Non-residential developers must not only meet the challenges of this uncertain real estate market, but are also required to comply with the state non-residential development fee program which requires a substantial fee to be paid to municipalities or the State of New Jersey for new non-residential construction. This development fee is based upon the equalized assessed value on the underlying land and improvements, whether new construction or an addition to an existing improvement, and must be paid before a certificate of occupancy is issued. This article will explain how municipalities are required to calculate the new non-residential development fee and describe the process for challenging excessive fees.
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.