Thursday, February 4, 2016

Why Jersey City's New unPILOTed Skyscraper Will Help Taxpayers, Not Necessarily the Public Schools


One piece of very exciting news in Jersey City over the last few weeks is that ground has been broken on a new skyscraper which will be the tallest building in New Jersey.

The final plan for 99 Hudson Street is for it to be 900' tall, 76 storeys, and 1.5 million square feet.  It will be 120' taller than the nearby Goldman Sachs Tower, currently Jersey City and New Jersey's tallest building.

Built for $500 million by China Overseas America, 99 Hudson Street will have 780 condominiums, 15,000 square feet of retail, and 7500 square feet of public plazas and open green space.  The views from the top floors will be "the best in the world."

Unlike the many high-rises elsewhere in Jersey City, which are built atop parking garages, 99 Hudson's base will be pedestrian-friendly, with storefronts and granite and limestone pillars.

As Mayor Steven Fulop proudly said:

This is another milestone moment for Jersey City.  Our plan here is to continue building a world class skyline and to continue leading the region in job creation with projects like this, and we couldn't be more excited to attract hundeds of millions of dollars of investment into the city.  This project is going to further put Jersey City on the map.

This is fantastic news for Jersey City and New Jersey.  Jersey City is a relatively small city, but thanks to 99 Hudson and many other skyscrapers, it has one of the best skylines in America. Once 99 Hudson is complete, Jersey City will have a taller building than "major-league" cities like Boston, Charlotte, Minneapolis, Atlanta, Pittsburgh, San Francisco, and Miami.

Jersey City already has taller buildings than Brooklyn and Queens.

And, in an extraordinary rarity for Jersey City, 99 Hudson Street will pay full taxes. 

Unlike the new skyscrapers being built at Journal Square and nearly every development downtown, 99 Hudson has no PILOT.  That's right, no abatement.  This property will pay the same taxes per dollar of official assessment that all non-PILOTed property pays.  Yep, Hudson County, the Jersey City Municipality will divide taxes on 99 Hudson Street in their usual 21%, 24%, and 50% split.

Mayor Fulop recognizes the full taxation as surprising to Jersey City-observers and was pleased to announce on his Facebook page that 99 Hudson was PILOTless:

We have gradually been working on phasing back long term tax abatements on the waterfront which were given out for the last 25 years. It has taken time but I feel good about the direction we have been moving and where we have arrived.
Today, I want to share that we had a groundbreaking on the largest building in NJ in our soon to be largest city in NJ. This includes $500 million investment into JC. NO tax abatement or subsidy. This is the first condo project in 8 years in JC. This is the 6th largest residential building in the USA. I am excited that this project is entirely international dollars as we become more of a global city attractive for investment based solely on our neighborhoods.  [my bold, Mayor Fulop's capitalization.]
I can only estimate what 99 Hudson Street's official property assessment and real value will be, but based on a few peer buildings, it will be very, very high.

(See http://tax1.co.monmouth.nj.us/cgi-bin/prc6.cgi?&ms_user=monm&passwd=data&district=0906&srch_type=0&adv=0&out_type=1 for tax assessments on individual properties.)

In size, 99 Hudson's nearest peer is the Goldman Sachs Tower, aka 30 Hudson Street, currently the tallest building in NJ.  The Goldman Sachs Tower is an office building and is PILOTed anyway, but its official assessment on the Jersey City tax rolls is $119,163,300 (Note: $119 million is not even remotely the GS Tower's real value due to Jersey City's lack of an up-to-date assessment.)

Trump Plaza, aka 88 Morgan Street, is also luxury condominiums and is a better comparison, although it is also PILOTed.

Trump Plaza's condos seem to be badly underassessed even by Jersey City standards.  Records indicate recent sale prices above $1 million, but assessments are in the $200,000 range, although there are some apartments assessed significantly below that, even as low as $100,000.  However, despite the drastic underassessment and the tax abatement, Trump Plaza's apartments and accessory properties have a total, official assessment of $66 million, or more than 1% of Jersey City's total, official assessment.

Trump Plaza may be a symbol of the problems of Jersey City's property assessment and PILOTing, we can use it to get a ballpark figure for what 99 Hudson Street's assessment will be.

Trump Plaza has 445 units.  99 Hudson Street will have 781, so 75% more units than that, plus some retail.  If 99 Hudson Street's official assessment is proportional to Trump Plaza's (and prices are not discounted due to the exposure to full taxation, 99 Hudson Street's assessment will be at least $115 million. 

Jersey City's official assessment is now $5,932,776,544.  $115 million is 2% of that.

At a $115 million assessment and Jersey City's 7.482% general tax rate (the "general tax rate" is the rate on official assessment), that means $8.6 million in new taxes.  The municipality would get about $4.3 million, Hudson County would $1.9 million, and the Jersey City Public Schools would get $2.1 million.

So about  $2.1 million for the schools?  This is great news for the Jersey City Public Schools, right????

Wellll........ Not quite. 

99 Hudson Street's full taxation is good news for the Jersey City taxpayers but not necessarily the Jersey City Public Schools. 

By itself, new ratables are budgetarily meaningless for a school district because a Board of Education sets a tax levy, not a tax rate. 

This point is often misunderstood because tax rates are always publicized, but the tax rate is given solely for informational purposes.  The tax levy determines the tax rate, not the other way around. 

Whatever (legal) tax levy a BOE sets a BOE gets.

After a tax levy is approved by a BOE, the tax assessor automatically and silently apportions tax responsibility among taxpayers based on their share of the school district's total assessment.  

The fact that the tax levy is the operative factor in taxation means that if a new building is built in a town and starts to pay $1 million in school taxes the BOE doesn't automatically get a cent more.  If the BOE doesn't change the tax levy, the addition of that new money means that every other taxpayer’s taxes are reduced by $1 million.  Conversely, if a non-profit buys a building that formerly paid $1 million in taxes then everyone else’s taxes automatically increase by $1 million.

The fact that a BOE sets a tax levy and not a tax rate means that PILOTs are more a tax problem than a school budget problem.  In 2013 candidate Steve Fulop said that "The City's tax abatement policy has long robbed the school system of necessary resources" but it's more accurate to say that the city's tax abatement policy "robs" the taxpayers. 

Taxes and the budget are linked of course, but the only way PILOTing "robs the schools" is if you assume that the Jersey City BOE increase taxes in proportion to the increase in ratables, since when ratables increase an X% tax levy increase would be less than a X% tax increase for individual taxpayers due to the enlarged tax base.

And would the JCBOE be willing to increase taxes above 2.0% if the tax base were growing more rapidly, ie, there were were no PILOTing?

Not based on the JCBOE's recent history.

Jersey City pays only 30% of its Local Fair Share, so the JCBOE is economically better situated than almost any other K-12 district in New Jersey to increase taxes above 2.0% and yet it has not used the health insurance and student population growth adjustments that every BOE has to do this and increase money for education.

However, despite Jersey City's relatively low tax rate, rising ratables (despite the PILOTing), and rising Equalized Valuation, Jersey City keeps its tax levy increase at 2.0% or below.


99 Hudson will be a palpable boost to Jersey City's property base, but unless the Jersey City BOE passes a tax increase larger than 2.0%, 99 Hudson's non-abatement is something for taxpayers to celebrate, not necessarily advocates for higher school spending.

What will 99 Hudson's Assessment be After the Reval?

Pinning a general assessment on 99 Hudson is speculative, so it would be even more speculative of me to try to estimate what the valuation of 99 Hudson Street will be after Jersey City does its reval and downtown assessments reflect market values, buthere goes anyway.

99 Hudson's land value alone is 10x its official assessment.

The official assessment for 99 Hudson Street's 1.7 acres is $6.8 million, but the land was sold in 2011 by Bank of America to Hartz Mountain for $35 million and then sold again in 2013 by Hartz Mountain to China Overseas America for $68 million.  

If you want to make a guess at what the assessment will be after the reval, you can look at the recent sale of the 22 storey Newport Office Center 5 (575 Washington Blvd) which JPMorgan Chase bought for $315 million in 2014. (Incidentally, this is a PILOTed building.)



The Newport Office Center 5's official assessment is only $50 million, so the Newport Office Center's assessment was one sixth of its true value.

In any case, I think it's safe to assume that 99 Hudson alone will increase Jersey City's Equalized Valuation more than what Newark, Elizabeth, Paterson, Camden, and Trenton combined gain in a year.




Will the new property wealth and income lower state aid?


If SFRA is followed to the letter, this will not change the total amount of K-12 aid Jersey City gets, but it will cause some Equalization Aid to be converted into Adjustment Aid since 99 Hudson will increase Jersey City's Aggregate Income and Equalized Valuation and thereby Jersey City's Local Fair Share.

The non-impact on state aid may surprise some readers because in 2010 State Comptroller Matthew Boxer wrote a report on tax abatements where he claimed that the tax abatements distorted the distribution of school aid.  However, Boxer missed the significance of Adjustment Aid.

Boxer's argument hinged on the fact that PILOTed property is "invisible" to the formula for Equalization Aid and therefore allows a town to conceal its true wealth.
"When new development occurs in connection with a long-term abatement, the PILOT revenue is not reflected in its ratable base, meaning formula state aid continues to provide enhanced funding based on artificially low community wealth. The school district still needs the state aid at the enhanced level since the district itself does not see the benefit of the PILOT amounts, and taxpayers throughout the state pay the resulting bill. The system allows the municipality, in essence, to hide its true wealth from the school district and the state, resulting in the school district's continued reliance on the state for funding."
Boxer's report has been influential. State Senator Mike Doherty, Assessmbly Jack Ciatarelli, and myself have all picked up Boxer's argument and accused Jersey City of using PILOTs to hide its wealth and "siphon money" from the rest of the state.  As Jack Ciatarelli said in the summer of 2015:

“At a time when the state is experiencing a painful squeeze on its budget and can’t afford to make the full teachers’ pension payment, the abatements exploit the state school funding formula,” Ciattarelli said. “If communities want to provide tax abatements to encourage development, they should fund them from municipal and county taxes, not school property taxes.”
Doherty and Ciattarelli are right that there is exploitation taking place, but Jersey City is grotesquely overaided even based on its $21 billion non-PILOTed Equalized Valuation. More importantly, Jersey City's overaiding is sustained by the Adjustment Aid mechanism of SFRA.

Since Adjustment Aid does not allow a district to receive less than 102% of what it received before SFRA became law in 2008, Jersey City can never lose aid due to its increase in wealth unless Adjustment Aid is changed.

So 99 Hudson will increase Jersey City's embarrassment of riches and make its $418 million in K-12 aid and Abbott membership even harder to justify, but absent Adjustment Aid reform, it won't reduce by a cent the Jersey City Public Schools' aid.

At best, 99 Hudson Street, will strengthen the argument that Jersey City's state aid should be redistributed to needier districts, but there is no automatic loss of state aid.  

Source: User Friendly Budgets

(IMO, the best defense of Adjustment Aid is that if districts lost aid whenever they approved new development NIMBYists would be empowered and the housing crisis would be exacerbated.)

Conclusion

Jersey City's PILOTing has become increasingly controversial in the last few years, as the city has become more prosperous and the tax abatements seem less and less justified in order to facilitate development.  And yet, despite Jersey City's desirability, the City seems to be granting as many PILOTs as ever.

PILOTs are often condemned for hurting the schools financially, but the situation is more complex than this because the taxes raised by a Board of Education do not automatically increase with growth of the tax base.  A BOE cannot just passively preside over a growing tax base and watch significant new revenue come in; a BOE must increase its tax levy in proportion to the growing tax base in order to gain revenues.

So it's wonderful that 99 Hudson is being built without a PILOT and is expanding the tax base, but, strictly speaking, the lack of a PILOT is something more for Jersey City taxpayers to celebrate than Jersey City students, teachers, and public school parents. (Not that there's anything wrong with that.)

So Jersey Cityans, there's a lot to criticize about PILOTs, but if you are worried about the budgetary position of the BOE, you have to ask for higher taxes too.


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