased burden.

A lot of heat has been generated over the years about the application of these tax incentives. In fact, Plainfield has witnessed any number of shouting matches at public meetings where the technique has been on the table.

It is instructive in the first case to remember just what local property taxes are SUPPOSED TO BE FOR: to cover the cost of providing NECESSARY SERVICES to the residents and businesses of a community in a way that is FAIR, EQUITABLE and RELIABLE.

As abatements, PILOTs are supposed to provide SOME income to the community in recognition for services provided. Typically, the entire PILOT payment goes to the municipality -- with nothing going to the schools, the county or any other taxing necessity (such as open space funds or fire districts).

Until New Jersey's 1991 revisions kicked in in 1993, the state had a patchwork of long- and short-term abatement and exemption laws. The new law, the Long Term Tax Exemption Law (P.L. 91, c. 431) brought order -- and change -- to the existing situation.

The devil, as usual, was lurking in the details.

Municipalities were promised that they would NEVER RECEIVE LESS on the property than it did BEFORE development. (Park-Madison had
NOT been on the tax rolls for decades, so what's the hard part here?)

Also, in the case of long-term abatements on office and retail construction, the PILOT can be NEGOTIATED as a FLOOR OF NOT LESS THAN 2% OF TOTAL PROJECT COSTS (including construction, permits, fees, etc.), or 15% OF GROSS ANNUAL REVENUES (in a formula defined in the statute).

Nice, huh?

It all depends.

Just because negotiation is enshrined in the statute does not necessarily mean the community will get the best deal.

My years in real estate taught me both the importance of good negotiating skills and their relative scarcity.

If, in the Park-Madison project, we had anything like the equivalent of the public uproars over the Devils stadium in Newark, or the Giants/Jets stadium in the Meadowlands, PT will bet that you never heard of it. And those deals were probably more favorable to the localities than if no public fight had taken place.

What Plainfield seems to have ended up with is the BARE MINIMUM the statute allows: a 2% PILOT on the County OFFICE BUILDING and PARKING DECK.

You will recall from the previous post that Plainfield taxpayers had to foot the bill for the PERMITS and FEES -- over $100K. But here's the kicker: those fees would have counted in calculating the PILOT, meaning we are losing that percentage over the 30-year life of the agreement.

Chump change? Maybe, but every nickel is precious to cash-strapped towns of which Plainfield is -- and will continue to be -- one.

But that figure pales next to the other demand made by the UCIA and the developer (AST, currently working on the Marino's project) -- which Plainfield batted down -- that the PILOT be calculated NOT ON THE STATUTORY FINAL PROJECT COSTS but on a smaller preliminary figure.

As for the RETAIL PROPERTIES, again what we have is the MINIMUM deal -- 15% of the GROSS ANNUAL REVENUES. And here, as noted in the previous post, the UCIA argued that the new retailers be exempted from the SID assessments. Makes you wonder who was the UCIA's client, no?

Perhaps overlooked in all of this is that the services offered by the County and State offices in the new office building are REGIONAL in nature, assisting residents of the tri-county area. How is Plainfield recompensed for that in the PILOT? Wouldn't fairness demand that other entities, as at the County level, kick in somehow to help the host community? PT doesn't know whether this thought has engaged anyone in New Jersey, though it seems to have in Connecticut.

As for the MONEY, PT is not aware that the PILOT payments have begun. One observer (not myself) calculates that in the year and a half that there have been both retail and office occupants, the City has missed between $300K and $400K in payments.

That would certainly be useful on the income side as the Council looks at striking a new budget, wouldn't it?

But, there is ONE LAST SURPRISE: The 30-year clock on the PILOT doesn't start running until a Certificate of Occupancy is issued. Which still hasn't happened a year-and-a-half after occupancy.

Are there lessons to be learned as the Administration prepares to go forward down the primrose path with the UCIA?

How about these:
  • Get good at negotiating and negotiate tough for fair agreements.

  • Be watchful of everything and everyone.

  • Make sure agreements are honored IN FULL, by ALL parties.
Ah, the joy of UCIA!

-- Dan Damon

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