Tuesday, March 21, 2017

South Second Financial Agreement Revised

In a brief meeting Tuesday, the City Council approved changes to a "payment in lieu of taxes" plan for a 90-unit residential development on South Second Street.

Economic Development Director Carlos Sanchez explained that the city will not lose revenues in the change, as a PILOT for a related commercial project is expected to be modified in a council vote on April 10.

The revisions are related to changes in the state's HMFA Low Income Housing Tax Credits program, Sanchez said.. Earlier this year the plan changed to a minimum rate of 5 percent, he said. The city's initial arrangement called for a 6.28 percent rate for the first fifteen years of a 30-year PILOT, which will be revised to 4.9 percent. It will yield $240,000 less than before, but the revision to the commercial portion will make up the difference, he said.

The changes will make the application "a little more competitive to the state," Sanchez said.

The commercial part is complete. See details of the initial agreement in this January 2016 post.

See an image of the residential project and more details here. It is described as a $22 million project and the "largest transformative development in the Fourth Ward of the City of Plainfield in 40 years."



  1. Is the implication that, in an environment of rising interest rates, the City is taking a 22% haircut on the residential portion of the PILOT, but will make this up by increasing the rate on the commercial side of the agreement so there is no net loss to the municipality? Or is it simply that with rising rates the City is just further subsidizing the developer on the residential end because that financing isn't set yet and is now costing more? Will ABC Supply, the commercial tenant, be paying more so the developer can make up the difference of a higher payment to the City? Being "a little more competitive to the state", as Sanchez put it, doesn't make it any less confusing to this reader. I'm not sure whose interest we're protecting here. I may be totally off-base, but this is what it seems like: interest rates have risen, it will now cost the developer more to continue with the project, and the City is eating the difference. If the amendments to both agreements are meant to net out, why were they not voted on concurrently?

  2. Without a full description of the "Commercial" income formula it is impossible to understand whether the statement that the "Commercial" side, will in fact compensate for the rate reduction on the apartments?
    What we can glean is that based in the figures given, that is, the reduction in the rate from 6.28% to 4.9%, and the payment in lieu of taxes is for a duration of 30 years results in a $240,00 decrease in total revenue paid to the City, that the total revenue paid over 30 years is $1,740,000,or, $58,000 annually. Since there are 90 apartments this would mean each apartment resident was contributing through his rent payment an average of $644 per year in taxes for the benefit of city services including education. If we further consider the inevitable devaluation of the dollar through inflation that $644 in 30 years could have a present day value of perhaps $100. Will during those 30 years the Landlord freeze his rents? I don't think so. It seems to me that in these long term deals the City revenue should be tied to a Cost of Living Index, or to a rent increase when and if the rent is escalated by the Landlord. The same suggestion applies to the pending Muhlenberg deal. Bill Kruse.

  3. The City will actually gain more financially through the amendments being made to the residential PILOT agreements and the commercial PILOT agreement. The commercial project is already in service which means that any increase made to the Commercial PILOT will begin immediately because the residential PILOT is not currently producing revenue for the City given that it has not been built. In addition to the City not experiencing a reduction in overall PILOT revenues from the project, the City will also gain two years of increased revenue beginning this this year and next year because the commercial component is actually paying a PILOT now. With PILOT agreements, whenever, the developer increases rents, the City benefits because the PILOT is a percentage of the gross rents received by the developer for the project. It is not based on the net of Gross Revenues minus operating expenses or any other expenses deductions taken before the agreed upon PILOT rate is multiplied by Gross revenues. It is Gross Revenues X PILOT rate. NJHMA administers the federal LIHTC program for the State of NJ. The lIHTC application process is competitive with projects across the State competing for the same funds. If NJHMFA grants more points to projects that have a PILOT at below 5% then you can rest assured that the vast majority of municipalities if not all municipalities will grant a lower PILOT to the developers who are submitting projects for consideration. NJHMFA is essentially applying underwriting standards to projects to ensure that they are financially feasible.