Renderings of Jersey City's Montgomery Gardens mixed housing plan. This project didn't benefit from the city's PILOT program, but it's an example of the city's vision of mixed-income development. Jersey City Mayor's Office

The city wants to steer mixed-income development to all its neighborhoods with clever tax incentives.

“Jersey City is really blowing up.” That’s a common refrain among people living in and around New Jersey’s second-largest city.

The historically industrial area has come a long way from the 1960s and 1970s, when jobs, residents, and investment began to disappear. The city has since repackaged itself as the cheaper, homier alternative to Manhattan and Brooklyn. Today it has young and diverse residents, many of whom work in New York, a short train ride away. By living on the Jersey side of the Hudson they avoid those high New York state income taxes.

But Jersey City’s growth, like that of so many U.S. cities, has been unequal. New residents funnel into the swanky, walkable neighborhoods downtown and along the waterfront, where most of the last decade’s development has taken place. The annual median household income of Port Liberté, for example, is $100,000. Rents there can climb above $2,000 a month.

In less sought-after neighborhoods, meanwhile, median household income ranges between $20-30,000, and rent can dip below $750. (For context, the city’s median household income is approximately $58,000.) Some of these neighborhoods are losing residents, especially the ones far from transit options.

Jersey City renters paying more than $2,000 a month are concentrated in the downtown and waterfront neighborhoods; those paying less than $750-1,000 are the center and west. (Jersey City Mayor’s Office)

In the coming years, Jersey City’s overall population rise is expected to accelerate, and the housing stock is expected to increase by 20 percent by 2020. To ensure this growth is equitable, the city has unveiled a clever new housing policy that employs a seemingly simple strategy: tax incentives. Local officials believe the plan can preserve community while promoting development—a harmony that’s proved so elusive elsewhere.

“Where many urban areas in the country have affordable housing condensed into one area and market rate elsewhere, we think a healthy city has both market rate and affordable touching every corner of the city,” Mayor Steven Fulop tells CityLab.

An “innovative” approach

Jersey City’s new housing plan is expected to become effective in the coming months after adjustments to the city code. It hinges on the extension of Fulop’s Payment In Lieu of Taxes (PILOT) policy, instituted in 2013, which offered developers stronger incentives to build in neighborhoods that were getting less attention from the market. So far it seems to be working.

“​[The PILOT plan] been instrumental for moving housing away from the waterfront, which was the original location of the market housing,” says James Hughes, dean of the Edward J. Bloustein School of Planning and Public Policy at Rutgers University, who is familiar with the 2013 policy’s outcomes. Hughes gives the example of Journal Square, a neighborhood that was languishing before PILOT but is now hosting new development.

The updated PILOT plan divides the city into four zones (below) with their own set of tax incentives and affordability requirements. Tiers 1 and 2 cover areas that are already quite developed. To build here, builders have shorter-term property tax abatements—exemptions or subsidies that reduce the cost of construction. Tiers 3 and 4 cover neighborhoods where the city wants to lure developers; these places have longer-term abatements. Each tier requires builders to construct or fund some affordable housing in the city.

Tier 1, for example, has a tax-abatement term of 10 years. To build in this zone, PILOT requires developers to set aside 10 percent of the total number of units for affordable housing. Tier 4, on the other hand, has an abatement term of 30 years, and requires 15 percent affordable housing contribution. If developers in any zone want to extend their tax-abatement period, they’ll have to commit to building additional affordable units.

(Jersey City Mayor’s Office)

Simply put, Jersey City would offer the smallest tax incentives for market-rate development in already-coveted neighborhoods—along with strong requirements for affordable housing. In less sought-after neighborhoods, meanwhile, it would offer the strong incentives for all development.

“What makes the Jersey City plan innovative … is that it varies the level of the tax incentives for development based on the market characteristics of the neighborhood,” Alan Berube, senior fellow and deputy director of the Brookings Institution’s Metropolitan Policy Program tells CityLab via email. “Too often cities fail to use these incentives strategically, or they spread them around like peanut butter.”

Tipping the scale toward affordability

Officials say many of the city's underdeveloped areas would remain that way without the tax subsidies at the core of the plan. By jumpstarting development in these vacant places, which currently aren't generating tax revenue, the PILOT policy will lead to an expanded tax base, more property taxes, and greater overall economic activity. They also argue their approach to affordable housing is more cost-effective than other alternatives.

"Ultimately, the incentives that we're using are still cheaper than if the city was to go through acquiring property itself and construction of huge numbers of affordable housing,” Fulop says.

Berube, who praised the plan via email, does warn of a potential pitfall. As with Seattle’s new affordable housing plan, Jersey City developers have the option to donate to the city’s Affordable Housing Trust Fund instead of putting up affordable units on their site. (State laws mandate that developers have a choice to waive affordable housing requirements; in other cities, similar requirements have come under fire.) This option might let them buy out of developing affordable units in high-demand neighborhoods, and lead to the type of imbalance Jersey City is trying to resolve.

City officials aren’t worried—they’re confident the tax incentives will tip the scale in favor of building on-site affordable housing. Hughes, the Rutgers planning professor, points out that because the state has the highest property taxes in the country, the tax abatement incentive is particularly potent here. With the PILOT policy, there’s a much greater chance that affordable units are built where they’re needed, he says. Plus, affordability is what can help Jersey City maintain its advantage over Manhattan and Brooklyn, which would be good for the city’s overall housing economy.

“Jersey City has a natural cost advantage,” says Hughes. “But the greater its cost advantage in terms of rent levels, the greater share of the [regional] housing market they're going to be able to secure."

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