The Star-Ledger

Newark Home Owners, Not Builders, Need Tax Break

The Star-Ledger — Friday, January 30, 2009

By Joan Whitlow

There is a glut of new homes in Newark and some builders are leaving projects unfinished to avoid the property taxes on completed homes. A city that got rid of many empty lots and abandoned buildings during a lucrative building boom is now seeing an increase in shiny new derelicts that threaten to create a new kind of neighborhood blight.

The city's solution? Give the builders a tax break.

There's room to improve on that idea.

The city council has passed an ordinance sponsored by Mayor Cory Booker's administration that allows builders to get the five-year property tax abatement that used to be reserved for owners who promised to live in the abated homes. The city hopes the new deal will convince builders to complete their projects and rent them out at least until the market improves. The administration says the effect on the budget is the same as if a live-in owner got the abatement and better than if unfinished property were held off the tax rolls. Blight is avoided and people get to rent in nice new buildings.

Many question the wisdom of almost any kind of tax abatement, which is supposed to be an incentive to attract buyers to hard-pressed areas. The advocacy group New Jersey Policy Perspective is working on a report that calls for a complete rethinking of abatements. For instance, the group questions why Jersey City needed to give tax abatements on condos that sold for $1 million. Why indeed?

Stefan Pryor, Newark's deputy mayor for economic and housing development, said abatement might reduce the $10,000 tax on a new multifamily home in Newark to $4,000 or $6,000, and under the new ordinance builders will pay a little more than owner-occupiers would. Yes, but limiting abatement to a live-in owner was a wise way to reduce absentee landlord problems. Will the cash-strapped builders deliver affordable rental prices?

The good outcome the city hopes for seems dependent upon the builders and market forces that created the mess.

The slump in home sales is national, but Newark's recent real estate history is special. The previous mayor went to jail for giving land bargains to the favored. Newark sold prime city-owned lots for a few dollars per square foot and asked nothing in return from the builders. In some cases the builder, lender, lawyer and inspector came as a package deal that did not protect the buyers' interests. Multifamily homes selling for $400,000 to $600,000 meant the owners had to charge high rents to make the mortgage. In many cases it was government rent vouchers that made the math work. It was only a matter of time before that house of cards collapsed.

The new tax breaks may reduce the incentive for builders to cut their prices and sell the houses. Pryor said the builders in Newark have already reduced their prices.

Well, on the same day that the council approved the builder tax break, it also approved some owner-occupied tax abatement for recently purchased homes. According to the documentation, construction costs for one Central Ward three-family house were $235,000 and the purchase price was $499,900. A South Ward three-family, for which the listed building costs were considerably less — $170,000 — sold for considerably more: $505,900.

If builders can get those prices do they need tax abatement? If they can't sell the homes, don't those price-to-construction cost ratios suggest room to discount before running to the city for a tax break?

Pryor told me that the "certified cost" does not include everything: The cost of land is not reflected, for example. Then, reflect it. That way we could see if some of the builders about to benefit from tax abatement already benefited from ultra-cheap city land deals before the Booker administration put a stop to them.

Phyllis Salowe Kaye, executive director of New Jersey Citizen Action, a consumer group that makes housing a priority, says that even in this market her group can get 4 percent, 30-year, fixed rate mortgages for people of modest means who either have good credit or attend credit counseling and scrupulously pay their bills on time in order to repair their credit. The group works hard to match people with houses they can truly afford, which means properties in the $250,000 range — and those are in short supply in Newark.

She said, however, that lease-purchase programs would help Newark's current problems by allowing people to rent the surplus stock and have a portion of what they pay set aside toward a future purchase. Also, people who lose their homes to foreclosure have trouble renting unless landlords look past that blot on their credit records.

Can the city, in return for tax abatements, get developers to do such things? Should it have worked that out before passing the ordinance?

I know a quick way to reduce the blight by at least one unit. "When is the mayor going to buy a house in Newark," is one of the questions I hear most often from people who seem to think it is important for officials to share the consequences of property tax decisions. Can you blame them?

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