Residents Are Effectively Paying for the Project
TL;DR
Municipal Land Use Law requires the Township to compensate the Developer for the lost income associated with the Affordable Housing mandate.
The proposed agreement does this in part with a tax break.
However, another accounting tactic (explained below) also allows the Developer to expense the Township for the Total Project Cost over the life of the agreement.
This allows the Developer to recover its investment and protect its cashflow, while reducing the Net Profit calculation used to determine whether residents share in the Project’s upside.
Background
Real estate investors are generally allowed to “depreciate” investment properties for tax purposes, meaning they can deduct a portion of a project’s cost from their taxes every year over a defined period of time. This is a non-cash, tax loophole; not a cash expense an investor actually pays.
The Lackawanna PILOT’s Version
A carry-over from other “negotiated” PILOT agreements in Montclair, the proposed Lackawanna agreement includes a provision that allows the Developer to expense the Township for the Total Project Cost (already a generously defined term) over the life of the agreement regardless of whether the Developer has already made its money back via cash-out refinance or sale. These deductions reduce the Net Profit used to determine whether the Township receives Excess Net Profit payments.
Why Does This Matter?
Because Excess Net Profit payments, residents' only opportunity to participate in the Project's upside, are triggered only when Net Profit exceeds a specified threshold. By deducting Total Project Cost first, the Developer is allowed to reimburse itself for a portion of Total Project Cost before the upside amount otherwise due to residents is even calculated.
Translation:
We’re effectively paying for the whole Project out of what would have otherwise been our cut; not just the lost income associated with the Affordable units through the tax break. Even after the Developer has recovered its initial investment…
The result is a fundamental asymmetry: the Developer’s bottom line is protected, while residents’ participation is conditional at best.
This is not how “partnership” is supposed to work.
What This Means in Practice
Let’s fast forward through the construction phase to when the Project is “stabilized” (see Lackawanna Part 1 for explanation). The Developer could refinance the Property, recover all or a portion of its initial investment, and upstream this cash windfall to investors without paying anything to the Township. See Lackawanna Part 1 for the mechanics. Yet the proposed agreement still allows the Developer to continue expensing Total Project Cost to the Township every year to shield a portion of Net Profit from resident participation. The Developer benefits twice: first through a federal tax deduction of depreciation and again though a reduction in Net Profit that shelters cash flow from residents.
Even if the Developer sells the Project, realizes another cash windfall (no participation for residents here either), and potentially makes a large profit; the new owner can continue to expense the Township for Total Project Cost every year through the remaining life of the agreement.
Notably, Total Project Cost includes $6.7MM in real estate broker commissions, which residents will also pay for under the proposed deal.
It Doesn’t Have to Be This Way
It is not an anti-development position to expect that residents participate in the value created by our tax breaks, density bonuses, zoning approvals, quality-of-life concessions, and town culture.
That is the basic premise of “partnership”. Yet the structure of the proposed agreement prevents exactly that.
When the largest Developer windfalls are excluded and the Township is expensed through cash flow shelters, the outcome is predictable: residents are left with little opportunity to share in the upside of the very Project we helped make possible.
A “yes” vote on the PILOT agreement as currently drafted is a willful decision to exclude residents from that participation.
It is a policy choice about who bears responsibility for Montclair’s fiscal future and who development in Montclair is meant to benefit.
Read Part 1 below of my Lackawanna PILOT series about the key provisions in the proposed PILOT agreement that prioritize Developer cash flow and investor returns over residents' participation in the value created by our tax concessions and zoning approvals.
Corrections, counterarguments, or missing context is welcome. Responses are reviewed privately.
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