Redevelop NJ

Gov. Corzine Signs 'Anti-EnCap' Bill Into Law

By Maria Wood

"The intention of the law is noble," says Ted Zangari, a Newark-based redevelopment law attorney with Sills Cummis & Gross. "No one wants to see the kind of waste and abuse [by EnCap] that was documented by the state auditor. But the new law is misguided in a number of ways, beginning with the requirement of a 110% performance bond. Let's not forget that performance bonds were in place on the EnCap project and yet completion of site work is far from a sure thing."

NORTH ARLINGTON, NJ-On Monday here, Gov. Jon Corzine signed the so-called "Anti-EnCap" bill, which establishes oversight on certain public-private projects, into law. After a string of victories in the legislature, the move was a rare defeat for the commercial real estate industry and economic development community that maintains the bill was an overreaction to the controversial EnCap project in the Meadowlands.

To read full article please click here.

Zangari on GlobeStTV

Ted Zangari was interviewed by Alyson Grala, associate editor of Real Estate New Jersey magazine, about the Smart Growth Economic Development Coalition and the economic recovery legislation that was signed by New Jersey Governor Jon S. Corzine on July 27, 2009. To watch the interview please click here.

NJ-NAIOP's Special Legislative Update Breakfast

NJ-NAIOP’s Special Legislative Update Breakfast regarding the NJ Economic Stimulus Act of 2009 took place on July 30, 2009. To view select materials from this morning's breakfast program, please click on the links below:

Economic Stimulus Act of 2009 Statewide Non-residential Development Fee Provisions
PowerPoint Presentation by Kevin Moore, Member of Sills Cummis & Gross P.C. 

Developer-Oriented Highlights of the New Jersey Economic Stimulus Act of 2009

Highlights of the New Urban Transit Hub Tax Credit (UTHTC) Program
Handouts by Ted Zangari, Member of Sills Cummis & Gross P.C.

 

Governor Corzine Signs New Economic recovery Legislation

(Blog editor-in-chief Ted Zangari, founder of the Smart Growth Economic Development Coalition, second from left, watches Gov. Jon Corzine enact the NJ Stimulus Act of 2009.)

 

Long term initiatives focus on continued rebuilding of economy

NEWARK - Governor Jon S. Corzine today signed economic recovery legislation to further reinvigorate the Garden State economy through a series of enhanced economic development measures.

"Without a doubt, the current global economic crisis has presented us with of one our greatest challenges, but it is also one of our greatest opportunities," said Governor Corzine. "Last October, we introduced a far reaching and multi-faceted Economic Recovery and Assistance Plan. Today we are building upon those initiatives with this additional recovery legislation that will help our economy and citizens grow stronger and more prosperous."

The bill, S-2299/A-4048, establishes an Economic Redevelopment and Growth (ERG)

Grant Program; revises the Urban Transit Hub Tax Credit Act and the Technology Business Tax Certificate Transfer Program; places a moratorium on COAH "Statewide Non-Residential Fee Act" and authorizes grants to municipalities for affordable housing and improves the financing of higher education facilities in New Jersey.

"In the face of daunting national economic challenges, New Jersey has been at the front of the pack in developing new thinking and approaches to staunch the hemorrhaging of jobs and economic activity out of our State," said Senator Raymond Lesniak, (D-Union). "The initiatives contained in this bill will establish even stronger job growth and business retention policies that ultimately will help create thousands of new jobs and billions of dollars in economic activity around the State. I applaud Governor Corzine for his foresight and commitment in making New Jersey the first to deal with the global economic crisis, and this legislation is another step forward in our State's path to economic recovery and prosperity."

"This legislation is real proof of Governor Corzine's pro-urban and pro-jobs New Jersey agenda. For cities like Newark, the signing of this Economic Stimulus bill will create tangible development and new tax revenue which will help us achieve economic progress. This smart growth legislation will be the catalyst for an increase in jobs, construction projects and investment opportunities that will not only benefit Newark's residents but all of New Jersey. Thanks to the leadership of our Governor and State Legislature, New Jersey is on the path to economic recovery."

The Economic Redevelopment and Growth (ERG) Grant Program will be established in the New Jersey Economic Development Authority (EDA). The program will provide incentive grants to developers that will reimburse a portion of taxes generated through the project. This will help fill in financing gaps which represent a part of the total redevelopment project cost for which the developer cannot find other financing.

"Local officials and businesses need more tools and greater flexibility to work together in planning and building the infrastructure projects that will bring new jobs and economic opportunities to New Jersey," said Assembly Speaker Joseph J. Roberts Jr. (D-Camden). "This multi-faceted effort sends the clear message that New Jersey is open for business and looking to the future."

As a further catalyst to economic development, the bill expands eligibility, clarifies qualifications, and limits certain provisions under the "Urban Transit Hub Tax Credit Act." This includes lowering the capital investment threshold from $75 million to $50 million for an owner of a qualified business facility and from $50 million to $17.5 million for a tenant that occupies a leased area of the qualified business. It also expands the "urban transit hub" definition.

"An investment tax credit is an important tool to luring new jobs and taking full advantage of our transportation infrastructure," said Assemblyman Albert Coutinho (D-Essex). "Focusing private investment in our transit hubs would complement the infusion of federal stimulus money in vital transportation projects."

In addition, revisions to the Technology Business Tax Certificate Program will increase the transferability and amounts of the new or expanding emerging technology and biotechnology companies' research and development tax credits and net operating losses. These changes include an increase in the maximum lifetime benefit per business from $10 million to $15 million.

"New Jersey has a long history of being a hub for technological innovation and advancement," said Assemblyman Upendra Chivukula (D-Somerset). "This enhanced investment incentive will ensure we continue writing new chapters of that history."

The legislation also exempts certain property from the 2.5% development fee imposed by the "Statewide Non-Residential Fee Act" and appropriates $15 million to the "New Jersey Affordable Housing Trust Fund. " As a result, the Department of Community Affairs (DCA) will have the ability to grant awards or loans to municipalities based on their anticipated use of municipal development fee funds.

"We cannot allow towns to back away from their responsibilities to provide housing choice and opportunity to all working families, but this move recognizes the vital need to move projects along and get shovels in the ground during these extraordinary economic times," added Speaker Roberts.

To improve financing opportunities of higher education facilities in New Jersey, the bill allows state and county colleges to enter into public-private partnerships for on-campus construction projects. The New Jersey EDA will be responsible for reviewing and approving all projects, which must be submitted within 19 months of enactment of Act.

"Too many state colleges and universities have been forced to rely on borrowing and tuition hikes as they try to keep up with the needs of rapidly growing student populations," said Assemblyman Patrick J. Diegnan Jr. (D-Middlesex). "Allowing schools to work directly with the private sector will not only create the modern campuses needed to keep more students in New Jersey, but will also do so in a more financially sound way."

The legislation also provides authorization for certain municipalities to impose special taxes and surcharges to fund redevelopment activities and certain programs.

"Not only are we giving towns a new tool to help them smartly redevelop, but we are basing it on a highly successful program that has proven results," said Assemblyman Louis Greenwald (D-Camden). "Tossing aside a failed model for one we know works makes common sense."

Certain large, energy-efficient audited manufacturing facilities producing products from post consumer materials will also find relief through a seven year exemption from the sales and use tax on their purchase and use of energy and utility service and from the transitional energy facility assessment ("TEFA") unit rate surcharge.

The bill was sponsored by Senator Raymond J. Lesniak (D-Union), Assembly Speaker Joseph J. Roberts, Jr. (D-Camden, Gloucester), Assemblymen Albert Coutinho (D-Essex, Union), Patrick J. Diegnan, Jr. (D-Middlesex), John S. Wisniewski (D-Middlesex), Upendra J. Chivukula (D-Middlesex, Somerset) and Assemblywoman L. Grace Spencer (D-Essex, Union).

Governor Corzine swiftly responded to the global economic crisis by introducing his Economic Assistance and Recovery Plan in October 2008 during a joint session of the New Jersey Legislature. With the Legislature's quick action, the Governor has advanced many initiatives designed to stimulate New Jersey's economy and create jobs while also working to protect those hardest hit by the slumping economy through food, home energy assistance and foreclosure programs. Federal funds through the American Recovery and Reinvestment Act (ARRA) passed by Congress and signed by President Obama on February 17, 2009 complements Governor Corzine's Program.

Developer-Oriented Highlights of the New Jersey Economic Stimulus Act of 2009

This is a summary of a complex law.  You should consult an attorney for its particular application to your circumstances.

 

The New Jersey Economic Stimulus Act of 2009, which the Legislature passed last week and which is awaiting the Governor's signature into law, provides four major economic stimuli to the development community – (1) a new tax increment grant/financing program to be known as “ERGG”, (2) an expanded and improved business attraction incentive program in urban transit hubs, (3) a new tax credit for developers of residential projects in urban transit hubs, and (4) a full moratorium on the affordable housing fee for certain non-residential projects, a total or partial refund of the affordable housing fee for certain non-residential projects and a corresponding reduction or elimination of the municipal actual growth share obligation generated by such exempted non-residential projects to the extent State or Federal funds are not available to partially or fully fund the fee such projects would otherwise have generated.

To read the full report please click here.

HOW SWEET IT IS!

The following is a speech delivered this morning by Sen. Raymond J. Lesniak, sponsor of the Economic Stimulus Act of 2009, to the NJ Business & Industry Association:

"I've been calling my economic stimulus legislation, which now awaits Governor Corzine's signature, “The most powerful economic growth tool on the planet.” Some have asked, "On the planet?.” If its impact on the City of Elizabeth is typical, I might have to change my assessment from "On the Planet" to "In the Universe". Let's take a look at what it brings to Elizabeth.

To read the full remarks please click here.

Stimulus Bill is the Right Prescription for Jump-Starting the State’s Economy

Op–Ed by Ted Zangari

In September 2007 – one month before the Dow hit its all-time high – over a dozen trade associations representing business, real estate and labor met to address “twin crises” affecting New Jersey. One, a short term “demand” crisis: the outmigration of jobs and residents to other states. The other, a longer term “supply” crisis: when businesses and people stop leaving the state and more start arriving, as demographers predict, where will this fully built-out state house them, if not on the remaining greenfields now off-limits to development?

The upshot of that meeting was the formation of the “Smart Growth Economic Development Coalition” and a year-long effort to draft a “stimulus package” for legislative consideration.

Many of the ideas promoted in the Coalition’s stimulus package are now embodied in the Economic Stimulus Act of 2009 (A-4048/S-2299) which the State Senate and Assembly are considering this week. The Coalition, whose member-organizations include groups that have thought long and hard about urban renewal, comprehensive land use planning, affordable housing, and business retention and attraction, strongly believe that A-4048/S-2299 will have dramatic positive consequences for the future of our state.

For example, consider the “Urban Transit Hub Tax Credit” (UTHTC) program within A-4048/S-2299. From an economic development perspective, this powerful new business incentive tool – unlike any business inducement program in the country – will attract large-scale employers to our state’s urban centers. Businesses otherwise headed to adjacent states or the sunbelt will be compelled to at least give serious consideration to locating their offices or factories to the cities included in the program. And because there’s a six-year window for eligibility, this program will spur projects in the next few years that will significantly contribute to the State’s economic recovery.

The nine eligible “urban aid” cities are not the only ones who will benefit if businesses relocate there. The state’s taxpayers will also win because the sooner these cities grow their property tax bases, the sooner they will be weaned-off of state aid. And the environment will benefit because under the program, office towers must locate within a half-mile of commuter rail stations to qualify for the tax credit, thus encouraging employees to take mass transit, and factories must locate along freight rail lines to qualify for the tax credit, thereby taking three or four tractor trailers off our roadways for every rail car loaded or unloaded.

Consider also the “Economic Redevelopment and Growth Grant” (ERGG) program within A-4048/S-2299. If anyone has ever wondered why large-scale mixed-use redevelopment projects have not risen in cities beyond our Hudson River waterfront, where rents and hourly parking rates enjoy the proximity to Manhattan, the answer is simple: the unique costs of redevelopment – land assemblage, environmental remediation, expensive structured parking – far outstrip the cost of developing in previously undeveloped greenfields, and yet there are no premium revenues to offset those added costs. Not even the developers of successful redevelopment projects on New Jersey’s “Gold Coast” have been able to “make the numbers work” for new redevelopment projects in those cities in recent years. Forty-eight other states have well-oiled tax increment financing programs to help close the financing gap on redevelopment projects, and yet, ironically, the state that needs redevelopment more than any other, New Jersey, has not had a workable tax increment financing program and will not unless A-4048/S-2299 becomes law.

Opponents of A-4048/S-2299 would have you believe that the legislation is nothing more than wasteful “pork-barrel” or “Christmas tree” subsidies to wealthy business-owners and developers. They could not be more wrong.

The Urban Transit Hub Tax Credit program is a fiscally responsible, smart growth response to the generous financial rewards other states are offering to businesses. In other states, incentives are granted regardless of where a business relocates, while the UTHTC is specially targeted to only nine urban, rail-connected cities. Competing states offer as-of-right incentives, but the UTHTC requires the NJEDA to confirm that an applicant’s project will have a net positive benefit to the state and host city after all public support to the project and municipal services have been taken into account.

The same applies to the Economic Redevelopment and Growth Grant program. Critics decry ERGG’s use of local property taxes to defray the cost of redevelopment projects. They claim that these dollars merely allow developers to earn the same profits that they used to earn developing greenfields before they were placed off-limits; the truth is that developers stand to actually lose money on most redevelopment projects, thus explaining the absence of construction cranes on the skylines of Newark, Elizabeth and Camden. Critics of A-4048/S-2299 also fail to mention that ERGG grants can only be funded using the incremental extra taxes generated as a result of a project; the existing taxes paid on a property can’t be touched. They also fail to note that once debt service on a project’s construction costs has been satisfied, 100% of the incremental extra taxes will go to the host municipality. And critics overlook the multiplier effect: these redevelopment projects will create near-term construction jobs, and longer-term permanent jobs, as well as new economic activity generating new income taxes and sales taxes. The smart growth economic development incentives contained in A-4048/S-2299 are not for “special interests.” They’re in everyone’s best interest.

Ted Zangari practices law in Newark and is the founder of the Smart Growth Economic Development Coalition.

The following are members of the Smart Growth Econimic Development Coalition:

• Building Contractors Association of New Jersey
• CoreNet Global - NJ Chapter
• Counselors of Real Estate - NJ Chapter
• Downtown New Jersey
• International Council of Shopping Centers - NJ Chapter
• National Association of Industrial and Office Properties - NJ Chapter
• Newark Real Estate Board
• Newark Regional Business Partnership
• New Jersey Apartment Association
• New Jersey Association of REALTORS
• New Jersey Builders Association
• New Jersey Business & Industry Association
• New Jersey Laborers'-Employers' Cooperation and Education Trust
• New Jersey Society for Environmental, Economic Development (NJSEED)
• New Jersey State Chamber of Commerce

 

Real estate development community sounds off on stimulus bill

The New Jersey Economic Stimulus Act of 2009, which cleared the Assembly Appropriations Committee on Thursday, will have dramatic implications for real estate and economic development in the state, said Ted Zangari, a real estate attorney at law firm Sills Cummis & Gross, P.C., in Newark. To read the complete story, please click here.

Proposed New Accounting Rules to Eliminate Operating Leases

A discussion paper on potential changes to lease accounting was released in March by the U.S. Financial Accounting Standards Board and the International Accounting Standards Board. According to the discussion draft all operating leases for real estate and equipment will have to be capitalized on corporate balance sheets and rent expenses will be dramatically altered. This would effectively eliminate operating leases, significantly increase costs and reduce flexibility.

Under this common standard, the contractual rights of a lease will be considered an asset and the rental commitments will be considered a liability. The rental payments will be split between capital and interest (similar to a loan) making the cost of the profit and loss account higher in the early years of a lease. Currently, leases are considered a straight-line operating expense.

While the stated purpose of the proposed new system is to create more transparency for company financial statements, it will cause balance sheets to balloon and cause significant reporting adjustments for contingencies. According to Jones Lang LaSalle, "If these proposals are adopted, they will change the way that corporations view their property holdings. They will inflate both assets and liabilities, affect profit-and-loss run rates, key performance measures including debt-covenant ratios, and change the overall make-up of corporate financial statements." According to the Equipment Leasing and Finance Association, of the top 30 companies with outstanding off-balance sheet rent obligations, 15 are retailers.

Comments on the proposed rules are being accepted until July 17, an exposure draft is anticipated in 2010 and final rule issuance could come as early as 2011.

Tax Appeals: an Effective Way to Soften the Blow of Vacancies (and Cut Operating Costs for Those Tenants Still in Possession!)

 

By: Noah Bronkesh, Esq. and Ted Zangari, Esq.

 

The recent economic tsunami has already devastated the commercial real estate sector. But another wave of bad news is about to hit owners of commercial real estate. The economic downturn has drastically reduced state tax revenues, and state officials are responding by significantly cutting state aid to municipalities and school districts. Why is this bad for property owners? Because local governments will be unable to compensate for the cuts in state aid simply by making commensurate cuts in expenses (many of which are fixed costs such as debt service and binding labor agreements) – they will be forced to increase local property taxes to make up for budgetary shortfalls.

Real estate taxes are often overlooked by building owners in their search for budget items that can be reduced in order to soften the blow of vacancies or to lower operating costs as they attempt to attract new tenants and retain existing ones. Tenants, who typically reimburse their landlords for a share of real estate taxes, overlook this potential area for savings even more frequently – by failing to compel their landlords (through enforcement of lease provisions or simple persuasion) to consider a tax appeal. Yet, a review of the local tax assessment process may well reveal that an owner and, in turn, its tenants are paying more than their fair share of the municipal budget. This is especially true in the current depressed real estate market because many municipalities last conducted a revaluation or reassessment in the real estate boom of the last decade, and, as a result, the current assessment of many commercial properties is based on bloated values of yesteryear that no longer reflect market value.

Not only could a successful tax appeal mean tax savings for 2008, it could also mean a smaller tax obligation in future years.

Statutory deadlines for filing a 2008 tax appeal are approaching (in New Jersey, the deadline is April 1, 2009), and most tax assessors have already begun to determine the assessed value to be placed on every block and lot in their municipalities for the coming year. Therefore, building owners who are interested in filing an appeal (and tenants who have the contractual right or clout to force an appeal) should immediately review their current local property tax situations to determine if an appeal is warranted.

Background on Valuation

Real property is assessed at market value for local property tax purposes. The local tax assessor is familiar with market conditions in his or her municipality. Using this knowledge, the tax assessor utilizes three approaches, each of which will be discussed below to determine market value as of a particular date. (For example, in New Jersey, the assessment date is October 1 of the pre-tax year.) Although all three approaches to value are utilized to verify an assessor’s value conclusion, the approach that is ultimately relied upon will depend on the type of property involved, the use of the subject property and the availability of data in each situation:

1. Sales comparison approach. In the sales comparison approach, the assessor (or the revaluation company) researches the market and obtains information regarding recent sales transactions. A review is made between the subject property and the various sales transactions to determine comparability. After comparable sales are identified, they are adjusted to reflect any differences between the comparables and the subject property. An analysis is then performed and a determination of value is reached. This approach is used when data on recently sold properties, similar to the subject property, are available. It is also used by assessors for valuing vacant land, residential properties and condominium properties. As previously noted, if a revaluation or reassessment was done in the last decade, the sales data was collected during a high point in the real estate market. Since that time, property values have declined in most tri-state municipalities, especially in the last year. Consequently, if a recent reassessment has not been done and the present assessed value of the subject property is based on data collected during that peak period, the subject property could very well be over-assessed.

2. Cost approach. The cost approach entails adding the estimated value of the land (determined by using the sales comparison approach) to the reproduction or replacement cost of the improvements on the land. The current cost of improvements is determined through the use of cost estimating manuals. Depreciation and obsolescence are then deducted from the estimated value of the improvements. This cost approach is used mainly when valuing new improvements or when valuing “special purpose” properties –properties that are unusual and not frequently exchanged in the marketplace. However, despite the fact that most properties are older or general purpose facilities, property record cards on file in an assessor’s office often indicate only the cost approach to value, even when this approach is not appropriate. Therefore, an independent analysis of the subject property must be done by using the other approaches to value in order to determine if the subject property is over-assessed.

3. Income capitalization approach. Income producing properties are valued through the use of the income capitalization approach. The present worth of future benefits is what is actually valued in this approach. If possible, an assessor reviews the present and historical actual income and expense information for the subject property. This information is commonly requested by the assessor’s office on a yearly basis. In addition, revaluation companies request this information from owners of income producing property prior to setting the assessed values during a revaluation. While providing the municipality with this information does not guarantee a correct assessment, it does assure that correct data will be applied. The assessor will also look to the market and review leases, expenses and concessions of comparable income producing properties to determine stabilized income and expenses for the subject property. The actual vacancy rates for the subject property and vacancy rate for similar properties in the market are also reviewed. Once this analysis is completed, net operating income is determined and is then capitalized to arrive at a determination of value. In addition to income producing properties, this approach is sometimes applied to owner-occupied commercial and industrial properties.

 

Conclusion

Given the dramatic changes in the commercial real estate market over the past year and the ongoing trend of lower rents and higher vacancy rates, building owners should carefully evaluate whether these circumstances will result in a significant reduction in the value of individual properties in their portfolio. If such a reduction has occurred, a prudent owner should seriously consider filing a tax appeal.

Knowledge of the data a tax assessor reviews and how he or she arrives at the assessed value of a subject property would certainly assist the building owner in determining whether its property is over-assessed and whether an appeal is warranted. In reviewing a property for this purpose, the owner must recognize that a tax assessor — unlike an owner, who is inclined to estimate the value of its property in a subjective and personal way — will look at a property's market value in an objective and impersonal fashion. Although the approaches to value mentioned above appear to be somewhat straightforward, numerous issues arise each tax year between assessors and owners regarding such approaches and their application to specific properties.

Challenging a municipality over local property tax assessments requires advance planning, careful attention to detail in gathering facts and data, and knowledgeable appraisal and legal assistance.

 

Noah Bronkesh is Chair of the Tax Appeal Practice Group and Ted Zangari is Co-Chair of the Redevelopment Law Practice Group at Sills Cummis & Gross in Newark and Princeton, New Jersey.