A 219-unit development approved for the former Center Circle site on Main Street would pay at least $500,000 in the first year of a proposed 30-year Payment In Lieu Of Taxes (PILOT) arrangement, with payments in the final year approaching $1 million.
City Council last week introduced an ordinance for the 30-year PILOT and will hold a public hearing and final adoption on the measure at its Feb. 12 regular meeting. The financial agreement and PILOT application can be found here.
UPDATED, 2/13/18: With no comments or questions from the public or its members, City Council unanimously approved the ordinance by an 8-0 vote during a 30-minute regular meeting on Monday night. Second Ward Councilman Michael Cox was absent.
The 3.5-acre property currently is assessed for $1.2 million, generating a property tax bill last year of about $81,200, but likely would be assessed for many more times that as an apartment complex. For instance, the 116-unit Metro Rahway, which also has a PILOT, technically is assessed for $10.275 million. The two-building, 159-unit Park Square development, which had its PILOT expire in 2015, has a total assessment of almost $14.5 million.
Under a PILOT, the city receives 95 percent of the payment and the county receives 5 percent. The project falls within the Central Business District Redevelopment Plan, which allows for PILOTs under state law. The Redevelopment Agency would receive $1,750 per unit, according to the redevelopment agreement approved earlier this month, which would total $383,250 for the 219 units.
Construction on the five-story, 219-unit project is anticipated to begin by May with completion by November 2020, according to the PILOT application filed by AST Development. The application also indicates a 50 percent ownership interest by 1255 Main St., LLC, established by Lavallette-based AST Development, and Sterling/Rahway II, LLC, created by Livingston-based Sterling Properties.
The two firms also were involved, along with Heartstone Development, in the development of the Metro Rahway complex on Campbell Street, completed in late 2014. That project was awarded a 15-year PILOT that called for annual payments starting at about $265,000.
The PILOT application expects a “lease up rate” of 12 units per month, similar to other recent developments, so it will take most of the first two years to become fully occupied and generating full income, likely making annual gross revenue significantly lower for those two years. Revenue is expected to stabilize by year three.
The 10-year operating statement (Page 24) shows effective gross income of $5.114 million in the first year, against total expenses of $1.674 million, for net operating income of $3.441 million. After debt service and capital reserves, before tax cash flow would be $633,466 in the first year, rising to $916,171 by year 10. The operating statement accounts for a typical 5 percent “vacancy loss” in each year.
The annual service charge (Page 9 of the financial agreement) would equal 10 percent of the annual gross revenue for the first 10 years, increasing by 1 percent every five years (11 percent for years 11 through 15; 12 percent for years 16 through 20; 13 percent for years 21 through 25, and 14 percent for years 26 through 30.
The annual service charge (Pages 25-29) breaks down as $511,490 in the first year and rising each year until about $949,470 in the 30th and final year, which would be about 2050.
In Year 16, the city would receive either the annual service charge ($710,052 that year) or 20 percent of the taxes on the value of the property and improvements, whichever is higher. That percentage rises to 40 percent by Year 22, 60 percent by Year 28, and 80 percent by Year 30.
The development budget (Page 49 of the PILOT application) shows a total cost of $55.465 million. That includes $5.315 million for acquisition of the 3.5-acre site as well as $40 million in hard costs, including $25.2 million for construction, or about 45 percent of the total.