NJ Downtowns Of Yesteryear Gain New Lease On Modern-Day Revitalization

On May 13, 1999, the Supreme Court of New Jersey confirmed the broad powers of municipalities in selecting the way to fund their Special Improvement Districts ("SIDs") in 2nd Roc-Jersey Associates v. Town of Morristown. The ramifications of this landmark decision will be felt in towns and cities throughout the state for years and will provide a critical foundation to the revitalization efforts of New Jersey’s downtowns. Challenges to business improvement districts’ legal status, rate structure and benefit analysis is nothing new; but a state Supreme Court decision supporting them certainly is. This article provides some basic background to the New Jersey SID legislation, the local case, and the Supreme Court opinion, from the perspective of the law firm that successfully represented the SID.

In 1986, The New Jersey legislature created Special Improvement District legislation to reverse the trend of diminishing commercial and business activity in the downtowns. In so doing, the Legislature gave municipalities broad discretion to cooperate with local merchants, proprietors, and commercial property owners. The enabling legislation grants municipalities the power to establish essentially geographic special improvement districts within a municipality, supported by special assessments imposed on the properties by the municipality. Now, if a municipality establishes an SID, it can manage the downtown business district in favor of local businesses. SIDs are authorized to provide security, sanitation and other services to the district supplemental to those normally provided by the municipality. To date, more than 40 New Jersey municipalities have created special improvement districts (SIDs), using the authority granted them in the legislation

Morristown is the County Seat of Morris County in Northwest New Jersey, about 30 miles west of New York City. Established in 1740, Morristown has strong historic ties to the American Revolution as the place where Washington and the Continental Army spent two winters. After the Civil War, Morristown was a summer resort to many of New York’s millionaires. The Court noted that the SID’s activities were necessary to keep Morristown and its businesses competitive in a market increasingly dominated by suburban malls and office parks.

In response to the deterioration in its downtown, the Town of Morristown formed a district management corporation, Morristown Partners, Inc. also known as the Morristown Partnership in 1994 to help oversee the revitalization of the central business district. The town opted to use the real property tax assessment formula as the basis for determining the special assessment necessary to fund the initiative. The municipal government opted to exempt residential property within the SID from paying the special assessment. All commercial properties were assessed. The Morristown Partnership serves an approximate 40 block area with an annual budget of $500,000 derived from the property tax-based assessment. The Morristown Partnership has implemented numerous and various programs and projects during its nearly five years in existence. The Morristown Partnership’s major areas of activity are clean and safe, physical improvements, business recruitment and retention, and marketing and promotions. Within these various categories the Partnership has undertaken many substantial projects.

Second Roc-Jersey Associates, the owners of a major mixed-use project consisting of three office buildings, a hotel and retail mall in the district, and Shav Associates, the owner of an office building, objected to the SID concept in general, and the exemption of residential properties and assessment structure in particular. They sued the Town of Morristown and Morristown Partnership arguing that the property tax-based assessment formula forced them to bear a disproportionate burden of financing the SID without a proportionate share of the benefit. Their suit contended that residential properties should not be excluded from the SID and that the SID’s benefits mainly accrued to the district’s retail businesses, not commercial properties. They chose to challenge the district management corporation on the grounds that the SID legislation was unlawful and unconstitutional.

The Morristown Partnership argued three main points: 1) the SID fee is not a tax, but rather an assessment; 2) the exclusion of residential properties is justifiable because SIDs are business-oriented improvement districts; and 3) the use of real property tax valuation as a basis for SID assessment is a reasonable and well-established standard nationwide.

Prior to the decision in 2ND Roc-Jersey Associates v. Town of Morristown, the New Jersey Supreme Court had already ruled that the SID legislation was justified in giving municipalities broad regulatory authority when establishing local SIDs.

Satisfied with the reasonableness of the Morristown plan, the New Jersey Supreme Court upheld its legality, as well as the constitutionality of the special improvement district legislation. In particular, the Court concluded that, "special improvement district provides sufficiently identifiable benefits to the subject properties and that the special assessments are measured reasonably and fairly in proportion to the benefits conferred," wrote Justice Alan B. Handler for the Court. The Court reiterated in another part of the decision that SID’s assessment formula is not a tax and therefore not subject to the uniformity provision that applies to taxation under the New Jersey State Constitution.

The recent ruling upholding the Morristown SID follows the theme of municipal empowerment developed in the New Jersey Supreme Court’s previous rulings. The Court deemed that the innovative and cost-effective strategy employed by Morristown to raise revenue for its SID was reasonable and constitutional. Morristown’s courtroom success supports the extent of control given to municipalities by the SID legislation.

The case of 2nd Roc-Jersey Associates was a major victory for downtown revitalization in general and the use of special assessment districts in particular. Providing flexibility in developing and financing business district development should encourage other municipalities to attempt the same. If the New Jersey Supreme Court’s decision had gone otherwise, all SIDs currently operating within the state would have had to be reexamined. Those SIDs with similar funding structures would have been enmeshed in similar litigation, effectively hampering the purpose and effectiveness of the SID as a revitalization tool. Finally, if towns were forced to place an assessment on residential properties, elected officials would have had to face the difficult choice of compelling residents to pay additional assessments for essentially business-related programs. This would have had a chilling - or even killing - effect on the establishment of SIDs.

Morristown is an excellent model of a successful Special Improvement District. It has helped to rehabilitate vacant buildings, created new streetscapes and contributed to a surge in reinvestment and redevelopment — even the plaintiff in the suit benefited by gaining a new tenant as a result of the SID! Advertising campaigns inform potential businesses and corporations of downtown Morristown’s amenities, bucolic setting, history and demographics. Businesses have been attracted to the downtown, including Foot Locker, Godiva Chocolate, GAP, GAP Kids and Jos. A. Bank Clothiers. Other New Jersey towns may now follow the lead of successful towns such as Morristown along with Red Bank, Freehold and others with active and effective SIDs.

In the end, even the large property owner that brought suit was convinced that the SID was good for Morristown. Again and again, lawsuits will question the nature of SID’s (or their variations) but the New Jersey courts and public agree: SIDs are an integral and important tool for downtown revitalization.

Robert Goldsmith is a partner practicing in the Litigation Department of Greenbaum, Rowe, Smith, Ravin, Davis and Himmel, LLP, in Woodbridge, New Jersey. He represents several Special Improvement Districts throughout New Jersey and is a member of the Board of Directors of Downtown New Jersey.