The city has endured criticism for years for giving developers "tax abatements," which exempt those developers from paying regular, fluctuating property taxes. The deal usually means the developer's annual payments will go straight to the city rather than to the city, the county, and the schools. Thus, regular taxpayers may have to contribute more to those budgets.
However, the new policy probably will not stem much of that criticism. Instead, it sets formulas for certain types of developers, in order to be more fair to the developers and close a loophole.
According to city Business Administrator Brian O' Reilly, the new policy will apply specifically to developers of rental housing. Those developers will have the choice of three tax abatement levels: 10-year terms, paying 10 percent gross annual revenue to the city; a 15-year term at 12 percent, and a 20-year term at 14 percent.
Usually, developers who receive 20-year abatements pay 16 percent of their gross annual revenue, whether it is it a rental or condominium. Condo projects will still be granted abatements with that 20/16 formula, or some variation thereof.
O'Reilly said last week the changes are being made because developers were opting for five-year abatements. He said this allowed them to pay conventional taxes in increments over a short period of time, rather than making direct payments to the city under the long-term abatements.
Also, developers receiving five-year abatements do not have to comply with the city's Project Labor Agreement, adopted by the City Council in June, mandating that developers with projects worth $25 million or more use union labor, and that 20 percent of the apprentices be Jersey City residents.
"They were taking advantage of a loophole, and we had to close the loophole quickly," O'Reilly said.
City Council President Mariano Vega said in an interview before the previous City Council meeting on Aug. 22 that the new abatement policy was needed.
He explained that developers complained to him that they were paying too much money under the city's current 30 percent tax assessment ratio when it compared to paying conventional taxes. A property selling for $1 million was taxed as if it had a value of $300,000.
"[The city] wanted to have a clear policy so the development community can say, I like it, I don't like it," Vega said.Stopping a taxing situation
O'Reilly was honest about the other reason the city was changing its abatement policy - to prevent the city from losing money.
The city depends on the revenues from long-term abatement agreements. One is the prepayment that helps the city bridge any shortfalls before the City Council approves the city's budget. Another is the payment that goes into the city's Affordable Housing Trust Fund.
O' Reilly pointed out that the five-year abatements will still be used by homeowners who want to make improvements on their homes, allowing them to pay discounted taxes to offset any costs for improvements.
That was the intended use of the five-year abatement, as homeowners will pay no taxes the first year. Then they will pay 20 percent of full taxes the second year, and there will be 20 percent increases for the next three years. By the sixth year, it is full conventional taxation.
Some still get five-year
Rental and condo projects valued at under $10 million can still get five-year abatements.
Owners will pay regular taxes the first year. However, a new formula was created where the second year will see 39 percent of taxes paid, followed by 59 percent of taxes in year three, 79 percent in year four, and then 90 percent in year five.
It is known unofficially as the Michael Sottolano Rule, as the City Councilman representing the Greenville section of the city came up with the new formula in response to developers seeking five-year abatements and paying under the old formula. Looking short-term for the long term
One of those projects granted five-year abatement was the 458-unit Grove Pointe project located at Christopher Columbus Drive and Newark Avenue. The abatement was approved by the City Council in May and allowed the developer to pay taxes within the 0/20/40/60/80 paradigm.
The lawyer for the developers, James McCann, told the Jersey City Reporter at the time that his clients, SK Properties, went with the five-year abatement and rescinded its original 20-year abatement for Grove Pointe. It would have made the developer pay the city $200,000 to $300,000 more per year than conventional taxes.
McCann said the tax assessment ratio dropped from 51 percent in 2004, when Grove Pointe's original abatement was granted, to 30 percent as of this year.
When asked recently about the city's new abatement policy, McCann said it was "helpful to the development community."
"What [the city] did was drop the percentage, so that the developer pays something close to conventional taxation would be but it's stabilized or fixed," McCann said.
McCann also said he hopes the city will look at the abatement policy for condos in the future.
But McCann does not have a lot to complain about, as 10-year abatements (at 10 percent payment of gross annual revenue) for two rental projects, to be built in Downtown Jersey City's Liberty Harbor North Redevelopment Area by his client, are up for approval at the next City Council meeting. Ricardo Kaulessar can be reached at email@example.com