To the Editor:
I write in response to recent letters to the editor and paid advertisements that have characterized the planned Stockton Street (the Seminary) project’s PILOT (Payment in Lieu of Taxes) Agreement as something nefarious and at the expense of other property taxpayers. Contrary to what has been claimed, the arrangement is not a rip-off of taxpayers, is not corporate welfare, and it has no impact on Mercer County’s ability to deliver vital services to its poorer communities.
For many years I was chair of Princeton’s Citizens Financial Advisory Committee. I have closely followed the Stockton Street project and studied the presentation to Princeton Council concerning the adoption of the PILOT agreement.
To approve the use of a PILOT arrangement, the town must determine that a development cannot be developed as envisioned without a PILOT. PILOTs are used to codify the financial agreement between a town and a project developer. They replace the annual property tax assessment mechanism familiar to most property taxpayers. PILOT payments are calculated based on a project’s audited financial statements thus creating a higher degree of transparency than in traditional commercial property tax assessments, which do not require audited statements.
The Stockton project includes 48 units of affordable housing that contribute to the townwide court mandated obligation. It helps fulfill the town’s environmental responsibility to focus housing growth in the denser, walkable areas of town. The project will introduce mixed-income housing to a wealthy section of town where none exists. The tension between the need for additional, inclusionary housing while maintaining neighborhood character is a real challenge. Meeting that challenge entails additional, cost-additive investments. However, the project’s projected rental revenue stream net of property taxes is insufficient to generate an adequate return to support the total investment. To induce the developer to make the investment the town negotiates a PILOT that is less than the property taxes. The reduction is sufficient to improve the project’s financial return. Without the PILOT, the project would only have an internal rate of return of 5.90 percent, which is not commercially viable. What could be built would be a far less desirable project.
But what if the project’s returns and the profits are higher than forecasted? The PILOT agreement provides a claw-back mechanism for excess profits based on audited financial statements. Any excess profits revert to the town.
The schools and county do not lose revenues from PILOTs. The schools and county each budget how much they plan to spend and (net of other revenue) send the tab to the town for the town to pay in full. The exclusion of this Stockton Street property from the town’s $7+ billion aggregate tax base will be minimal.
Finally, this PILOT arrangement will produce significant new revenue to the town. The town’s financial analyst projects revenue to the town upwards of $48M over the course of the agreement — revenue that can be shared with the school district above the 2 percent cap.