Lackawanna PILOT - Part 1: From Public Pockets to Private Profits

The Lackawanna PILOT is a great deal. 

For the Developer… 

Residents have been told that we’re “partners” in this project. However, the structure of the proposed agreement tells a different story. 

TL;DR

• Residents' potential upside excludes the two largest sources of Developer windfalls (explained below), leaving significant potential revenue on the table.

• Investor returns can be distributed before Net Profit is calculated, allowing cash to flow to investors while the amount due to residents remains low or zero.

• Because Excess Net Profit payments are the only mechanism for residents to share in the project’s upside, these provisions make additional public revenue far less likely.

• These are policy choices.  Elected officials are choosing to prioritize Developer returns over resident participation.

Estimated read time: 5 minutes

I acknowledge that Municipal Land Use Law requires the Township to compensate the Developer for lost income and value associated with the Affordable units.  However, the proposed agreement, like many PILOTs before it, goes far beyond this obligation. 

If this is a partnership, then residents should participate in the value that our zoning variances, density bonuses, and town culture help create. 

In Part 1 of my Lackawanna PILOT series, I analyze two key provisions that virtually eliminate this opportunity for residents and continue the tradition of one-sided PILOT agreements in Montclair. 

As you’re reading, think about some of the financial challenges that Montclair currently faces:  the school budget crisis, decaying municipal facilities, and fire department staffing. 

Then ask yourself, why do PILOT “negotiations” continue to allow potentially lucrative revenue opportunities pass us by?  Why is the only solution to our financial challenges continuing to increase the burden on the people who live here? 

Our policies reflect our priorities. 

What are yours?

The Biggest Profits are Off Limits

The proposed agreement suggests that the Developer’s largest cash windfalls are none of the public’s business. 

In real estate development, the two biggest sources of profit typically come from refinancing after stabilization and the eventual sale of the property.  Under the proposed PILOT agreement, both windfalls are explicitly excluded from the calculation of Net Profit. 

Why Does This Matter?

Because the public’s only opportunity to participate in the upside of the project comes through Excess Net Profit payments.  If the two largest liquidity events are excluded from that calculation, then residents are excluded from the largest opportunity to benefit from the value created by our tax concessions and zoning approvals. 

How It Works

Sales are straightforward.  Whether the Developer sells condos or the entire project, residents see none of these proceeds under the proposed agreement. 

Refinancing is a bit more subtle. 

During construction, a project’s value (and the loans supporting it) is largely based on the project’s cost and the Developer’s financial backing.  Once the project reaches “stabilization”, meaning it has achieved expected occupancy and rental rates, the property is valued based on the income it produces. 

That shift in valuation is where much of the money in real estate development is made. 

Because construction loans are more expensive and temporary, developers typically refinance into permanent financing once stabilization is achieved.  If the stabilized value is higher than project cost (typically the goal), the Developer can refinance the property and extract substantial cash while the property’s rental income supports the new loan. 

Under the proposed agreement, residents would see none of those proceeds.

The moments when the project generates its largest cash windfalls (refinancing and eventual sale) are precisely the moments when the public’s share is zero.

Developer Cash Distributions

There are several accounting maneuvers that prioritize the Developer’s position in the deal.  However, buried in the definitions is the key provision:  Debt Service. 

The interest expense associated with any loans is typically deducted from annual revenues to determine Net Profit.  On its face, this seems reasonable. 

However, Debt Service as defined in the agreement includes “returns on institutional equity financing”. 

In plain English, that means that investor returns are treated as a project cost; not profit. 

Let that sink in. 

The practical effect is that the Developer can distribute substantial cash to investors while reporting little or no Net Profit for the purpose of determining whether residents participate in the project’s upside beyond the already discounted PILOT payments. 

Residents aren’t positioned as partners in this structure. 

We’re residual claimants. 

Notably, “institutional equity financing” is conveniently not defined in the agreement.             

Pumping the Well Dry

One-sided agreements that prioritize the Developer’s cash flow, liquidity, and returns over resident participation are policy choices. 

Elected officials are choosing to subordinate resident participation. 

It sends a message that the costs associated with keeping Montclair Montclair and addressing our current, fiscal realities should be borne primarily by the people who already live here. 

When outcomes are this one-sided in the Developer’s favor, it begs the question…

On whose behalf are you “negotiating”?

Adopt an Ownership Mentality

Montclair should be extracting value from these large, disruptive deals when the opportunities arise. 

Why do these agreements keep getting approved? 

I’m not suggesting corruption or ill intent.  But at a minimum, the legacy of these agreements suggests a troubling misalignment of political incentives and public priorities. 

Residents deserve to understand why these outcomes keep repeating.

In Part 2 below, I examine another accounting maneuver that results in residents paying for the whole Project.