Bayonne, N.J., wants to transform a former naval base in New York Harbor into a large-scale mixed-use development with the help of tax increment financing, among other funding options.
The site is a 430-acre stretch of land called the Peninsula at Bayonne Harbor that officials anticipate could be a revenue booster for the city once the site is fully developed. To reach that goal, officials at the Bayonne Local Redevelopment Authority, which oversees the Peninsula, would like to leverage future property tax revenues in order to transform the site.
The state's Local Finance Board is reviewing an application for establishment of a revenue allocation district, or RAD, for the site and could weigh in on the plan at its Dec. 10 meeting. Gaining approval for a district would allow projects on the Peninsula to benefit from tax increment financing bonds, called RAD bonds in New Jersey.
The state also has redevelopment area bonds, which are used to help finance stand-alone projects as opposed to an entire area. RABs tend to involve payments in lieu of taxes.
While RABs have been used in many redevelopment projects throughout the state, a big-box retail development in Millville in southern New Jersey is the only approved RAD bond transaction to date, even though state lawmakers approved the financing tool in 2002.
The Peninsula currently has more than $100 million of capital needs to prepare the site for development, according to BLRA executive director Joseph Nichols. Using RADs, as opposed to the city or county selling general obligation bonds, would help transform the site into a mixed-used community without putting a strain on the local government's borrowing capacity, he said. In addition, in the future the authority could tap into other revenue streams beyond property tax receipts to help finance residential and commercial growth.
"If you can dedicate the new property tax revenue to the RAD, you'd have a recurring revenue source that's capable of self securitization and of use within the district," Nichols said. "And it can certainly handle many of our capital needs. Unlike a TIF, RADs can also dedicate other revenue which would include lease revenue, sales tax revenue, hotel tax revenue, and parking tax revenue."
The Peninsula at Bayonne Harbor plans include two million square feet of commercial space and 6,000 residential units, along with industrial port business and a cruise-ship terminal. The Peninsula is seven miles from Manhattan, with views of the island and the Statue of Liberty.
"There's no bad view from this place," Nichols said. "It truly is an impressive project and there's no question that over time it will be a significant contributor not only to Bayonne's economy but also to the region's. ... If it's built out as currently planned, it would contribute as much as 40% of the town's operating budget."
If the Local Finance Board approves the RAD application, the site will need to generate enough revenue to bond against. Those revenue streams may not kick in until mid-to-late 2009, according to Joe Baumann, bond attorney at McManimon & Scotland LLC, the Bayonne authority's bond counsel.
Officials expect to receive a total of $90 million from Ports America Inc. in a land deal that will also bring in $1.8 million each year in annual taxes. Ports America will build a roll-on, roll-off vehicle port on up to 90 acres of land.
In addition, Trammell Crow Residential will build 530 luxury apartments that the real estate developer will begin renting in June. Trammell agreed to pay $18.4 million for the development rights on the site. Baumann said once those revenue streams are in place and generating funds for the authority, the project can move forward with the potential RAD bond sales.
"I think in this market, in this credit environment, it's probably going to be difficult to sell the bonds as non-recourse obligations until the revenue streams have begun," Baumann said. "I don't think the bonds could really be sold until the first two significant revenue streams are coming in, and the first one would be the close on the Ports America land sale. That will immediately produce tax revenues that could go into the RAD and could be securitized. And once Trammell Crow gets their [certificates of occupancy] and begins paying their taxes, then those two revenue streams should begin by the end of 2009."
The BLRA is currently working with the New Jersey Economic Development Authority on how best to finance development at the Peninsula. Along with potential RAD financing, the area could use RABs and possibly general obligation debt as well as state grants. The BLRA, the NJEDA, and the city of Bayonne could serve as issuers for the bonds.
New Jersey lawmakers are currently working on a bill sponsored by Sen. Raymond Lesniak, D-Union, that would facilitate more RAD financing in the state and, if passed, could help Bayonne officials use RAD financing at the Peninsula.
According to legislators and others familiar with New Jersey's current RAD law, the act is cumbersome and leaves unanswered financing questions. But even if the new measure fails to pass, the Peninsula could still use RAD financing if the Local Finance Board approves the application next week.
"The [Lesniak] bill also makes technical changes to how revenues are undertaken and what revenues go into it ... those technical changes will be a significant benefit to Bayonne," Baumann said. "It cleans up the current law while expanding it, yet Bayonne doesn't necessarily need it."
The Lesniak bill would also open up RAD financing to areas in need of rehabilitation, not just blighted neighborhoods or transformation projects like the Peninsula. The measure would also allow for abandoned property to benefit from RADs.
At a Senate Economic Growth Committee hearing last week, Lesniak stressed the importance of bringing private developers and businesses into areas that have a hard time attracting new retail and residential projects. The bill calls for not only LFB approval on RAD applications, but also evaluation by the NJEDA. That agency would receive a fee of $10,000 to $25,000 for review and determination as to whether a RAD application meets the requirements of the law, according to an Office of Legislative Services fiscal estimate on the Lesniak bill.
"They will have to make a determination that this development would not go forward without this type of financing," Lesniak said during the hearing. "So the state really is not going to lose any of these revenues because without this financing it wouldn't occur in the first place. And then they will decide what percentage of the revenues allowed for this financing is necessary to do it, and the financing will be used to build the infrastructure and needs of the development or the cleanup costs, which is an infrastructure need."
During the hearing, many senators and other speakers said that RAD financing should only be used when other financing options fail to materialize and to help keep developers interested in an area or a project. But Stefan Pryor, Newark's deputy mayor for economic development, said New Jersey's largest city would gain more commercial and residential development with RAD financing and that municipalities would use the financing mechanism properly.
"We assure you that if you do put these structures into better repair, if you improve the RAD that is, we will continue to work through rigorous evaluation processes ... to ensure that we select projects that are viable, that are efficient, that need the least subsidy, and generate the greatest return," Pryor told the Senate committee.
Yet reserving RAD financing for projects that would not occur without it could be difficult to adhere to, Gregg Edwards, president of the Center For Policy Research of New Jersey, said in a phone interview. The center is a nonprofit think tank that stresses free markets.
"Are you subsidizing something that would have occurred anyway, or are you encouraging something that wouldn't have happened without it?" Edwards asked. "And that to me is always the crux of the problem. And it seems clear to me that if you are talking about a site that has a lot of environmental problems, then TIF financings might make some sense. But there probably are other instances where it might be subsidizing economic development that would be happening anyway."
Conversely, Baumann said that if used properly, RAD financing allows a local government to redevelop an area without tapping into GO debt while creating a larger or new tax base that will benefit local coffers over time.
"And then when it's all done, if the RAD works the way it should, 10, 15, 20 years from now you have a project that couldn't have gotten built, and it's built," Baumann said. "The RAD bonds have been paid off and everything goes back to the normal tax rolls, and in Bayonne's case you basically built a city the size of Hoboken, and also you've accelerated that process in difficult economic times where you have extraordinary costs."