More Accountability Is Needed In Jackson’s Push For PILOTs

Payment in lieu of taxes programs have created quite the headache throughout the state (and beyond). Back in 2010, former State Comptroller A. Matthew Boxer stated that New Jersey’s loses hundreds of millions in tax abatements each year due to these programs, while nationally, close to $70 billion is lost. This blog wanted to point out a few examples of unpaid PILOTs over the years, including some that have affected Montclair.

In late 2013, Jersey City announced they would sue the Port Authority of New York and New Jersey for unpaid property taxes stemming from a PILOT agreement:

Jersey City recently announced it would sue the Port Authority of New York and New Jersey for $400 million in unpaid property taxes stemming from long-standing payment-in-lieu-of-tax agreements — called PILOTs — on Port Authority properties. Mayor Steve Fulop said the unpaid taxes have caused a “severe and negative impact on Jersey City taxpayers.”

Our neighbors across the Passaic River have also encountered problems with PILOTs. In 2012, North Arlington struggled with completing their budget due to unpaid PILOTs dating back to 2009:

Anthony Bianchi, East Rutherford's chief financial officer, said the borough still is waiting for state approval for its introduced budget of $24.8 million.

In North Arlington, the borough is tied up in "protracted tax appeal litigation" with the New Jersey Meadowlands Commission over roughly $1.7 million in unpaid property taxes and payments in lieu of taxes dating to 2009.

"As a result of the uncertainty of the payment … the borough has been unable to finalize its 2012 budget and will not be able to do so until the issue of payment is resolved," Randy T. Pearce, the borough attorney, wrote in a letter to state officials requesting a three-week extension.

And here in town, the Siena at Montclair was the biggest violator of the unpaid PILOT bills, owing more than $280,000:

Township officials say the owners of The Siena at Montclair , the seven-story retail and condominium complex at the corner of Church and South Park streets, owe the municipality $282,451 in unmade payments in lieu of taxes on the property, a claim the developers are disputing.

According to Township Attorney Ira Karasick, that dollar amount represents unpaid bills for the retail portion of The Siena that date back to 2008.

The Siena, constructed on the site of the long-vacant Hahne & Co. department store, is part of a redevelopment area and the owners and developers - Herod Redevelopment, the Pinnacle Companies and Kohl Partners - have a payment- in - lieu - of - taxes (PILOT) deal with the township.

Under the terms of that agreement, the property owners were expected to pay roughly $94,000 per year on the ground-floor, commercial facet of the project once it was completed. 

The way the agreement was set up was somewhat confusing to the developers. Under the agreement, the developers- Herod Redevelopment, the Pinnacle Companies and Kohl Partners- assumed they didn’t need to make payments until the property had been completely developed. But at the time, part of the property’s space had been developed and was being leased to Starbucks. The Montclair Tax Collector's Office started to send out bills to the developers to which the developers responded by saying nothing was owed yet. According to the Montclair Times:

“The township did not follow up and pursue the outstanding payments until now. When Herod and Pinnacle received their notices of default and sent letters arguing that they didn't have to pay, the municipality did nothing further. The developers therefore "assumed that the Township accepted" their explanation and reasoning, according to one letter from Applebaum.”

Thankfully, this mess has been resolved under our Township attorney’s lead, Ira Karasick, who has recovered more than $400,000 in unpaid PILOT programs.

Karasick has saved Montclair a considerable amount of money during his tenure, including more than $150,000 in legal expenses as well as money due to the township as part of Payment In Lieu of Taxes (PILOT) programs, according to Lewis.

In an Oct. 4 memo to the council, Karasick wrote that under his watch the Township Law Department had collected more than $430,000 in unpaid PILOT payments.

We should be careful with the type of agreements Mayor Jackson is trying to push on our town. PILOTs allow developers huge tax breaks at the expense of our town, our schools, and ultimately, us as taxpayers

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Is Mayor Jackson’s PILOT Program the Right Approach For Montclair?

With Mayor Jackson’s payment in lieu of taxes (PILOT) push for some development projects in Montclair, one must ask, is it good for our town? PILOT agreements typically divert funding from schools and counties and instead place the burden on local taxpayers who would need to subsidize the payments. This blog decided to look at some research on this matter and also at other towns that have either implemented PILOT agreements, or at least tried to implement the program.

According to a report by former New Jersey State Comptroller A. Matthew Boxer, PILOT programs take funds from school districts and other taxpayers:

“Our review of tax abatement practices in New Jersey found numerous weaknesses in the regulation, implementation, and oversight of these programs, including: Payments to municipalities by businesses and developers in lieu of taxes, known as PILOT payments, distort municipal incentives in using and structuring abatements at the expense of counties, school districts, and other payments.”

Additionally, the report found that PILOTs “do little to help other local entities”:

“PILOTs also shift the tax burden among regional and local taxpayers. Governing bodies set tax rates to provide a certain level of revenue for operating expenses. If selected properties are exempt from taxes, then any necessary revenue must be obtained from the remaining tax base. Thus, tax abatements may raise the tax rates for those not receiving abatements by removing a previously paying ratable (i.e., a taxable property) from the tax rolls, or by exempting a new development that could have paid taxes or that imposes extra costs on local government entities. The imposition of a PILOT may offset this shift of tax burden within a municipality; however, PILOTs do little to help other local entities reliant on tax revenue, such as counties and school districts.”

The report recommended that PILOT agreements be restructured in a way that would benefit counties and school districts:

“The current legal structure allows municipalities to keep almost the entire PILOT amount in the case of long-term abatements. This creates a perverse incentive whereby the municipality may gain revenue through granting an abatement, while other government entities lose out. This imbalance should be eliminated.”

According to a comment on Baristanet from Martin Schwartz, Mayor Jackson has acknowledged that previous PILOT programs were not structured properly and under-taxed developers:

“The Mayor has advocated publicly that some projects provide sufficient economic benefit to Montclair and are therefore worth effectively giving a County tax reduction to developers. The purpose could be further encourage redevelopment, or to encourage a project’s expansion so as to further generate even more local tax rateables. His position, which he’s made both publicly and privately to many, is that while some Montclair PILOT agreements in the past were not well-structured and may have under-taxed developers, new agreements being signed today accurately reflect both the real estate value assessments, expected taxes over the 30 year life of the PILOT, and the expectations of school age children being generated.

Regardless, the decision to offer economic development tax inducements remains with the Mayor and Council/Manager, even though the Mayor is now officially off the Planning Board.”

The under-taxing issue was also a concern for zoning board member Susan Baggs. According to Baristanet:

“Zoning board member Susan Baggs gave several reasons for skepticism for redeveloping these areas, fearing that tax abatement schemes like PILOTs would take money from the schools, forcing the state to make up the difference, and that the agreements will shortchange the town.  She insisted that the developers of the Siena haven’t paid the full amount owed under the agreement on the grounds that it’s hard for the tax assessor to know whether all the payments have been made.”

Mayor Jackson’s push for PILOTs (without knowing the full ramifications of the program) is worrisome. A full analysis on the effects of PILOTs should be done. Schwartz has even acknowledged that no analysis on the program has been done in Montclair:

“There has been no analysis done on the PILOTS, the redirection of funds, loss of certain types of revenues, impacts etc. etc.”

Taking a look at other districts in New Jersey, a discussion of the PILOT programs came up at a Board of Education meeting in the South Orange-Maplewood district, resulting in a resolution being passed for greater transparency of the programs:

“On Monday night, the South Orange-Maplewood Board of Education passed a resolution requesting greater transparency regarding PILOTs — or “payments in lieu of taxes” which are often used by municipalities to incentivize major developments.

Both Maplewood and South Orange have recently awarded or are considering awarding a number of PILOTs for housing developments. However, while the municipalities receive funds from these PILOTs, the school district does not. Municipal leaders have argued that the PILOTs are necessary to incentivize developments which, in turn, keep the towns vibrant and maintain and improve the value of taxable properties.”

A South Orange-Maplewood Board of Education member Beth Daugherty said there should at least be a compromise with PILOT programs, with some contributions going toward schools:

Daugherty does see a compromise “if the towns feel they need to offer PILOTs for economic development,” saying that she knows of no reason why PILOTs cannot include contributions to school districts.

“When future PILOTs are granted, I’d love to see us discuss contributions to the school district.”

And in Washington Township, New Jersey, the Township Council Republicans supported a mixed-use development plan that called for a 20-year tax abatement through a PILOT agreement. According to the South Jersey Times:

“Council Republicans support the PILOT agreement for the development as a means to bring permanent jobs to the township while boosting its economy, said Council President Daniel Morley.”

But the PILOT agreement has been vehemently opposed by the township school district:

“The PILOT agreement has long been opposed by the township school district, since the PILOT would allow developers to pay an annual service charge instead of regular property taxes that are normally divided among the school district, municipality, the county, fire and library districts, with the bulk going toward the schools.”

Before any other PILOT programs are implemented in Montclair, they should be fully analyzed. In the analysis, Montclair residents ought to know about previous PILOT agreements, what happened with those agreements, the amount of taxes that were diverted from the county and schools, and the tax rates residents saw before and after PILOT programs were implemented. This blog is therefore demanding greater transparency in these matters. Additionally, for the sake of our school district, a percentage of the PILOT program should benefit our schools as was considered in the South Orange-Maplewood district.

Pay to Play? Jackson’s Push To Get His Development Project Approved

This blog started exploring Mayor Jackson’s curious lawsuit with the Watchtower Bible and Tract Society of New York. The lawsuit was “curious” in a sense that Jackson struck a deal with the church- selling the property for $11,500,000 while wanting to collect a $9,500,000 “consulting fee”- but later reneging on the deal and ultimately filing a lawsuit against the church. You can revisit the blogs here: part 1, part 2. 

This blog wanted to know why Jackson sold the property to the church in the first place, when he was applying for zoning for the property to have several developments on the land. The only explanation this blog was able to find for Jackson selling the property was due to the economic downturn. 

As was mentioned in the previous blogs, Jackson intended to develop four properties on 250 acres of land. In the 2004 Town of Ramapo’s Comprehensive Plan,  Jackson’s development plan was recommended for redevelopment as an age restricted planned community of residents aged 55 and over. In July 2005, the Planning Board granted preliminary approval for Jackson’s senior-citizen housing development in addition to three other developments, totaling 1,800 potential housing units. Some members in the community were concerned that the Jackson’s development project would cause drainage issues, traffic, and affect the wetlands in the area:

“ ‘This is not going to be a good thing,’ said Edward Goodell, executive director of the New York-New Jersey Trail Conference. ‘It's a bad idea and bad planning.’ During previous sessions — the project has been discussed for at least four years — Goodell and residents have raised concerns over issues ranging from drainage to traffic to the development's impact on wetlands. Goodell said he would like to the project's density to be decreased as well its location changed so as not to impact the natural surrounding.”

Others were also interested in preserving the Ramapo River Watershed’s drinking water and the areas open spaces. Ramapo Supervisor Christopher St. Lawrence “spearheaded” the Ramapo River Watershed Intermunicipal Council aimed at preserving Ramapo’s water. St. Lawrence served as the Chairman for Ramapo Watershed:

The goal of the Watershed Council was to ensure fresh drinking water and preserve the remaining open spaces. The Advocacy Director for NY/NJ Trail Conference Dennis Schvejda said it was under St. Lawrence’s watch “that the Lorterdan project is moving towards final approval,” and by allowing the Lorterdan project to be approved, St. Lawrence was not protecting the Council’s best interests. 

This blog became interested in the contributions the Jackson municipal campaign ticket received in 2012, and was also interested in the types of contributions Jackson made. As it turns out, Jackson made a quite a few contributions in New York, including a couple contributions to St. Lawrence’s campaign:

Jackson’s Lorterdan Properties also made several contributions to Friends of Alex Gromack and the Rockland County Republican Committee:

According to Gromack’s LinkedIn page, he is the Town Supervisor for the Town of Clarkstown. It’s fitting that Gromack’s LinkedIn summary includes: “Supervisor Gromack has supported senior and 55 and over housing,” the type of housing development Jackson was trying to get zoned. 

And Jackson made even more contributions to city council and town council candidates in the county and townships Jackson’s property fell under: 

It’s clear that Mayor Jackson was interested in getting the property developed. He had a few setbacks from the environmental groups and community members, but a few contributions to town councils really helped his efforts. Does this record of shady business dealings cast light on his qualifications and current abilities as mayor? This blog is concerned about the mayor’s previous business dealings in Montclair, and whether contracts were awarded not based on merit but rather through pay-to-play dealings. From the looks of it, he may have some experience with that sort of thing. 

Why Did Developer Jackson Charge Nearly As Much As The Property For A “Consultant Fee” In Questionable Real Estate Deal?

A few days ago, this blog wrote about the big, messy lawsuit that now-Mayor (then-Developer) Jackson was involved in. In summation: Jackson’s company, Lorterdan at Ramapo, purchased close to 250 acres for $2,075,000, and later sold the property to Watchtower Bible and Tract Society of New York, a Jehovah’s Witnesses group, for $11,500,000, a 454% return on investment in just 7 years, without making any improvements to the property. The Jehovah’s faced some complications when applying for zoning, and coupled with problems in their attempts to get a tax exempt status, the group decided to ask Jackson to repurchase the property, as Lorterdan was required to do pursuant to their contract. Jackson agreed, but later reneged on his agreement and instead filed a lawsuit against the church.

While looking at some of the details from the Opinion & Order issued in the Lorterdan Properties v. Watchtower Bible and Tract Society of New York case, it stands out that a consulting fee of $9.5 million was required of the Watchtower group once they reached the decision to develop the land. The Watchtower group purchased the land for $11.5 million, so a consulting fee of $9.5 million, almost the total cost of the land, seems astronomical.

As was mentioned in the previous blog, the property was originally acquired by CHFM Associates, and was sold to Lorterdan Properties at Ramapo, LLC in 2002 for $2,075,000.

CHFM Associates is a New Jersey Partnership, founded by its partners Foun-Chung Fan, Wen-Hong Chen, Maurice Hsu, and Hsiu-Ju Mao. According to New Jersey’s business entity records, Foun-Chung Fan is also a principal at Lorterdan Properties at Ramapo, LLC. Jackson likely received the property at an extremely discounted rate because Fan also serves as a principal for Lorterdan.

So this brings us back to the question: why would Jackson ask the Jehovah’s Witnesses to pay, in addition to the $11.5 million purchase price for the property, an additional $9.5 million for “consulting fees?” According to the court, Lorterdan was required under the contract to provide “consulting services as required to secure zoning” for the Jehovah’s Witnesses over the course of two years. If we assume Jackson was engaged in these consulting services full time over the course of two years (not likely) the “consulting fee” would work out to $2,283.65 per hour. That is a pretty hefty fee, especially since whatever services Lorterdan did provide ultimately failed to get the property zoned.

            2,080 hours in a work year x 2 years=4,160 work hours in 2 years’ time

            $9,500,000/4,160= $2,283.65 per hour

It’s pretty clear that this “consulting fee” was probably not actually a fee paid for Lorterdan’s consulting services. It seems that it may instead simply be the second installment of the purchase price for the property, with some creative financial engineering behind it. Lorterdan’s own attorney referred to the $9.5 million dollar payment as the “second tranche” of the purchase price in a letter sent to the court. So, why would you break the purchase price of a property essentially in half and call the second installment a “consulting fee?” Well, one explanation might be to avoid paying some taxes. As this blog will explain in more detail below, it appears Lorterdan could have saved close to $200,000 in tax payments by essentially misrepresenting to the IRS what the $9.5 million payment was actually for.

This blog will only focus on the federal corporate tax rates, as there are too many variables to determine state and local tax rates. The principle is pretty simple: a large single transaction will be taxed at a high rate, but if you break the transaction into two smaller transactions and spread them over two years, those transactions will be each taxed at a lower rate, meaning you would pay less in taxes. This is the same reason that when people win the lottery, they often choose smaller payments made over 20 years rather than a single lump payment.

A number of assumptions are made here. First, it is assumed Lorterdan has elected to be taxed as a corporation. Lorterdan is an L.L.C. and can elect to be taxed as either a corporation or sole partnership. L.L.C.'s often elect to be treated as corporations for income tax purposes because they are generally subject to lower effective tax rates.

Lorterdan’s cost basis, or purchase price, for the property was $2,075,000. To find what the property gain was for Lorterdan, you have to take the sales price and subtract it from the basis. Without knowing a lot of the specifics, this example is just assuming that there is no depreciation, no capital improvements to the property, etc. This blog has a hunch why Jackson split the property up: the property’s value was originally intended to sell for $21,000,000 but by dividing up the costs into the $11,500,000 property costs and $9,500,000 consulting fees, Jackson would see lower corporate tax rates. Let’s take a look:

To calculate the federal corporate tax rate, you must subtract the sales price from the basis to get the property gain, which is the taxable amount. So let’s assume the property’s value is $21,000,000:

            $21,000,000- $2,075,000 (Lorterdan’s purchase price)= $18,925,000

The taxable rate for the property then would be $18,925,000. According to the federal tax rate schedule, any taxable income over $18,333,333 is automatically taxed at 35%.

So calculating the taxes on $18,925,000, Lorterdan would need to pay $6,623,750 in federal taxes.

By structuring the sale of the property at $11,500,000 and “consulting fees” of $9,500,000, Lorterdan would fall under a different tax bracket than if it reported the $21,000,000 sale price. So looking at the $11,500,000 property sale first:

            $11,500,000 - $2,075,000 (original purchase price)=$9,425,000

So following the rules of the corporate tax structure, Lorterdan would have paid $3,204,500 in taxes on the $11,500,000 property sale:

            $113,900+ ((9,425,000-335,000)(0.34))= Tax liability

$113,900 + (9,090,000)(0.34)

$113,900 + (3,090,600)= $3,204,500 Tax liability

Calculating the corporate tax amount on the $9,500,000 consulting fee is a slightly different calculation since it was a straight income. The taxable rate on the $9,500,000 consulting fee is $3,230,000:

            $113,900+ (($9,500,000-335,000)(0.34))= Tax liability

$113,900 +($9,165,000)(0.34)

$113,900 + ($3,116,100)= $3,230,000 Tax liability

So adding up the taxed portions on the land and consulting fees, Lorterdan likely would have to pay $6,434,500 in taxes:

$3,204,500+$3,230,000=$6,434,500

Now if Lorterdan had reported to the IRS that the sale price was $21,000,000, they would have paid $6,623,750 in taxes, but instead they likely decided to divide the property up into two chunks- the property price and the “consulting fee” for a total of $6,434,500 in taxes. The difference between the straight sale of the $21,000,000 and the $11,500,000 +$9,500,000 “consulting fee” is $189,250.

            $6,623,750- $6,434,500= $189,250.

By dividing the property into two separate payments, Lorterdan would 1). spread out the taxes over the course of two years instead of one and 2). pay less in corporate taxes. By structuring the deal this way, Lorterdan could have saved $189,250, by these estimates.

Based on the corporate tax structure, it could have been cost-effective for Lorterdan to split the costs into two separate payments as they did. This blog is also assuming that the $9,500,000 in “consulting fees” were being taxed at the corporate rate. If either Fan or Jackson pocketed that amount, it would be taxed at a private rate, which is less than the corporate amount. Obviously, there are a lot of variables at play here, but this scenario suggests that the deal was set up to help Lorterdan save on taxes by misleadingly classifying income.

This blog made numerous assumptions and simplifications here, but the $9,500,000 consulting fee is very strange and should be questioned and investigated by others that might know these issues better.

PART ONE: Did Mayor Jackson Rip Off a Church?

As this blog has delved deeper into Mayor Jackson’s business dealings, there have been some interesting stories that make me wonder about the Mayor’s leadership and track record, which will be recounted here. Mayor Jackson has quite a few businesses in Montclair and the surrounding communities. One business in particular, Lorterdan, is a diversified real estate development company. Lorterdan Properties has numerous businesses throughout New Jersey.

In 2002, Lorterdan Properties at Ramapo, LLC purchased close to 250 acres near the New Jersey/New York border. The property was originally acquired by CHFM Associates and was sold to Jackson.

The land was a HUGE discount for Jackson. Jackson bought the land for $2,075,000 in 2002 and later sold the land (keep reading below for the details) for $11,500,000 in 2009. If the land was adjusted for inflation, the land should only have been worth $2,474,509.59 in 2009. Instead, Jackson saw a 454% increase. That’s a pretty significant increase. After looking through records, it appears like Jackson didn’t make any improvements to the land.

So why did Jackson receive such a discount on the land he purchased in 2002? Well, CHFM Associates is a New Jersey Partnership, founded by its partners Foun-Chung Fan, Wen-Hong Chen, Maurice Hsu, and Hsiu-Ju Mao. According to New Jersey’s business entity records, Foun-Chung Fan is also a principal at Lorterdan Properties at Ramapo, LLC. Probably as a result of this partnership, Jackson received the property at a heavily discounted rate.

Once Jackson got the property in his hands, he intended to build four developments, totaling over 1,800 housing units. Jackson even received zoning for the property, but something seemingly went amiss and Jackson put the property up for sale. Some speculate the economic downturn was a contributing factor for Jackson’s decision to sell the property.

What follows next is taken from a lawsuit, Lorterdan vs. Watchtower. Documents from it are linked to at the bottom of this blog for your reading pleasure.

The property was eventually sold by Jackson to Watchtower Bible and Tract Society of New York  (a Jehovah’s Witnesses group) for $11.5 million in 2009. If Watchtower decided to develop the land, they would then pay an additional $9.5 million in “consulting fees.” A repurchase agreement on the land was also included in the contract—at any time, Watchtower could back out of the contract within a two-year period, and Lorterdan was contractually obligated to repurchase the property for the same price as it was sold for.

Over the course of a year, Watchtower had numerous setbacks when they tried to get zoning for the property in order to develop it, and were ultimately unsuccessful. Additionally, they had difficulties earning a tax-exempt status. When it was clear that Watchtower could not get the property developed within the agreed upon timeline of two years, they sent a letter to the mayor dated November 1, 2010 and asked his company to repurchase the land.

Mayor Jackson personally met with Watchtower, acknowledged his contractual obligation, and promised to begin financing the repurchase of the property. Mayor Jackson’s company, apparently planning for what to do with the property after the repurchase, petitioned the Town Board on March 1, 2011. Lorterdan’s original 2005 development plan was zoned for a 55+ Senior Development, but in 2011, he wanted the age restrictions removed due to the "proposed target market of those homes" had "drastically declined, largely because of the current deteriorated national economic conditions."

Watchtower was more than willing to work with the mayor (developer) and consented to Lorterdan’s rezoning efforts, providing Lorterdan with an Owner's Consent Affidavit dated March 14, 2011. The Owner’s Consent Affidavit stated that the Lorterdan had a contractual right in the property and there was an obligation to repurchase it from them.

However, during that period of time in March 2011, it seems Mayor Jackson’s rezoning plans did not pan out. According to the Opinion and Order, on March 28, 2011, Lorterdan’s attorneys sent Watchtower a notice that it was rejecting the repurchase agreement, despite Mayor Jackson’s previous statements and assurances. In addition to backing out of the property repurchase plan, Lorterdan demanded that Watchtower pay $9.5 million for consulting fees that would have been owed had Watchtower decided to develop the property (perhaps the mayor somehow forgot the letter they received from Watchtower several months earlier?). Mayor Jackson’s company then initiated a very, very messy lawsuit. Ultimately, the case was settled confidentially.

This begs the question: why did Mayor Jackson agree to repurchase the property from the Watchtower group, only to reject the repurchase agreement and file a lawsuit against the religious group? This blog has a couple of different theories.

1.     It’s quite possible that Lorterdan's rezoning plan submitted on March 1, 2011 was turned down, or that they weren’t able to secure financing for the project.  But even in that case, they were still obligated to buy the property back from Watchtower, and suing instead of doing that raises questions about principles and ethical business behavior.  

2.     Another possibility is that Jackson just didn’t have the $11.5 million on hand to return to Watchtower and was looking for a way out of the contract. But in that case, that’s just irresponsible.

The case raises a number of interesting and important questions that will be explored in future posts. Stay tuned…

For more information on the case, click here.