The 10-year Payment In Lieu of Taxes (PILOT) for Meridia Water’s Edge will reduce the property tax bill on the rental development by anywhere from about $85,000 to $160,000 annually. Over the next decade, that could mean a minimum savings of $1 million to $1.6 million, and likely much more as taxes rise.
Precisely how much Water’s Edge would have paid in property taxes without the PILOT has never been mentioned — at least not publicly during City Council or Redevelopment Agency meetings. A review of the city budget and the PILOT amounts estimated for 2012 got my calculator humming.
In brief interviews after recent meetings, City Administrator and Redevelopment Director Peter Pelissier estimated that the property taxes normally would be similar to other recent construction, about $2,800 per unit, or almost $303,000 based on 108 units at Water’s Edge. The $216,000 PILOT would mean an annual savings of at least $87,000, or about 70 percent of the original projected tax bill, by that estimate.
Using the recent sales of the 136-unit River Place and the 88-unit Meridia Grand as a base for a comparable assessment, regular property taxes for Water’s Edge property taxes would run just less than $380,000 (~$3,500 per unit), an annual savings of at least $164,000 for the developer, or about 56 percent of the normal property tax bill, according to my estimates. That’s based on 2011 tax rates and you can check my math in this Google spreadsheet.
The estimate ran a couple of thousand dollars more when River Place is used as comparable. What Water’s Edge eventually gets assessed will be determined after construction, and the smaller units at Water’s Edge also might keep the assessment lower when compared with the other projects, so perhaps it would be south of $380,000.
Still, over 10 years, that’s a savings of at least $1.65 million on property taxes for the developer, and as taxes rise over the decade, the savings would theoretically grow. For perspective, based on Rahway’s 2001 tax rate of $3.297 per $100 of assessed value, the estimated assessment for a Water’s Edge project 10 years ago would have yielded property taxes of about $217,000 (coincidentally similar to the negotiated annual PILOT payment). But also keep in mind, the 0.75-acre parcel currently pays zero property taxes because its owned by the Redevelopment Agency, which sold it for about $840,000.
City officials negotiated the $216,000/$2,000 per unit PILOT with Capodagli Property Company, according to Pelissier, who often has said that developers continue to be interested in Rahway. The city will receive 95 percent of the annual payment (~$205,200), with 5 percent going to Union County (~$10,800). City Council President Samson Steinman said in recent interviews that much of the new construction such as River Place does not have tenants with children, thus not impacting the school system. All interested developers want some kind of financial subsidies, said Pelissier, adding that some PILOT agreements don’t pay anything for many years. “The bank wants to know there’s that number that won’t change for several years,” said Pelissier.
The “minimum annual service charge,” as the PILOT is called in the application initially filed Sept. 1 by Capodagli Property Company, will be calculated as 2 percent of the total estimated development cost — estimated in November at $10,775,457. Meridia must provide a certified budget for total project costs from an architect and engineer after construction has been completed, which will be used to determine the actual annual PILOT payment, according to Redevelopment Agency attorney Frank Regan. Conceivably, the PILOT would be higher if the total estimated development cost turns out to be higher than the $10.7 million estimated so far.
The Water’s Edge PILOT isn’t tied to any requirement for the builder, such as, LEED certification for instance. Pelissier reiterated what was presented before the Planning Board, that the project will follow some aspects of LEED certification, but the cost of certification is too high, sometimes upward of $50,000. He said that’s more feasible in places like Manhattan, Millburn or Morristown, where projects are getting higher rents. George Capodagli said at a recent Redevelopment Agency meeting that his firm has hired a planner focused on green initiatives, as a result of the some requests last year to pursue LEED building standards.
Units at Meridia Water’s Edge would be considerably smaller (ranging from 672 to 850 square feet) than other recent construction, such as Park Square or River Place, which likely would mean a smaller tax assessment, thus lower property taxes. Monthly rents would range from $1,400 to $1,550 with another $70 per month in parking fees, according to the financial agreement. The facility would have 91 parking spaces on the ground floor, with another approximately 17 spaces available in the adjacent library lot.
Total gross rental income would be approximately $2 million, and after expenses of $670,000, net rental income of approximately $1.24 million, and $422,000 after debt service, according to the financial agreement.
The PILOT application indicates construction would begin in March with a projected timeline of about 15 months, meaning a completion date of May 2013. Bank loan financing would cover 75 percent of the cost, with 25 percent a Capodagli Property Co. equity contribution.