Within two years of its adoption, the New Jersey Economic Opportunity Act has been responsible for successfully attracting and retaining businesses throughout the Garden State. Through the Grow New Jersey Assistance Program (Grow NJ), the state provides a tax credit to virtually any business, other than point-of-sale retail, that creates or retains jobs in New Jersey and makes a capital investment at a qualified business facility. The success of this program is evidenced by the more than 130 projects that have been approved since September 2013. These projects promise the creation of nearly 19,000 new jobs and the retention of 17,000 jobs otherwise in danger of leaving the state. While much has been written and discussed about the Economic Opportunity Act, the details of two integral components of the legislation are still being hashed out.
Grow New Jersey Tax Credit Transfers
The first issue relates to how businesses can monetize the tax credit once awarded. By way of background, Grow NJ tax credits are awarded based on the number of jobs a company creates or retains in the state. In addition to the jobs factor, a company is required to make a capital investment in industrial or office property as a prerequisite to an award. This capital investment can include either the rehabilitation of an existing building or new construction and the required capital investment is tailored accordingly.
Grow NJ tax credits may only be used to offset New Jersey corporate business tax, insurance company tax and franchise tax. As such, a company's ability to use these credits is limited to the company's corresponding New Jersey tax liability. Although the statute allows a recipient to carry forward unused credits for a period of 20 years, businesses may need immediate capital to offset the cost of the required development.
To address this issue, the legislation allows a recipient to apply for a tax credit transfer certificate covering one or more years, provided that the sale shall not be less than 75 percent of the transferred credit amount. However, the transfer provision (set forth in N.J.S.A. 34:1B-248) provides little procedural guidance. Moreover, those considering a tax credit transfer need to think through issues such as the following: (i) the projected timing of the initial issuance of the tax credit certificate; (ii) appropriate damages for breach; (iii) indemnities in the event that the recipient defaults under its incentive agreement or otherwise loses the benefit of the credits; and (iv) changes in the law that may affect the validity of the tax credits. As the market for these credits matures, procedures and best practices are being established by practitioners.
Long Term Tax Abatement for Garden State Growth Zone Development
N.J.S.A. 52:27D-489r allows developers located in one of the four "Garden State Growth Zones" (GSGZ), i.e., Paterson, Passaic, Trenton and Camden, to qualify for a 20-year tax abatement program. The program allows a developer to claim an exemption from payment of property taxes on the improvements to the eligible property for an initial 10-year period. In the 11th year, the developer is required to pay the municipality 10 percent of the taxes on the improvements. The amount of taxes owed on improvements increases by 10 percent each year until full taxes are due in the 20th year. After the termination of the exemption, the property (including all parcels, land and improvements made thereto) is assessed and subject to taxation in the normal course. Any exemption obtained is also fully transferrable upon the sale of real property so long as the new owner meets the requisite criteria.
To qualify for the 20-year abatement, the following criteria must be satisfied: (i) the property must be an "eligible property," i.e., residential, commercial, industrial or other business property located in a GSGZ that receives a Certificate of Occupancy or is transferred in a legal sale on or after July 1, 2013; (ii) the GSGZ had to adopt an ordinance to opt-in to the 20-year abatement (note: Paterson, Trenton and Camden adopted opt-in ordinances); (iii) the developer must establish a "Garden State Growth Zone Development Entity" (GDE) to own the property; and (iv) the developer shall be required to complete the improvements prior to September 18, 2023.
Although the law regarding the 20-year tax abatement resembles and often mimics the procedures for the long term tax abatement under the Local Redevelopment and Housing Law (LRH), many open questions exist. In contrast to the formation of an urban renewal entity under the LRHL, the statute does not expressly require the New Jersey Department of Community Affairs' approval for the formation of a GDE. Additionally, the language regarding allowable net profits for GDE is opaque and ambiguous. Lastly, it is incumbent upon municipalities to adopt procedures for to guide GDEs in their pursuit of the 20-year abatement.
Recent Developments
Despite the open issues and shortcomings of New Jersey's economic legislation, it is clear that procedures are being established and enhanced over time. Additionally, the legislation itself continues to be modified to address new challenges related to economic development. As an example, Senate Bill No. 2458 (3R) amends the Economic Redevelopment and Growth Grant (ERG) component of the New Jersey Economic Opportunity Act to support the development of parking by municipal parking authorities and certain private developers.
Under S-2458, developers and municipal parking authorities can apply for a grant or tax credits under the ERG program when they develop mixed use parking projects. These projects are defined as "a redevelopment project undertaken by a municipal redeveloper in a Garden State Growth Zone, the parking component of which shall constitute 51 percent or more of any of the following: (i) the total square footage of the entire mixed use parking project; (ii) the estimated revenues of the entire mixed use parking project; or (iii) the total construction cost of the entire mixed use parking project." The caveat is that if developed by a private developer, the parking component of the mixed use parking project is required to be operated and maintained by a municipal parking authority for the term of the financial incentive agreement. The bill also authorizes the Economic Development Authority to grant tax credits for mixed use parking projects if the estimated amount of the incremental revenues pledged towards the state portion of an incentive grant is inadequate to fully fund the amount of the state portion of the incentive grant.
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