Long-Term Tax Abatements in New Jersey
August 20, 2015
Long-term tax abatements are authorized under New Jersey’s Long Term Tax Exemption Law (N.J.S.A. 40A:20).
The statute authorizes municipalities to grant tax exemptions to developers who undertake residential and commercial redevelopment projects, relocation projects for residents displaced by redevelopment, or low and moderate-income housing projects.
Long-term tax abatements, which can last as long as 30 years from the completion of the project, are only available in areas having already been determined to be “an area in need of redevelopment” or a designated “Urban Enterprise Zone.” In addition, the developer must also form an Urban Renewal Entity, which must be approved by the Department of Community Affairs.
The Long Term Tax Exemption Law defines an urban renewal entity (sometimes referred to as a “URE”) as a limited dividend entity or a nonprofit entity. Any duly formed corporation, partnership, limited partnership, limited partnership association, or other unincorporated entity may qualify as an urban renewal entity so long as its certificate of incorporation, or other similar certificate or statement as may be required by law, contains the provisions set forth in the statute.
Once the developer forms an urban renewal entity, it must then reach an agreement with the municipality in which the project is located. While each municipality has its own policies and procedures, the approval process generally consists of the following:
- The developer prepares and submits a tax abatement application, the requirements of which may be set forth in the Long Term Tax Abatement Law as well as local ordinance.
- The developer and municipality negotiate and draft a Financial Agreement.
- The municipality’s mayor or other chief executive officer must, within 60 days of his receipt of the application thereafter, submit the application with his recommendations to the municipal governing body.
- After review by all appropriate offices and committees, the governing body (i.e. municipal council) votes on the agreement. If approved by resolution, the governing body will adopt a local ordinance. In the event of disapproval, changes may be suggested in order to secure an approval, so the application can be revised and resubmitted.
- The parties execute a final Financial Agreement, which is submitted, along with the ordinance, to the Director of the Division of Local Government Services.
- Working with local officials, the Developer must ensure compliance with the terms of the Financial Agreement, such as submitting Affordable Housing Trust Fund payments and providing required annual reports.
- Once the project is substantially completed, the municipality’s tax assessor starts billing the developer for the annual service charge rather than for property taxes.
The tax abatement statute authorizes municipalities to charge annual service charges in an amount based on a percentage of project costs or based on a percentage of the annual gross revenue generated by the project (no more than 15 percent). In either case, the development project must be gradually phased into full property taxation in 20 percent increments.
As noted above, securing a long-term tax abatement in New Jersey is a multi-step process that requires in depth knowledge of the Long Term Tax Exemption Law as well as the urban renewal entity formation process. To obtain timely approval, it is imperative to work with experienced counsel.