Incentives And Development On The Gold Coast Are 'A Tale Of Two Cities'

In New Jersey, the government's role in development is constantly pulled between two poles: Should it spur investment and economic growth, or fight to ensure that any growth is equitable?

As Gov. Phil Murphy and the state legislature struggle with the question of the state's expiring development incentives, local governments interact more directly with the developers who say they need incentives to keep building and constituents whose social services depend on tax revenue that incentives cut into.

Among the most common incentive programs is Payments In Lieu Of Taxes, better known as the PILOT program. The state law, which is not among those set to expire, allows municipalities to negotiate revenue-based payments from new developments or significant improvements rather than property taxes based on an assessment.

Many developers see PILOTs as necessary countermeasures to high construction costs, as they argued at Bisnow's Gold Coast Summit event at Liberty House in Jersey City on June 12.

“The biggest problem with [construction] pricing is a lack of certainty, and what the PILOT provides is certainty," Skoloff & Wolfe partner David Wolfe said. "If a project is expensive, a developer can handle that. But there’s an inherent amount of risk to come out of the ground without a PILOT, due to the uncertainty around the level of real estate taxes."

A sticking point across the state, especially in larger cities with more economic diversity, is that a chunk of property taxes go toward funding the local school district, while 95% of PILOT payments are required by statute to go directly to the municipality and the remaining 5% goes to the county.

“In Hoboken, that’s my concern with PILOTs, because even if the municipality benefits with 95% of the tax revenue, the schools really get the short end of the stick," Hoboken Mayor Ravi Bhalla said at the event.

Sending the money back to the schools can be an arduous process, Bhalla said.

“We’ve tried to identify workarounds at the local level to that statutory restriction,” Bhalla said, citing a PILOT deal with Bijou Properties where 30-40% of the city's payment would be earmarked for the school district — a similar percentage to its share of property taxes. “That has to be done on an annual basis with a resolution between the City Council and the mayor.”

To make the process more worthwhile to residents, Bhalla required some community benefit agreements from Bijou Properties, such as a public green space. To Bhalla and Jersey City Council President Rolando Lavarro Jr., that exchange is the only way municipalities can keep doling out incentives such as PILOTs and tax abatements.

Quid pro quo has been at the root of developer-municipality negotiations for generations, but at least in the Gold Coast, it had mostly been carried out in back rooms. Since Bhalla and Lavarro took office this decade, they have both stressed the importance of transparency in that process.

“We’ve negotiated several redevelopments agreements in the past year and a half, and it is a new process that some developers who have been around for a while aren’t used to, but it’s more community-involved,” Bhalla said. “But my job is to represent the interests of the community, while developers’ job is to maximize their return. And that’s where we negotiate from.”

When the citizens of a city become more aware of the negotiations surrounding a development, their natural inclination is to wonder what they get out of a deal. That has translated to tougher stances on incentives, especially in Jersey City, where the waterfront area has seen both buildings and rents grow higher at a fast pace.

“With Jersey City, the posture seems to be pushing back on the PILOTs and incentives,” HFF Senior Managing Director Jose Cruz said. “On the waterfront, it feels tough [for the city] to justify giving that money to developers, but on the developer side it makes total sense — they just know that it’s tough to build without PILOTs.”

Over the past year, Jersey City Mayor Steven Fulop has hardened his stance against incentives, but Lavarro tried to make it clear to event attendees that he is more amenable — for a price.

He has introduced legislation that would require all new multifamily developments to have 20% of their units set aside for residents making at most 80% of the area median income, without any alternatives such as paying into a housing trust fund or including public space.

“I’m certainly open to the idea of relief, but we wanted to start with a bright red line as a negotiating point, so when we come out of the next meeting we can start reconciling our differences,” Lavarro said.

Multiple panelists contended that adding such requirements effectively negates the benefits of incentives on a development's bottom line. Since the Gold Coast's main competitive advantage against New York for residents is its relative cheapness, and Jersey City continues to shrink that gap, there is little margin.

“The reason why you can build multifamily in New York with 25-35% affordable units is that there are tax abatements on a level that’s never even been considered in New Jersey,” Mill Creek Residential Trust regional development head Russell Tepper said. “When different communities around the state, including Jersey City, are increasing the affordable requirement, it would be my suggestion to at the same time look at growing the abatement to match that.”

Set-asides carry their own set of issues irrespective of what incentives come attached to them, as evidenced by the resistance Lavarro acknowledged to his no-alternative proposal. Bhalla expressed doubt at their efficacy.

“Quite candidly, I’m a little bit skeptical of inclusionary housing as the only method to bolster the affordable housing stock,” Bhalla said. “Essentially, you’re forcing for-profit developers to deliver housing that they’re not in the business of doing. And that’s why you see them keep trying to find ways to get out of it.”

The conflict between the civic needs of a city and the profit incentives of developers is one that will remain as long as the U.S. is a capitalist nation, but one thing the Gold Coast Summit's public and private sector panelists agreed is that more can be done to make negotiations easier for all parties.

“We had established certain policies around tax abatements, zoning and things of that nature, but a lot of that has kind of crumbled and frayed over the past couple of years, which has created uncertainty,” Lavarro said. “If we want [the waterfront] to continue at this pace and see resurgence for the rest of the city, restoring certainty is one of our biggest opportunities.”