The New Jersey Tax Court recently answered this question in a case where the court sided with the property owner and denied the municipality’s motion to dismiss a tax appeal.  See Cam Gar v. Verona Township, Docket No. 004838-2011, NJ Tax Court, Nov. 9, 2011 [link]. 
 

Verona Township sought to dismiss a tax appeal alleging the property owner failed to respond to a Chapter 91 request.  The property owner admitted it received the request, but argued it responded to the request in a timely manner by mailing the completed response to the assessor.  To support its position, the property owner offered the testimony of its bookkeeper, a 16-year employee whose job responsibilities include responding to Chapter 91 requests sent for the numerous properties managed by her employer. The bookkeeper went through in detail the procedures she implemented to handle Chapter 91 requests and produced a copy of the Chapter 91 response which had her hand written note “mailed w/rent roll 9/24/10.”  Although she admitted that she did not have a specific recollection of completing or mailing the form, “she testified that she would have followed all of the above procedures as to the handling of the Chapter 91 request.”
 

The municipality argued that without a specific recollection of completing and mailing the Chapter 91 response, the property owner cannot take advantage of the “presumption of receipt” arising under New Jersey case law. In addition, the municipality argued that vague testimony would lower the standard for other property owners who could merely argue “the check is in the mail” and avoid having its complaint dismissed. The court disagreed with the municipality and denied the motion.
 

It is important to note that the court’s decision turned on the credibility of the witness and the corroborating evidence produced at the hearing. It is not enough for a property owner to allege “I believed I mailed it”, or “since I responded every  year, I believe I responded this year”, without providing a thorough description of the procedures implemented to handle Chapter 91 requests and producing documentation that supports the testimony. Prudent property owners should adopt specific procedures for responding to Chapter 91 requests, including:

1. stamping the request with the date it is received;
2. having the information assembled immediately for a timely response;
3. mailing the response by certified mail; and
4. keeping a copy of the response with some record of when it was mailed

Is there an exception to this rule? Yes, but it is very limited.

 

The New Jersey Tax Court can “relax the tax payment requirement and fix such terms of payments as the interests of justice may require.”  N.J.S.A. 54:51A-1(b).  Recently, the New Jersey Tax Court reviewed a case where a property owner asked the court to relax the payment requirement because the municipality was partially to blame for the financial problems arising from the development of the property being appealed.  Evans-Francis Estates Associates, LP v. Township of Cherry Hill, Docket No. 012386-2011, New Jersey Tax Court, Nov. 9, 2011.   The owner alleged the municipality’s reluctance to allow affordable housing units to be constructed on the property contributed to the financing obstacles.  However, the owner conceded that the collapse in the tax credit equity market contributed to delays in starting construction.

 

The Court applied the following three part test when reviewing the request to relax the tax payment requirement:

At a minimum, it would seem that such circumstances must be (1) beyond the control of the property owner, not self-imposed, (2) unatributted to poor judgment, a bad investment or a failed business venture, and (3) reasonably unforseable.
 

The Court found the property owner failed to meet any part of the test because the “obstacles encountered by the plaintiff in securing the approvals and financing necessary to construct its project are commonplace and reasonably foreseeable.”   The Court was not persuaded that the municipality’s conduct was a mitigating factor or that the severe economic times excuse the obligation to pay property taxes.
 

The case demonstrates the challenges facing property owners in these tough economic times when it comes to appealing a distressed property. To appeal, a property owner must find a way to be current through the first quarter of the year or risk having its appeal dismissed, good times or bad. 

Recently, the Unsecured Creditor Agent appointed by the Court in the Orleans Homebuilders bankruptcy case sent demand letters to select creditors of Orleans seeking to compel the creditors to return money they received during the 90 days before the filing of the bankruptcy case. In the end, many contractors and suppliers will be searching far and wide to understand why they have to return money to a company who stiffed them by filing for bankruptcy. This seemingly unfair consequence is the result of Congress’ inclusion of the preference laws in the United States Bankruptcy Code.

What Was Congress Thinking? One of the fundamental objectives of the bankruptcy law is to make certain that similarly situated creditors are treated equally and share in the distribution of the debtor’s assets on a pro-rata basis. To meet those objectives (and others) and avoid the pillaging of weak debtors during the slide into bankruptcy, Congress targeted certain types of pre-bankruptcy transactions, which result from the debtor providing preferential treatment to one or more creditors in the period leading up to the filing for bankruptcy. These transfers are known as “preferential transfers” and result in the debtor or trustee filing “preference actions” to attack the transactions and recover payments.

Policies and theories are often times hard to stomach, especially when you are a creditor subject to a preference action. Nevertheless, it is the law and many creditors involved in the Orleans Homebuilders bankruptcy case are about to feel the pain of being sued by a bankruptcy company.

What is a Preference Payment? The 90 days prior to the filing for any bankruptcy case is referred to as the “preference period.” The United States Bankruptcy Code allows a trustee to recover payments made to unsecured creditors during the preference period if certain conditions are met. To recover a preferential transfer, a trustee must prove the following five (5) factors:

1. A transfer of an interest in the debtor’s property;
2. Made within 90 days of the date of the bankruptcy filing;
3. Made on account of an antecedent debt (past due);
4. Made while the debtor was insolvent; and
5. Enables the creditor to receive more than it would receive if the debtor was liquidated in a Chapter 7 case (i.e. the assets sold).

The trustee must prove all five (5) elements. However, the trustee gets the advantage of a statutory presumption, which provides that for preference purposes, that the debtor is presumed to be insolvent during the 90 days before the bankruptcy is filed. Also, note that “transfer” does not just cover payments, but any transfer, including the granting of certain liens.

How Do I Defend a Preference Lawsuit? If you are a supplier to a company who has filed for bankruptcy protection and you receive a preference complaint, there are several practical tips for defending a preference action.

1. Defend The Case, Do Not Ignore It. It is very important to seek an attorney with bankruptcy experience immediately in order to avoid allowing the trustee to win by default. Under the rules governing bankruptcy cases, you have 30 days from the issuance of the summons to file an answer. Do not delay - get an answer filed or contact the plaintiff’s lawyer to obtain an extension of the deadline to file an answer.
2. Do Not Confuse a Preference Claim With a Fraud or Breach of Contract Case. Do not confuse a preference claim with any other type of litigation you have experienced - it is a world unto itself. It does not matter that you fully performed under the contract or delivered conforming goods or services. It also does not matter that your intentions were noble and your good graces allowed the debtor to string out your payments. Preference claims are very rigid and once the five (5) elements described above are satisfied, a preference claim has been established, subject to certain defenses. You need to focus your attack on the five (5) elements the trustee needs to prove and the statutory defenses set forth in the Bankruptcy Code.
3. The Facts. The facts, and nothing but the facts, are what may save the day. It is very important to explain to your attorney all of the facts surrounding the transfers. In terms of general facts, you need to explain to your attorney the nature of your business, how transactions are generally performed within your business, and how you generally bill and collect invoices. In terms of specific facts, you need to prepare a complete payment history of your relationship with the debtor, assemble all invoices and shipping documents, verify payments, assemble all letters, emails and faxes relating to any billing and collection activities, and any other appropriate documents.
4. Chart the Invoice and Payment Dates. To evaluate defenses to a preference action and to be prepared to meet with your attorney, you need to organize the most important information. The best way to do this is to prepare a payment history chart. The chart should have at least five (5) columns, showing the invoice number, invoice date, date check was received, date check cleared, amount of check and time between invoice date and payment date (measured in days). The last column which shows how many days after the invoice date the payment was made is crucial information in evaluating the ordinary course of business defense and new value defense. A properly prepared chart with supporting documentation will save you time and money when meeting with your attorney.
5. Think About Potential Expert Witnesses Within Your Industry. You may need an expert witness to give you a report that the payments made during the 90-day preference period fall within ordinary business terms. Your attorney will explain that one of the main defenses to a preference action is that the payments were made in the ordinary course of business. You may want to look to competitors or local trade groups to find an expert in your particular industry. Not all cases require experts, but some do. Get a jump on the selection of an expert by reviewing your files and identifying capable experts in your industry.
6. Retain Experienced Bankruptcy Counsel. Preference cases are very unique and outside the experience of many lawyers. Bankruptcy lawyers are a somewhat tight group and is helpful to have an attorney who has litigated cases with the trustee in other matters. Also, you want to make certain that the trustee is forced to prove his entire case and all affirmative defenses are analyzed.
7. Reality Check - Some Cases Are Hard to Defend. Sometimes the trustee has a strong case and there are no affirmative defenses available. In this situation, your attorney needs to attempt to settle the case early at a favorable number. If you let emotion get in the way of sound business judgment, the end result may be unpleasant. An experienced lawyer can give you an honest opinion of your case and if it is very weak, find a way to gain some leverage to settle the case before you incur substantial legal and expert fees.

Preference claims often times result in unfair results. However, the fact remains that most large Chapter 11 cases end with a slew of preference actions. If you receive a preference complaint, immediately start working on your defense and get to an experience lawyer who can help you go on the offensive.

On June 26, 2009,  the New Jersey Turnpike Authority (“NJTA”) filed a complaint seeking to acquire property containing an office building and a double-sided billboard.  The billboard was owned by an outdoor advertising company who leased part of the property from the owner to construct the billboard.  The billboard company opposed the taking arguing that the billboard was real property and, as a result, the NJTA was required to enter into bona fide negotiations to purchase the billboard prior to filing suit.   The outdoor advertising company’s argument was based primarily upon N.J.S.A: 20:3-2-(d), which defines property as:
 

Land, or any interest in land, and (1) any building, structure or other improvement imbedded or affixed to land, and any article so affixed or attached to such building, structure or improvement as to be an essential and integral part thereof, (2) any article affixed or attached to such property in such manner that it cannot be removed without material injury to itself or to the property, (3) any article so designed, constructed, or specifically adapted to the purpose for which such property is used that (a) it is an essential accessory or part of such property; (b) it is not capable of use elsewhere; and (c) would lose substantially all its value if removed from such property.
 

The outdoor advertising company argued that its billboard, which stood 43 feet tall above the ground and was imbedded in the ground in a 20 x 20 x 5 foot slab of concrete, was an “improvement imbedded or affixed to the land” and thus compensable property.  The property owner and NJTA disagreed and argued that the billboard was personal property.
 

The Appellate Division reviewed the statutory definition of property and concluded that the key issue is not how the billboard is attached to the property, but whether it is an “essential and integral part of the land.”  In reviewing the facts before the court, the Appellate Division agreed with the property owner which argued that a billboard is not part and parcel to the property, “but merely a trade fixture owned by LaMar that is located on the property.”  The Court also found that the specific language in the lease stating that the “landlord agrees that the sign shall remain tenant’s personal property” clearly shows that the outdoor advertising company “never considered the billboard as real property and reserved its right to remove the billboard at anytime during the terms of the lease.”

Although billboard cases may not be as common as one would think, the decision clearly stresses the importance of evaluating all potential rights being acquired in a condemnation case.  The analysis must include an extensive review of the applicable statutes and case law, and a thorough understanding of real property law.

Recently, the Appellate Division of the Superior Court of New Jersey had an opportunity to define “in use” in the context of a tax appeal case.   Pan Chemical Corp. v. Hawthorne Borough, 404 N.J.Super. 401 (App.Div. 2009).  In Pan Chemical, the property owner moved its business to a new location, but kept a small crew on site to avoid triggering environmental clean-up obligations under the Industrial Site Remediation Act (“ISRA”).  The property owner argued that despite the fact that it did not trigger ISRA, it was still entitled to take into account the contamination when valuing the property.  The Appellate Division disagreed.

The Pan Chemical court concluded that a bright line test was necessary for determining when a property was “in use” for purposes of applying the Inmar standard in a tax appeal case. After reviewing various case law and statutes, the court adopted the definition of closing of an operation under ISRA which is “the cessation of operations resulting in at least a 90 percent reduction in the total value of the production output . .  or, for industrial establishments for which the product output is undefined, a 90 percent reduction in the number of employees.”  See N.J.S.A. 13:1K-8(1)).  Since the property owner was still operating at about a 15 percent level, it was not entitled to any reduction in the assessment based upon the contamination.

Although a bright line test is easy to apply, the result does not seem fair to a property owner whose property is being assessed significantly above its true value merely because ISRA has not been triggered.  However, this appears to be the law since the New Jersey Supreme Court refused to accept the case for review.  In addition, the New Jersey legislature is reviewing a new bill which may further complicate matters for property owners.

In Prime Accounting, the tax bill identified the owner of the property as “Prime Accounting Dept.”, which was a department of a prior tenant, “Prime Management Company”.  Most likely, the former tenant asked the tax assessor for their tax bills to be directed to the company’s accounting department. When the tax bill was changed naming the “owner” as Prime Management’s accounting department, no one thought there would be any problems. However, when an appeal of the property’s tax assessment was filed in 2009, Prime Management no longer was a tenant, yet it appears the tax bill for the property was never updated, which resulted in “Prime Accounting Dept.” being named as the plaintiff in the tax appeal. Standard practice for most tax appeal attorneys is to use the most recent tax bill as the source of the information to complete a County Tax Board Petition or Case Information Statement (for Tax Court cases).

When the issue was raised by the Tax Court, the plaintiff filed a motion seeking leave of court to amend the complaint to name the current tenant as the plaintiff (ie. change the plaintiff from Prime Accounting Dept. to Bocceli, LLC.).  The Tax Court denied the motion and dismissed the tax appeal.  The Tax Court held that it did not have jurisdiction since the original plaintiff was not a taxpayer and the amendment of the complaint could not correct this problem.  The decision has been appealed to the Appellate Division of the Superior Court of New Jersey.

It is important to make certain that the person or entity filing the appeal meets the definition of an aggrieved taxpayer (ie. owner, tenant paying taxes under a lease, etc.)  Although it may be more convenient and effective to have a tax bill sent to a particular person (ie. management company or department within a larger company), you need to make certain that the entity named in the petition or complaint is a “taxpayer”.

Recently, the Appellate Division reversed a trial court judge who held that the property owner was limited to the judgment rate of interest on the additional award of just compensation.  The property owner wanted to present evidence of a more reasonable rate of interest, (10 year treasury rate plus 290 basis points) which was much higher than the judgment rate of interest.  At stake was an additional $500,000 for the property owner.

   

The Appellate Division agreed with the property owner and held that the judgment rate of interest is not controlling in eminent domain cases.  Rather, the court held that the trial court should have held an evidentiary hearing to determine the applicable rate of interest.  The Appellate Division did not think an evidentiary hearing was not required in all cases and that under certain circumstances, the trial court can make its determination based upon certifications.  However, in this case, an evidentiary hearing was merited.

   

This case is an important decision for larger cases where there are substantial amounts of time between the filing of a complaint and the ultimate conclusion of the case.  In this particular case, the complaint was filed on March 7, 2001, funds deposited on May 3, 2001, but the award was not finally confirmed until March 28, 2008.  The property owner was entitled to just additional interest which accrued over approximately 7 years.

You can read the decision here.

• Tax appeal lawyers have relationships with real estate appraisers that specialize in New Jersey tax appeals.
• Tax appeal lawyers also have relationships with many of the municipal tax assessors and tax revaluation companies which can help in tax reduction negotiations.
• Many tax appeal lawyers can represent clients before both the tax board and the New Jersey Tax Court.
• Experienced tax appeal lawyers can provide homeowners with honest assessments on difficult cases.

Stark & Stark's Tax Appeal group represents homeowners and commercial property owners throughout New Jersey in property tax appeals.  You can read more blog posts on New Jersey Tax Appeals here. 

The Appellate Division of the Superior Court of New Jersey recently affirmed a trial court’s decision finding that the property owner was without recourse when its tenant was relocated and the New Jersey School Construction Corporation (“NJSCC”) decided not to acquire the property.  R.A.R. Development v. Associates v. New Jersey Schools Constr. Corp., 2008 WL 2663403 (N.J. Super. A.D. 2009).  In this particular case, NJSCC targeted a property for acquisition in order to build a new school.  After making an offer to acquire the property but before filing a condemnation complaint, NJSCC agreed to relocate a commercial tenant located at the property in question.  Since the relocation was going to take more than one year at a cost of approximately $5 million, NJSCC did not want to wait for the condemnation complaint to be filed before starting the relocation process.  When the move was almost complete, NJSCC decided not to acquire the property.  The property owner was extremely upset since it lost a tenant occupying over 100,000 square feet of space.
 

The property owner filed a lawsuit against the NJSCC alleging several causes of action, including tortuous interference with contractual and economic advantage, estoppel and inverse condemnation.  In terms of the tortuous interference claims, the court found that the NJSCC acted in good faith and pursuant to its statutory rights since New Jersey law permits the relocation of tenants prior to acquiring property by eminent domain (subject to certain requirements).  In terms of the estoppel argument, the court found that the property owner did not rely to its detriment on any representations of the NJSCC concerning the relocation of its tenants.  Finally, the court dismissed the inverse condemnation claim finding that the lease was at the end of its term (1 month remaining at the time the tenant completed its move) and the tenant had paid all rent due through the term of the lease.  In rejecting the property owner’s agreement that it was entitled to compensation for the taking of its renewal option, the court held that a “landlord’s expectation that the tenant will exercise the right of renewal does not confer on the landlord a recognized property interest subject to just compensation for its taking.”
 

The property owner in this case was harmed, but without recourse.  When negotiating with a condemning authority, one must keep in mind that New jersey law allows a condemning authority to change its mind at various stages of the process with little regard for the property owner’s rights.

This is a very important case for property owners since it makes it clear that attorney fees and expenses can be recovered in the event the government files a condemnation action and later abandons the taking.  However, if a property owner spends a substantial amount of time and money negotiating with the condemning authority and the complaint is never filed, there is no right to recover attorney fees and expenses.  A complaint must be filed.  In addition, property owners may now look to recover attorney fees and expenses incurred prior to the filing of the complaint providing the attorney fees and expenses are directly related to the taking of the property and are incurred after the property is targeted for condemnation.

Trinity Matzel owned an apartment building in East Orange which produced rental income for many years prior to 2006.  During 2006, the property owner performed major renovations at which time the tenants vacated the apartment building.  As a result, no income was received in 2006.  The following year, the tax assessor sent a Chapter 91 request to the property owner seeking annual income and expense information for the property.  The property owner did not respond to the Chapter 91 request.
   

The following year, the property owner filed a tax appeal seeking to appeal the assessment.  The municipality moved to dismiss the complaint arguing that the property owner failed to respond to the Chapter 91 request and, as a result, the complaint must be dismissed. [See New Jersey Law Journal for discussion on Chapter 91] The property owner, relying in part upon the HJ Bailey case, argued that since the property did not produce any income in 2006, it was not required to respond to the Chapter 91 request seeking information for that particular year.  The municipality, relying primarily upon an prior Appellate Division case captioned Alfred Conhagen v. Borough of South Plainfield, 16 N.J. Tax 470 (App. Div. 1997), argued that the complaint should be dismissed even though the property did not produce income in the year of question, because in prior years, the property did produce income and the property owner failed to notify the assessor of the change to a non-incoming producing property.
   

The Tax Court reviewed the Conhagen and HJ Bailey cases and found that the Conhagen case was more similar to the case at bar and dismissed the taxpayer’s complaint.  The Tax Court followed Conhagen’s holding that a property owner “had a mandatory duty to respond to the tax assessor and a duty to demonstrate that its property ceased to be income-producing as of May 1994.” (emphasis added).
   

The definition of “non-incoming producing” is not as clear as one would think.  If the property generated income at one time and subsequently becomes owner occupied or vacant, the property owner should respond to the Chapter 91 request and advise the assessor of the status of the property.   In light of the continued uncertainty in this area of the law, prudent property owners should respond to the annual Chapter 91 request even if the property does not generate any income.  The response is easy to complete and will provide you with protection in the event a motion to dismiss your complaint is filed.

In the case in question, the property owner failed to respond to the Chapter 91 request and was limited to the remedy of a “reasonableness hearing.”  A reasonableness hearing is not a hearing to determine the value of the property, but rather a hearing to determine the “reasonableness of the assessment imposed by the assessor.”  The New Jersey Supreme Court has described such a hearing as:
 

 “The inquire will focus solely on whether the valuation could reasonably been arrived at in light of the data available to the assessor at the time of the valuation.  Encompassed within this inquiry are (1) the reasonableness of the underlying data used by the assessor and (2) the reasonableness of the methodology used by the assessor in arriving at the valuation.”
 

To no surprise, the property owner was not successful in challenging the reasonableness of the assessment.  The primary obstacle in a reasonableness hearing is not only its limited scope, but the legal problem arising from the “presumption of validity”  of the original assessment.   What this means in lay terms is that the data upon which the assessor relied and the assessor’s methodology are “presumed to have been reasonable.”  In light of the presumption, the property owner is required to overcome the presumption by producing evidence that is “definite, positive and certain in quality and quantity.”  Put another way, the property owner must establish that the “assessor acted arbitrary or capriciously in setting the assessments.” 
   

Although the property owner proved that the assessor’s methodology did not include a physical inspection of the subject property, did not include any effort to determine the fair market value of the property, and did not include any accumulation or thorough investigation or current data from the market place, the property owner nevertheless lost his case.  The Court found that the assessor was permitted to rely upon data appearing in the file produced or accumulated by his predecessor assessors without verifying or updating the data, and is entitled to rely upon information and recommendation from the municipal appraisal expert without inquiring as to the basis for the information and recommendations.
   

Although a reasonableness hearing is not impossible to win, the standard is extremely high.  Keep your eyes open for the annual Chapter 91 request and respond in a timely manner.

1. Look Back at 2008:   Was the community being separately assessed for any common property or area in 2008?  Look for any payments to your local tax assessor and determine why the payments were made.  If no payments were made and the Association has not received any tax assessment notices, the Association is most likely being treated fairly.  However, if payments were made, determine which lot and block were subject to the taxes, who owns the lot, and what the lot is being used for.  This information is necessary to determine if the property can be assessed.
2. Be Prepared For 2009:  In late January or early February 2009, you should receive an assessment notice which is generally sent on a small card advising you of your assessment for 2009.   If you do not receive your tax card by the end of February 2009, call your tax assessor and ask for a copy.  You will need to know the tax lot and block for the common property when you call your assessor.  If the notice shows an assessment for common property, you need to do the following: A. Review your governing documents to confirm that the common property is specifically identified as common property or common element, subject to restrictions on use and transfers. B. Confirm your type of association - condominium association or home owners association (HOA).  The basis to challenge the assessment varies depending upon the type of association.   Condominiums have the benefit of a separate New Jersey law that prohibits the taxing of common elements, while HOA’s do not have the benefit of a separate law.  HOA’s must rely upon case law that has been developed over the years. C. If your common property is specifically identified as common property and subject to restrictions, you most likely should not be assessed. D.    Calendar the appeal deadline.  The deadline to file your tax appeal is April 1, 2009. If your town sent out the tax cards late, the deadline may be extended.  You can call your tax assessor to confirm the appeal deadline.   
3. Prepare Your Case Now.  Although April 1, 2009 seems far off, it will sneak up on you quickly.  If your common property was assessed in 2008, it most likely will be assessed in 2009.  Copy your most recent tax bill and send it to your counsel with a copy of the governing documents and a detailed description of the property in question. 

Now is the time to make certain your homeowner associations are only paying their fair share of the tax burden and not being subject to the whim of an aggressive tax assessor.  If you need assistance with a tax appeal, call Timothy P. Duggan, Esquire at 609-895-7353, or email him at tduggan@stark-stark.com.  Mr. Duggan is a shareholder of Stark & Stark and specializes in property tax appeals.

To fully understand how development fees are calculated, a developer must understand some basic principles of tax assessment law in New Jersey.  Each property in New Jersey is assessed a value for purposes of determining real property taxes.  The assessed value is multiplied by the local tax rate in order to determine the amount of real estate taxes to be paid by each property owner.  The assessment is generally a percentage of the fair market value of the property, that percentage being the “average ratio” for a municipality.  For example, the average ratio for Princeton Township, New Jersey was 47.45% in 2008.  If a property in Princeton Township has a fair market value of $500,000, the assessed value should be $237,250 ($500,000 x 0.4745). 

The process for assessing the development fee starts when the developer first obtains a building permit.  Once the building permit is issued, the construction official who issued the permit is required to send a notice to the local tax assessor advising him or her that a building permit has been issued.  Within 90 days of receipt of the notice, the tax assessor is required to estimate the equalized assessed value of the non-residential development based upon the filed plans.  Although the statute does not specifically state that the assessor must notify the developer of the estimated equalized assessed value, it seems implicit that the developer is entitled to the information for purposes of estimating the development fee.

The term “equalized assessed value” is the assessed value of the new construction divided by the average ratio of the municipality.  In theory, the equalized assessed value should be the fair market value of the property when completed.  By using the equalized assessed value (i.e., fair market value of the property) and not the lower assessed value, all development fees will be determined on a uniformed basis.  For example, assume Developer A and Developer B build the same size and quality office building in Town A and Town B, respectively, each with a fair market value of $2 million.  Assume further that Town A recently performed a revaluation and has an average ratio of 100%, and Town B is behind the times and has an average ratio of 50%.  If the development fee was based upon the assessed value, Developer A would pay a fee of $50,000, (2.5% of $2 million tax assessment) and Developer B would only pay a fee of $25,000 (2.5% of $1 million tax assessment).  By dividing the assessment by the average ratio, Developer A and Developer B both pay $50,000 which is 2.5% of the fair market value of the property.

When the developer requests a final inspection, the tax assessor is required, within 10 business days (not calendar days) of the request for the scheduling of a final inspection, to confirm or modify the previously estimated equalized assessed value of the improvements and  notify the developer of the amount of the development fee.  The fee is based upon 2.5% of the equalized assessed value, subject to certain limitations (discussed below).  If the assessor fails to advise the developer of the amount of the fee within the 10 day time period, the property owner is permitted to perform its own “estimate” for purposes of paying the fee.

If the project is new construction, the fee is 2.5% of the equalized assessed value of the land and building.  If the project is an addition to an existing structure, the fee is 2.5% of the increase in the equalized assessed value of the addition.  However, in the situation were the property was previously developed with a building, structure or other improvement (ie. demolition of building with new construction), the calculation is slightly different.  The fee is based upon the difference between the equalized assessed value of the land and building at the time the final certificate of occupancy was issued and the equalized assessed value on the date the developer first sought approval for a construction permit.

Once the development fee is determined, the developer has two options.  First, it can pay the development fee and take no further action. In the alternative, the developer can challenge the amount of the development fee by attacking the assessor’s determination of the equalized assessed value.  In order to challenge the assessment, the developer must pay the fee to either the municipality (if the municipality is authorized by the state to collect the fee) or the State of New Jersey under protest.  The money is required to be held in an interest bearing account pending the outcome of the challenge.

The first step in the challenge is to file an objection with the Director of Taxation of the State of New Jersey.  The statute does not set forth a specific deadline for the filing of the challenge.  However, once the challenge is filed, the Director of Taxation has 45 days to render a decision.  Once the decision is rendered, either party may file an appeal of the decision to the New Jersey Tax Court. 

The statute does not specifically state who bears the burden of proof of the issue of the amount of the increase in equalized assessed value.  However, the general rule in tax appeal matters is the assessed value is presumed to be correct and the party challenging the assessment must overcome the presumption of correctness.  To overcome this presumption, developers will need to retain an appraiser experienced in tax appeal matters to opine as to the value of the increased assessment.

When a property owner decides to challenge a development fee, the property owner most likely will also challenge the added assessment (assuming an added assessment is imposed).  An added assessment is a tax assessment placed on the property starting with the month following the completion of an improvement.  For example, if a building is completed on May 15, 2008, the assessor is entitled to increase the tax assessment starting the following month (June 2008) through the balance of the year.   The tax assessor will probably use the same value in each case.  However, it is important to note that a challenge to the Director of Taxation of a development fee will not constitute a challenge to the added assessment, and vice versa.  Separate challenges must be made to the development fee and the added assessment, and a new tax appeal must be filed for the following year.

The “double whammy” of the development fee and added assessment tax bill will put a further strain on non-residential development in this challenging market.  Developers must make certain that the development fee and added assessment are included in their budget to make certain funds are available to pay these expenses, especially the development fee since it must be paid before a certificate of occupancy is issued.  If a developer believes the development fee is based upon an erroneous equalized assessed value, the developer must be prepared to mount a timely challenge in accordance with the requirements of the Statewide Non-residential Development Fee Act.

In Township of Haddon v. Morgan Brothers, et al., Haddon Township sought to acquire a parcel of real estate by the exercise of its power of eminent domain.  After the complaint was filed, Haddon Township deposited $280,000 with the court which was the Township’s estimate of the fair market value of the property “as if remediated”.  The Township also admitted into evidence an expert report alleging that the amount necessary to remediate the environmental contamination was estimated to exceed $1.3 million.
   

The holder of several tax sale certificates sought to withdraw $125,000 from the $280,000 deposit which was the amount due on the tax sale certificates.  The tax certificate holders argued that as first priority liens under New Jersey law, they were entitled to be paid before any other party in the case.  However, the estimated clean-up costs were approximately $1.3 million and greatly exceeded the value of the property.  The court was asked to determine whether the tax certificate holders were allowed to be paid from the $280,000 being held in escrow, or whether the certificate holders were required to wait to see if there was any money available after the clean-up was completed.
   

Under New Jersey law, when a condemning authority deposits the estimated value of the property into court and files a declaration of taking, title to the property transfers to the condemning authority.   Liens against the property attach to the deposit in priority order.  Parties with an interest in the funds are entitled to file a motion with the court to withdraw funds in the order of their priority.  For example, a mortgage holder is entitled to withdraw the balance due on its mortgage before the property owner receives any funds.  The same holds true for a tax certificate holder who is entitled to be paid before all mortgages, judgments liens and the owner.  This is the case when there are no environmental problems.
   

When there are environmental problems, the process for withdrawing funds is changed.  The condemning authority is entitled to introduce into evidence an environmental report disclosing the estimated clean-up cost for the property and request that the estimated clean-up costs be withheld from the amount on deposit until the clean-up is completed.  For example, if the “as remediated” value of the property is $300,000 and the estimated clean-up costs are $100,000, the property owner and lienholders are only entitled to withdraw $200,000 from the $300,000 on deposit, with the balance of $100,000 to remain in escrow pending the completion of the environmental clean-up.  The term  “as remediated” means the value of the property assuming all environmental remediation has been completed.
   

The Appellate Division ultimately held that the tax liens may only be paid from funds remaining after Haddon Township is reimbursed for the remediation costs.  Under the facts in the case, it was unlikely there will be any remaining funds remaining due to the high cost of remediation.
   

The case is based upon sound reasoning.  Looking at the Haddon Township case, if a property is worth $280,000 “as remediated”, but it costs $1.3 million to remediate it, it has negative value.  After the remediation is completed, the property is only worth $280,000.  It would be unfair to allow the property owner (or lienholders) to keep the $280,000 which is a direct result of the $1.3 million spent to clean up the property. 

Imagine the situation where a conscientious property owner decides to install solar panels in an effort to reduce his or her energy costs and help the environment.  Then, imagine further, that once the work is completed, the local tax assessor increases the property’s tax assessment arguing that solar panels are an improvement to the property, which causes the property’s fair market value to appreciate.  The resulting taxes from this higher assessment could end up off-setting all or most of the energy savings generated by the solar panels, thereby discouraging property owners from making investment in green building technologies and processes.  Clearly, this is not an acceptable outcome for the property owner or the general public and, apparently, our state government agrees.  In June, 2008, the New Jersey State Legislature overwhelmingly passed a bill, which Governor Jon Corzine recently signed into law on October 1, 2008 (P.L. 2008, ch. 90; codified at N.J.S.A. 54:4-3-113a, et seq.), that provides a tax exemption for the increase in value to real property attributable to the installation of renewable energy systems - and the new law does not just benefit homeowners.
   

Under the new law, a “renewable energy system” is “[a]ny equipment that is part of, or added to, a residential, commercial, industrial, or mixed use building as an accessory use, and that produces renewable energy onsite to provide all or a portion of the electrical, heating, cooling, or general energy needs of that building.”  The term “renewable energy” is defined broadly to include, among other things, “(1) electric energy produced from solar technologies, photovoltaic technologies, wind energy, fuel cells, geothermal technologies, wave or tidal action, . . .; and (2) energy produced from solar thermal or geothermal technologies.”
   

In order to obtain a renewable energy systems exemption, a property owner must make a written application for certification to the local enforcing agency (i.e. building inspector) under oath and once the application is received, the local enforcing agency must review it for compliance with all legal requirements.  If a property owner is denied the certification and wants to appeal, an appeal may be filed with the local construction board of appeals.  In the event a property owner’s work is certified, but the local tax assessor imposes an unreasonable tax assessment on the property, the aggrieved property owner may file an appeal with the county tax board or State Tax Court in accordance with the court rules.
   

It also be noted that the exemption from taxation for the renewable energy system shall not become effective until the tax year following the year in which certification has been granted.
   

In conclusion, the aforesaid enactment is a good law.  It will prevent property owners, who “go green,” from being penalized by local taxing authorities with higher real property taxes.  However, property owners seeking to take advantage of this new benefit should familiarize themselves with the entirety of the new law and all applicable forms and regulations, as may be adopted by state agencies. The procedures to obtaining the certification must be followed in order to take advantage of the exemption.