189 the Plaza is a property on a lot included in the State Street Area in Need of Redevelopment (AINR) that had been so designated by the prior Council (Click Here) and thus its redevelopment plan adopted by the prior Council 2 weeks after the November 2022 Council election (Click Here) had to have occurred in order to make this property legally eligible to be granted a PILOT. (Hence this property then became “PILOT-eligible” but
Here is a composite of what Voices has been told about this current PILOT proposal as described by NW Financial’s analyst.
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In looking at NW Financial’s Presentation the first thing noted is that this consultant appears to have accepted as true the numbers submitted by the developer. Should Teaneck’s taxpayers simply accept the numbers submitted by a for profit builder? Shouldn’t the Council or its consultant assess whether the numbers submitted by the builder are reasonably accurate and reflect generally accepted construction costs for similar projects?
No bank would – prior to making a construction loan – accept a builder’s numbers without having its own engineering consultants (paid for by the developer) verify the reasonableness of the costs submitted and of the project’s income over time. There is no evidence that this issue – the reliability of the developer’s numbers – was considered by NW Financial.
What follows are five examples of how NW Financial’s presentation to Council on 6/27 failed to undertake the kind of analysis that might better guide the Council in deciding whether to grant a 30-year PILOT to 189 The Plaza.
First, the developer says his land cost is $2 million. Did he pay $2 million for the land in an arm’s length transaction, or did he pay less than $2 million? If he paid less than $2 million then he is booking a profit from the get go that considerably raises his bottom line and may significantly increase his real rate of return – not the rate of return he used to justify his request for the 30-year PILOT. NW Financial should have looked into that. Did it? A bank certainly would look into what an applicant pays for land before it made a loan to the builder. In the case at hand, NW simply did not address the issue. Is Teaneck being asked to surrender hundreds of thousands of dollars in real estate taxes to benefit a developer of market rate housing without examining whether the builder’s return on his capital investment warrants any type of PILOT, let alone a 30-year PILOT.
Second, the developer is reported by NW Financial to say it is putting up more than $7.6 million of its own capital to build the project. Where is that money coming from? Has NW Financial seen the developer’s net worth statement? Is the developer borrowing some or all of that $7.6 million and paying interest on that money to do so? If so is that interest part of its stated “soft costs”?
Why is that important? Because the soft costs number shown in the cost analysis is considered by some who are expert in these matters to be way too high for a project of this size. Does that soft cost number include interest to unnamed parties? Does Council know who are all the people behind 189 The Plaza? Is it just assumed that the developer itself has the $7.6 million it says it will invest in the project?
Sometimes a financial benefit such as the PILOT being requested is the icing on the cake needed to attract investors to put their capital into a project. Is that the case here? Developers often include in their soft cost estimates of the time they have invested in the project to date, and it frequently works as a way of reducing the capital the developer is actually putting up to secure a construction loan. Getting a PILOT would then permit earning a significantly larger return on a portion of non-existent capital investment than the developer would otherwise be able to realize. In sum, if it did not, at the very least NW Financial should have asked for a breakdown of the soft costs before accepting the developer’s numbers. If it did so, the Presentation should have included the results of that breakdown in its presentation to Council.
Third, this developer’s stated cost per apartment seems extraordinarily high. Its numbers deserve a strict analysis of their validity. When this developer applies for a bank loan to build its project the bank will require it to submit its estimated cost for each construction component: land preparation, concrete work (footings, basement walls, slab), backfilling, elevator block work, framing and siding, roofing, windows, electric, plumbing, HVAC, interior walls and doors, flooring, elevators, etc. etc. No bank would simply accept a builder’s estimate of the average cost to construct an apartment. Why?
Because the builder’s number might be too low, in which case the builder will not be able to complete the project unless the bank puts up additional funds beyond that permitted under its loan to value limitation (generally 65% in this market). The alternative, foreclosing the building and completing it, is something no bank wants to do. Conversely, if the builder’s construction numbers are higher than its costs, the bank’s true loan to value ratio night be considerably higher than 65%, and the builder will be putting up much less equity than it said it would in its loan application. Without knowing the breakdown of the average cost per apartment, we are left completely in the dark.
Fourth, the inadequacy of the Presentation can be seen clearly in its juxtaposition of two tables, the first showing the taxes that Teaneck would receive if the project was not built and the second showing the taxes Teaneck would receive under the proposed PILOT.
MISSING is a third indispensable table showing what taxes Teaneck would receive if the project paid its true real estate taxes (as every typical property owner does in our town) over the 30-year period of the proposed PILOT. Leaving out that third table denies to Teaneck taxpayers their right to know the amount of the subsidy they are being asked to give to this developer.
It is certainly striking that the Presenter told the Council that absent the PILOT the developer would not build the project. Whence that information? And why? Is it because of this developer’s weak financial condition or previous decisions. Is it its grandiose plans?
We note again that Teaneck’s development HAS NOT RECENTLY BEEN DEPENDENT ON TAX GIVE AWAYS – by PILOTS! The Avalon development was bult and pays regular taxes, The apartment project at 1500 Teaneck Road pays them. The 8-story 1475 Palisade Avenue facility did not receive a PILOT.
If the developer of 189 The Plaza won’t build without a PILOT should he be encouraged to sell the land to someone who will?
Fifth, there is something clearly wrong in the rate of return the developer claims it would earn with and without the PILOT. For arguments sake let’s take the developer’s best case, where it gets the 30-year PILOT. In that case it shows a return of 7.57% over a 10-year holding period. Would any typical developer go into a project and invest more than $7.6 million to make a best-case return of 7.57%?
If a developer’s projected 10-year return (including amortization and tax savings) in undertaking a $20 million project did not approach a 20% or 30% return over a 10-year holding period the developer would elect not to build the project, knowing, that unforeseen problems will inevitably arise that will likely reduce his real return. He would ALMOST CERTAINLY garner more than a 7.57% return by buying a CVS or a Walgreens property, with virtually zero risk and holding it for 20 years – and paying off the entire mortgage during that time frame. In the case of 189 The Plaza, it will likely get a 25-year mortgage at 6% interest with 300 equal monthly payments.
Isn’t it more likely that the developer’s true return on his invested capital (Including amortization and tax savings) over a 10-year holding period is probably somewhere between 20% and 30%, and vastly greater than that if he keeps the property for 25 years even without the PILOT.
Two factors would support this alternative forecast about the developer’s likely profitability. First, NW Financial simply ignores the value of the $2.9 million in amortization that will accrue to the developer, given a 25-year mortgage of $8.5 million at 6% over the 10-year holding period. The NW Financial Presentation also ignores the $8.5 million that will accrue to the developer by paying off the mortgage over the 25-year term while the Payment in Lieu of Taxes (PIILOT) continues for another 5 years. Neither the $2.9 million in amortization nor the $8.5 million is accounted for in NW’s Presentation. The developer likely knows all this. Does Council have a sound basis for estimating how much money the 189 The Plaza developer stands to make even without a PILOT?
Second, NW Financial fails to note the Federal tax benefits that are available to real estate developers, benefits that are not available to most Teaneck taxpayers who are – if this PILOT is approved – are being asked to subsidize a private developer who stands to make millions of dollars from building 189 The Plaza.
Here are matters missing from the NW Financial presentation. NW needs to explain know how it believes builders think about the profitability of such an investment. Some observers suggest to Voices that the NW Presentation is tantamount to a brief for the developer. It surely provides an inadequate and significantly incomplete guide to the members of the Town Council in deciding whether to grant a PILOT to 189 The Plaza.
One other way to look at the “why should Teaneck give this developer a tax break” question is to ask: “What is the Town actually gaining by giving up tax income it would otherwise get” if this PILOT facility with this proposed PILOT were not built at this time by this developer on that piece of property.
True the Town does have long-term affordable housing obligations and this facility would by code provide 7 of its 48 units as affordable units – thereby helping the Town marginally meet its COAH obligation.
One way to look at this PILOT is the following: So Teaneck “gets” is 7 affordable units, what does providing this PILOT tax break as a subsidy for seven units (4 two-bedroom; 2 three-bedroom and 1 one-bedroom) cost? If we skip all the questions we have posed about the PILOT Presentation’s numbers, we can calculate the cost that the Town would be agreeing to subsidize each of: the four-bedroom units at $2700 per month (= $10,800 each month); subsidize both two-bedroom units at $4340 and $1194 monthly for the single bedroom unit. So each month all the regular property owners paying normal taxes are taxed an extra total of $16,334 more than they would otherwise need to be taxed. – which means that every year for 30 years the Town’s combined property tax payers are paying $196,000 to enable the Town to provide 7 affordable-housing eligible families a place to live at 189 The Plaza.
Add it up: that’s + or – $5,880Million over the life of the Pilot. If those 7 families were current Teaneck residents, some might find that to be worth it. But those 7 units will be bid on by residents from the four NJ counties in the region. Odds are low that any of those 7 units would be occupied by folks living here now.
Should Teaneck not be working to get a better deal on affordable housing needed by our current residents? Several Bergen County towns have successfully found a way to do so. And Voices has begun the research to find out how. Tenafly and Fort Lee are finding a way.
In summary, one thing is proving very true – the prior Council’s recent housing/development policy to address most housing and tax issues by declaring more and more of the Town blighted (with Areas In Need of Redevelopment) not only maligns our many diverse neighborhoods but just in respect of municipal fiscal policy is surely the wrong – maybe even a disastrous – path.
