Recent Changes in New Jersey Redevelopment Law

Source: Surety Title Corporation, Marlton, NJ

Recent Changes in New JerseyRedevelopment Law.
Redevelopment has become the focus of development in New Jersey. In the past several years, municipalities, developers and the public alike have begun to realize and appreciate the flexibility and positive impact redevelopment can have on communities. The trend is being furthered by the State of New Jersey's strong policy of smart growth, which discourages development in greenfields but encourages it in centers where infrastructure and mass transportation exist. The New Jersey Legislature recently amended New Jersey's redevelopment laws.

Changes in the Long Term Tax Exemption Law
The Long-Term Tax Exemption Law allows municipalities to enter into financial agreements with redevelopers whereby the redeveloper undertakes a project and is granted tax exemption. In return, the redeveloper makes a payment in lieu of taxes (PILOT). The PILOT structure provides that for the duration of the exemption (up to 30 years from the completion of the project, or 35 years from the execution of the financial agreement), the redevelopers does not pay taxes, but instead pays a fee (the PILOT) to the municipality in the amount of 15 percent of annual gross revenues form the project or two percent of total project costs, with certain limited exceptions. The municipality retains 95 percent of the PILOT payment with five percent under the new legislation dedicated to the county. The PILOT may also be applied to for sale housing units. Thus, individuals purchasing homes from the redeveloper have the assurance of knowing that for a set period of time it will pay a fixed PILOT rather than ever increasing real property taxes. This can be a useful marketing tool.

Ratification of Prior PILOT Agreements
One aspect of the new legislation provides that all tax exemptions approved under the current law or its predecessor is ratified and validated. This broad ratification was a response to the recent Secaucus v. Jersey City line of cases, where a PILOT arrangement made pursuant to the redevelopment laws was held to be invalid. The tax court's findings that the structure of the tax abatement was invalid caused great concern among redevelopers and municipalities alike. This aspect of the legislation was interned to allay that concern.

Others Changes To the Law
As noted, five percent of the annual PILOT payment received by the municipality must now be remitted to the county. This does not increase the payment paid by the redeveloper. In addition, the municipality may now levy an administrative fee not to exceed twp percent of the PILOT. Some definitions have also been revised with significant effects on the structure and calculation of the payments to be made to the municipality by the redeveloper. For instance, the definition of gross revenue has been amended to exclude any gain realized by the redeveloper from the sale of a unit in fee simple. This provision facilitates use of PILOT's on for sale residential units.

The definition of allowable profit rate has been amended to cap the allowable profit rate at 12 percent. In addition, the definition of expenses now includes payments of rent by the redeveloper (including ground rent), all debt service and amounts sufficient to amortize all capital costs. The amended legislation also includes a new definition of total project costs where the project includes for-sale units. In this case, the total projects cost for those units would be their sales price in a bona fide arms' length sales transaction, but cannot be less than the assessed at 100 percent of true value. Total project cost may also exclude any extraordinary costs associated with alleviating blight in the redevelopment area.

A new definition of debt service has also been added, and is defined as the amount required to make annual payments on the principal and interest on any project financing for the term of the tax exemption. These provisions were intended to give greater flexibility to the municipality and the redeveloper in fixing the PILOT structure. Several other noteworthy changes were made to the law. A new generalized provision was added to the criteria for determining whether an area is in need of redevelopment. The H criterion permits a municipality to designate an area in need of redevelopment if the ‘ designation of the delineated area is consistent with Smart Growth planning principles adopted pursuant to law or regulation." However, the validity of this section is subject to question, and should be used with particular care.

Finally, as part of the approval process for the redevelopment project, the municipality must now submit its resolution designating the area in need of redevelopment to the commissioner of the Department of Community Affairs for review. If the area in need of redevelopment is not located in an area where state laws and regulations encourage development or redevelopment, the designation cannot take effect without the commissioner's approval. Overall, these changes were intended to facilitate and expand the use of New Jersey's redevelopment laws.

The authors of this article Roberts S. Goldsmith is a partner at Greenbaum, Rowe, Smith, Ravin, Davis, & Himmel L.L.P., in the firm's real estate department and land use practice group. He concentrates his practice in redevelopment and representing special improvement districts and has broad experience in complex commercial litigation, construction litigation and appellate work. Jennifer J. McDermott is an associate in the firm's real estate department and banking and creditor's rights practice group. Her areas of practice including commercial real estate, mortgage and asset based financing, redevelopment, zoning and land use, and environmental matters.