There is much to admire in the planned redevelopment at Canal Crossing, a post-industrial brownfield site that was subject to a decades-long environmental cleanup. Multiple Jersey City mayors have envisioned turning the 111-acre site from a chromium contaminated wasteland into a new, walkable neighborhood with easy access to the Hudson-Bergen Light Rail.
The plan to build thousands of mixed-income housing units at the Canal Crossing site was first conceived during the Healy administration, and the current urban design and zoning for the site dates to the Fulop administration. The first phase of Canal Crossing will deliver 508 new homes, over 18,000 square feet of commercial and retail space, and a new 33,000 square foot park on Garfield.
Mayor Solomon has touted the project as a “new standard” for housing affordability in Jersey City, citing that the project will have 20% of its apartments set aside as deeply affordable below-market-rate rentals for households making under 50% AMI (~$65,000 a year for a family of four). The mayor has misrepresented his administration’s involvement in putting the Canal Crossing project together, however. Public filings show that the project was already set to include 20% affordable housing for households below 50% of AMI in 2024 under the previous mayor [Affordable Housing Agreement 1; Affordable Housing Agreement 2].
Better Blocks is pro-housing but we always take care to evaluate associated costs and benefits of any proposal, especially when they involve a controversial policy topic like PILOT agreements. In previous articles, we have discussed the tradeoffs involved with affordable housing. We, too, have made the argument that PILOT agreements for affordable housing should target 20% in order to unlock Aspire tax credits. Although this project pre-dates Solomon, in some respects, Canal Crossing is the first proposal that matches the agenda he advanced during the mayoral campaign. We had concerns about the costs of that agenda, and you can read about the concerns that we expressed during the campaign below:
In this article, we will look at 1) the details of the proposed affordable housing set-aside, 2) the costs and benefits associated with the using PILOT agreements and Aspire tax credits to pay for affordable housing, and 3) how the administration’s newfound reliance on PILOT agreements might impact the Jersey City budget (and your tax bill).
Affordable Housing at Canal Crossing
The first phase of Canal Crossing project has two subphases, 1A and 1B, six- and ten-story buildings respectively. The total project will create 508 apartments. The 102 affordable apartments will be divided into 19 studios and one-bedrooms, 59 two-bedrooms, and 24 three-bedrooms.
Income-restricted affordable housing offers apartments at below-market-rate rents, which are set based on a household’s income bracket as a percent of area median income (AMI). At Canal Crossing, around 13 of the units will have rents under $1,000, but they’ll only be available for studio apartments that rent to very-low-income households making below 30% of AMI (~$27,000 for a single person). The modal “below-market-rate” rent for Canal Crossing would likely be just under $1,500 a month for a two-bedroom apartment, which is available only to households with 3-4 family members. Households will only get access to affordable housing at Canal Crossing if they qualify, apply, and win the affordable housing lottery.
The restriction of the income-restricted units to households with such low income brackets has three effects: 1) the developer’s model projects market rate rents for the neighborhood (~$3,500 a month) that are higher than at present to cross-subsidize the affordable units, which means this project might not break ground if market conditions soften; and 2) the level of taxpayer subsidy needed to make affordable housing at Canal Crossing viable has to be higher; and 3) it unlocks state tax credits under Aspire as a subsidy stream. Points (2) and (3) bring us to the proposed PILOT agreement.
Solomon Gives Himself a PILOT License
The most contentious element of the Canal Crossing plan since it was announced has been the 30-year PILOT agreement. We have written about PILOT agreements previously. They are one of the most misunderstood tools in municipal finance.
In short, PILOT agreements allow the city’s government to partner with private developers to build things that would not otherwise get built without having to issue a bond to pay for the project. They work by removing the developed property from conventional property taxes and taxing the building’s gross revenue as a Payment in Lieu of Taxes (hence, PILOT) instead. The PILOT payment usually ranges from a 15% tax on gross revenue (least generous and most financially beneficial for the city) to 10% tax on gross revenue (most generous and least financially beneficial for the city). The city gets to keep 95% of the PILOT payments and the county gets the other 5%.
At Canal Crossing, the proposed PILOT is a 10% PILOT (the most generous, deepest subsidy allowed by state law) to pay for the 102 affordable housing units, the 33,000 square foot park, 100% union labor, and other community givebacks contemplated by the project. To unlock state help from the New Jersey Economic Development Agency’s Aspire tax credit program, the city must issue a PILOT agreement, agree to set aside 20% of apartments as income-restricted affordable housing, and enter into union labor requirements.
Jersey City has received Aspire tax credits for projects previously — both 701 Newark and Bayfront Phases I & II received assistance from the program. Here, Canal Crossing will receive $180 million in state support ($90 million for each of the two phases), which is worth $86 million in actual, net present value over the life of the project [Aspire]. With a total project cost of $317 million, the state of New Jersey is providing over 25% of the project’s financing stack. This financing covers the affordable housing component and the union labor requirements. To put the extent of the subsidy in perspective, for each affordable housing unit built, the project will receive $833,000 in state subsidies.
Simply put: Canal Crossing will not get built as is without the financial stability offered by the combined PILOT agreement and Aspire tax credits. But the developer will contribute $1.95 million a year in PILOT payments, which is significantly more revenue for city coffers than the undeveloped brownfield site.
It is also likely that Canal Crossing might not get built even if there were no affordable housing set-aside or additional community givebacks like new park space because the Canal Crossing site is particularly challenging. For starters, it’s an 111-acre brownfield site that has barely any sewer, stormwater management systems, roads, utilities, or any other infrastructure necessary to build a new neighborhood, so either the budget-constrained city or the developer must pay to put in the basics, which are estimated to cost at least $10 million. In reality, this is what the PILOT is paying for while the state pays for the affordable housing.
Given existing affordable housing requirements for the Canal Crossing site (15% affordable set aside), a PILOT agreement with an Aspire tax credit is the only viable way to get housing built at Canal Crossing without amending the mandatory 15% minimum affordable housing set aside.
What are the Implications of a PILOT agreement on the City and School Budget?
We have long expressed skepticism over Mayor Solomon’s affordable housing policy but the particulars of this deal pre-date his time in office though they align with his stated policy goals. More generous PILOT agreements reduce the income potential from a building’s gross income and reduce flexibility in using such agreements to pay for other things like new public schools or community centers.1
To make the case clearer, we can compare Canal Crossing to two other PILOT agreements that were also negotiated by Jersey City last year: The Embankment project, creating a new park and setting aside 5% of its units as affordable housing (which then-Councilman Solomon voted for) and 177 Grand Street, setting aside 15% of its units as affordable housing (which Solomon and Councilman Frank Gilmore voted against).
While the 177 Grand Street project had a lower affordable housing set-aside and fewer overall apartments, it is generating the same amount of PILOT revenue for the city as the Canal Crossing proposal, and the city nets the most money from it compared to conventional taxation (note: the project needed a PILOT to break ground due to the 15% affordable housing set-aside that Solomon pushed for as councilman—it would not have been viable without a PILOT).
In the case of Canal Crossing, were conventional taxation on the improved property possible, the city would collect only $1.4 million under conventional property taxation so the city is coming out nearly $400,000 ahead due to the revenue from the 10% PILOT, which is not a bad deal in isolation.
The other major thing to consider is the effect of a PILOT agreement on the county and school budgets. The county gets 5% of PILOT revenues but the schools receive no money from a PILOT (as opposed conventional taxation where schools are over 40% of the tax bill). We have addressed this topic extensively in previous articles: money is fungible when it comes to the school district and the city since they cover the same tax base, and sharing PILOT revenue is largely irrelevant from an individual taxpayer’s perspective. In any event, Mayor Solomon proposes to divert 10% of PILOT revenue to the Jersey City Public Schools, sending around a quarter million a year to a school trust fund.
Still, it is instructive to compare the 10% revenue diversion to the increased costs on the school budget created by the 20% affordable housing set-aside. Affordable housing — especially in mid-rise buildings according to a Rutgers study — adds more school-age children to the public school system than market rate housing, which makes sense as the majority of affordable units are set aside for larger low-income households with children [Davis et al., “School-Age Children in Rental Units in NJ”]
The Rutgers study implies that a mid-rise development like Canal Crossing would add around 73 school-aged children to Jersey City’s public schools (nearly three times as many as if it were 100% market rate), which would cost the Jersey City Public School system $1.9 million a year to educate at $26,130 per pupil. The added education costs nearly perfectly match the revenue collected from the PILOT agreement, meaning the financial benefit to the taxpayers on their municipal bill translates into increased property taxes from the school district regardless of whether 10% of the PILOT is diverted to a school trust fund.
On net, the PILOT agreement might raise $1.85 million in new revenues for the city but it will add nearly $1.9 million in new public school costs due to the high amount of schoolchildren living in the affordable housing units (affordable housing is not exclusively available for current Jersey City residents).
Conclusion
The tradeoff inherent in all of this is that a mandatory affordable housing policy shifts the burden for a handful of $1,000 rents and other deeply subsidized below-market-rate apartments to 1) taxpayers through generous 10% PILOT agreements, and 2) to market-rate renters specifically through projected higher rents. We leave readers to reach their own conclusions about these tradeoffs as they are ultimately value-based judgments.
Spelling out some of the tradeoffs involved:
- If the city is focused on building more income-restricted affordable housing, is Canal Crossing a better place to focus the subsidies than Downtown? Family-sized units are a requirement of New Jersey’s Mount Laurel affordable housing obligations specifically because wealthy suburbs tried to exclude lower-income minority children from their stellar school districts. Focusing on affordable housing downtown would allow children from low and moderate-income families to have greater access to the best public schools in the city. It would be a shame if the administration only built affordable housing in lower income neighborhoods, which would do little to alleviate educational and economic segregation.
- Could the city build Canal Crossing with 0% affordable housing and use a less generous PILOT to bolster municipal revenues even more while still getting new infrastructure and Garfield Park? Based on historic agreements for market-rate housing built on former industrial brownfield sites, it seems likely that such a project would pencil out with a smaller PILOT subsidy. A 12% or 13% PILOT would net the city an additional quarter to half million a year in PILOT revenues as a conservative estimate. Reducing the affordable housing component would also likely add fewer school-aged children to the public school system, freeing up $1.1 million in additional school expenditures that could be allocated to improved city services or mitigating tax increases. This would, however, require a council vote to amend the minimum 15% affordable housing set-aside.
- Could this project work without a PILOT at all? Unlikely, unless either i) market rents rose dramatically or ii) the city issued a bond to fund the needed infrastructure buildout, and the bond would still have to be paid off while the city collects less revenue under conventional taxation than it would from a PILOT agreement.
We remain supportive of the Canal Crossing project largely because more housing is good and no other project could get built at this site under current regulatory conditions. The 20% affordable housing set aside is a requirement for the project to get additional state subsidies from Aspire, which does help offset some of the cost to local taxpayers. And the transformation of an industrial wasteland into a walkable, transit-oriented community with streets, parks, and utilities infrastructure will be good for future development and housing construction in the area. Taken as a whole, Canal Crossing is likely a net benefit for Jersey City albeit not the financial windfall the Solomon administration is trying to portray it as.
We think the public deserves a full accounting of the costs and benefits. The administration’s presentations and social-media commentary have left out key details about the potential costs to taxpayers — likely over $55 million across the 30-year PILOT — in exchange for a new park, 102 affordable apartments, and the foundations of a new neighborhood.
This deal is fine on its own terms. But its terms do not generalize sustainably. Canal Crossing pencils out only because it receives Aspire tax credits, and those credits are scarce and require at least 20% of units to be income-restricted. Requiring a 20% set-aside as a condition for every PILOT agreements limits their ability to patch up the municipal deficit and might blow up the school budget in the process. Finally, there is not enough state aid to make a set-aside that high work at scale. What works as a one-off here cannot be applied across the board to every development. And if this project is not approved for Aspire funding, the required set-aside will need to be modified for the project to work at all.
Footnotes:
- Bill O’Dea and Jim McGreevey – the two other leading mayoral candidates – had similar proposals to impose stricter affordable housing requirements when entering into PILOT agreements; Solomon’s plan went further by proposing a 20% affordable housing set aside for all new developments with more than 50 units. We expressed reservations of such a “bespoke” approach to affordable housing policy during the campaign. ↩︎