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Sweetening development deals in Jersey City.

Byline: David Jones

In April 2006, Coalco New York was awarded a 30-year tax abatement to help transform the former American Can Company site in Jersey City into a sprawling complex of loft residences.

The abatement was designed to allow the developer to pay 16 percent of its annual gross revenue, or the amount it earned before taxes and other expenses have been deducted, over 30 years.

But the market has changed dramatically in the past two years, and when Canco Lofts debuted in February, Coalco officials feared that buyers would be reluctant to purchase two miles from the waterfront, when prices were starting to drop in so many emerging neighborhoods in the area.

As a result of the weakening market, Canco was awarded an even more lucrative tax abatement arrangement by the City Council in Jersey City. The council reduced the annual payments to 10 percent for the first 10 years, 12 percent for the next decade, and 14 percent for the final 10 years.

"It is a tough location, and it is in a location where the city wants to spur development, so we went back," said James McCann, a law partner at Connell Foley, who negotiated the original tax abatement for Canco Lofts in 2006.

Looking for more sugar

Few of the major developers in Jersey City would discuss the Canco abatement, but government sources said the council has been approached about sweetening existing abatement agreements for other developers and is also negotiating more generous first-time abatements for new projects.

Even before the Canco deal, a number of developers had requested changes to their abatements; however, nearly all of those deals were for proposed residential buildings, instead of for completed projects.

After rejecting a change in January, the City Council did an about-face in May and agreed to a request by Short Hills-based Roseland Property Co. to restructure a 2006 abatement for its proposed Monaco Towers project, which would create 524 market-rate apartments in two buildings on Jersey City's waterfront.

Roseland initially wanted to trim the annual payments to 12 percent of gross income from 16 percent, and reduce the abatement term to 15 years from 20 years. But by the time the May vote rolled around, the market had weakened significantly, and Roseland got an even better deal. The new arrangement cuts the payments to 10 percent and the abatement term to 10 years.

Meanwhile, the city is also wielding its tax policy on new abatements to incentivize more building.

It is, for example, continuing to negotiate an abatement deal with MEPT Journal Square, a partnership that is developing a $500 million rental apartment and retail project designed to help revitalize the Journal Square section of Jersey City.

The partnership, led by Jersey City-based Harwood Properties and Bethesda, Md.-based Multi-Employer Property Trust, is negotiating a deal that would create a payment in lieu of taxes of 10 percent, based on a 30-year master lease agreement with the city.

"There is a lot of enthusiasm for the project both on the part of the developer and the city," said MEPT spokesman Alan Marcus. "There is the anticipation of a structure of a tax agreement."

However, the Jersey Journal recently reported that a memo written by a key city government official warned that the city would lose $500,000 in the first year of such an agreement.

Note: Correction appended

Opponents have blasted sweeter abatement deals like Coalco's because of the city's growing budget gap. They have also accused some city council members of engaging in quid pro quo politics by giving developers better deals in exchange for relatively symbolic gestures for the community.

"Rather than use the tax abatements as an incentive to build, they're using it as a plug for a budget gap," said Steve Fulop, a city councilman. "We need some more kind of professionalism around it."

Fulop, who represents downtown Jersey City, said that he appreciates the need for tax incentives, but that they have given the appearance of political payoffs and do not have any uniform criteria that determine which projects qualify.

Daniel Levin, former president of Civic JC, a local government watchdog group, says Jersey City residents are concerned that the subsidies for large development projects are driving up their real estate taxes without providing any benefit to them.

"Tax abatements have become a bad word in Jersey City because the public has lost confidence in the city's ability to negotiate fair agreements," said Levin.

Indeed, tax abatements have become the hottest of potatoes in Jersey City politics.

Nonetheless, officials at K. Hovnanian Cos., the Edison, N.J.-based developer of 77 Hudson in Jersey City, said they would not have built the 420-unit condo without the 20-year tax abatement they received.

"Generally without a tax abatement, you're not going to touch a property, because it won't make sense financially," said Thomas Graham, senior community manager at the property.

The abatement also applies to the sister property of 77 Hudson, an adjacent 481-unit luxury rental tower being developed by Equity Residential. Graham rejects the notion that homeowners are subsidizing new developments, noting that his company paid $7 million up front to Jersey City under the tax abatement deal, which was used to help plug a budget shortfall.

Appealing to first-timers

Jersey City brokers said that tax abatements can influence purchasing decisions, particularly among first-time homebuyers looking for a bargain.

"This isn't brain surgery," said Larry Perlaki, a broker at Joseph A. Delforno in Jersey City. "When it comes to attracting buyers from other markets, aside from being across the river from Manhattan, if the taxes are reasonable it would certainly attract a higher volume of people to the area."

He noted that properties like Canco Lofts are far more sensitive to sales prices and taxes, because the further away from the waterfront you go, the tougher it is to use location as a selling point.

"It makes a huge difference in someone's monthly payment," said Kristen Hurd, broker manager at Weichert Realtors Exchange Place in Jersey City. "It can make or break a deal."

Rosemary McFadden, deputy mayor, defends the use of tax abatements as a tool to stimulate development and encourage developers to revitalize parts of the city that are suffering from neglect.

"When you think of the development and the revenues that are going to be added, it's only going to add to the tax base," she said. "Granting developers some type of certainty as to what their taxes are going to be over a defined period of time encourages further development in this city."
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Author:Jones, David
Publication:The Real Deal
Geographic Code:1USA
Date:Jul 31, 2008
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