For Phoenix water heaters to run "closed system", the heating loop has to be isolated with an exterior heat exchanger and circulation pumps on each side of the isolating heat exchanger. See the "brazed plate" indicated in figure 7, page 21 (pdf. pagination) in the manual, which is the isolating heat exchanger in the diagram.
Open systems may or may not meet code in NJ, but they're a bad idea in general.





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