How To File a Five-Year Tax Abatement in New Jersey?
August 19, 2015
In New Jersey, the Five-Year Tax Exemption Law (N.J.S.A. 40A:21-1 et seq.) governs short-term tax abatements for improvements to one and two family homes, multi-family dwellings, and commercial/industrial buildings.
The statute authorizes municipalities to grant five-year tax exemptions and/or abatements in areas in need of rehabilitation to promote the construction and rehabilitation of residential, commercial and industrial structures.
Abatements are only available if the municipality has determined the property to be an “area in need of rehabilitation” of an “Area in need of redevelopment.” In addition, the municipality in which the property is located must have adopted an authorizing ordinance, which establishes specific application procedures and eligibility criteria. Many municipalities, including Jersey City, differentiate for the purposes of determining eligibility among the various neighborhoods, zones, areas or portions of the designated area in need of rehabilitation or redevelopment.
To obtain a tax abatement, the developer must satisfy all of the criteria in the statute and general ordinance. For applicants seeking to improve dwellings, commercial, and industrial structures or convert buildings to multiple dwelling use, the application process is fairly straightforward. Once the application is approved, Form E/A-1 must be filed with the tax assessor within 30 days of completion of the improvement, conversion or construction.
Application Requirements for New Construction
Pursuant to the Five-Year Tax Exemption Law, applicants for tax abatement involving new construction of commercial or industrial structures or multiple dwellings must submit an application that requires more detailed information, including:
- A general description of a project for which exemption and abatement is sought;
- A legal description of all real estate necessary for the project;
- Plans, drawings and other documents as may be required by the governing body to demonstrate the structure and design of the project;
- A description of the number, classes and type of employees to be employed at the project site within two years of completion of the project;
- A statement of the reasons for seeking tax exemption and abatement on the project, and a description of the benefits to be realized by the applicant if a tax agreement is granted;
- Estimates of the cost of completing such project;
- A statement showing (1) the real property taxes currently being assessed at the project site; (2) estimated tax payments that would be made annually by the applicant on the project during the period of the agreement, and (3) estimated tax payments that would be made by the applicant on the project during the first full year following the termination of the tax agreement;
- If the project is a commercial or industrial structure, a description of any lease agreements between the applicant and proposed users of the project, and a history and description of the users’ businesses; and
- If the project is a multiple dwelling, a description of the number and types of dwelling units to be provided, a description of the common elements or general common elements, and a statement of the proposed initial rentals or sales prices of the dwelling units according to type and of any rental lease or resale restrictions to apply to the dwellings’ units respecting low or moderate income housing.
Developers should also be aware that many municipalities impose additional requirements. For instance, Jersey City’s tax abatement ordinance requires applicants to provide a disclosure statement of the interests of all parties, including subsidiary companies, in the property project and other projects located within the City for which an abatement or exemption was previously awarded.
Calculating Payments in Lieu of Taxes
Once the tax abatement application has been approved via the adoption of a municipal ordinance, the municipality and developer must execute a written agreement setting forth the payments in lieu of taxes that will be paid (often referred to as a “PILOT Agreement”). Pursuant to the Five-Year Tax Exemption Law, the agreement must use one of three formulas. Under the cost-based formula, the applicant must pay a percentage of the cost of the project. The gross-revenue basis requires the developer to pay to the municipality an amount annually equal to a percentage of the annual gross revenues from the project. Finally, the tax phase-in scheme requires the applicant to submit payments in accordance with the following schedule: no payments the first year after completion; payment of not less than 20 percent of ad valorem taxes otherwise due in year two; 40 percent of ad valorem taxes in year three; 60 percent of ad valorem taxes in year four; and 80 percent of ad valorem taxes in year five.
If the property owner ceases to operate or disposes of the property or fails to meet the conditions for qualifying for the exemption, the local property taxes due for all the prior years subject to exemption and for the current year must be paid as if no exemption had been granted.
As highlighted above, it is certainly lucrative to pursue a tax abatement in New Jersey. However, it can also be a complicated and time-consuming endeavor. Therefore, it is generally advisable to partner with an experienced attorney who can walk you through the process.