In an Advisory Opinion issued near the end of 2016, the New York State Department of Taxation and Finance has determined that the transfer of real property in New York State from an “exchange accommodation titleholder” to a taxpayer in connection with a so-called “reverse” like-kind exchange under Section 1031 of the Internal Revenue Code is not subject to the New York State Real Property Transfer Tax. In the more typical or “forward” like-kind exchange, a taxpayer sells real property (the “relinquished” property) and deposits the proceeds from such sale with a qualified intermediary.  Subject to the rules established under IRC Section 1031, the qualified intermediary holds the proceeds until the taxpayer has identified one or more “replacement” properties and the proceeds are then held by the qualified intermediary are used to acquire the “replacement” property or properties.  In a “reverse” exchange, the “replacement” property is acquired before the “relinquished” property is sold by way of an “exchange accommodation titleholder” or EAT.  The EAT holds title to the “replacement” property (generally using a newly-formed limited liability company that is disregarded for tax purposes) until the taxpayer transfers the “relinquished” property.  The Advisory Opinion concisely describes the process of a “reverse” exchange and the rules governing “reverse” exchanges.

The taxpayer provides the funds used by the EAT to acquire the “replacement” property; the EAT does not use any of its own funds.  The funds provided to the EAT are generally evidenced by a promissory note and secured by a mortgage on the “replacement” property.  The taxpayer is also responsible for maintaining the “replacement” property, usually by way of a lease.  The EAT leases the “replacement” property to the taxpayer until the exchange is concluded, with the rent paid to the EAT being consistent with the debt service payments made by the EAT on the mortgage securing the loan from the taxpayer for the funds used by the EAT to acquire the “replacement” property.

The opinion examines the exemption to the payment of the Real Estate Transfer Tax allowed under Tax Law § 1405(b)(4) with respect to “conveyances of real property without consideration and otherwise than in connection with a sale, including conveyances of realty as a bona fide gifts.”  The opinion further states that two conveyances are made for consideration in a “reverse” exchange: the purchase of the replacement property by the EAT and the sale of the relinquished property by the QI to a purchaser.  The EAT is considered to be acting as the agent of the taxpayer by holding title to the “replacement” property for the purpose of timing under a like-kind exchange, no consideration was found to have been provided for the conveyance of the “replacement” property from the EAT to the taxpayer, thus qualifying for the exemption under Tax Law § 1405(b)(4).  In addition, the fees that the EAT receives from the taxpayer for its services in acting as the “exchange accommodation titleholder” were not deemed to be consideration subject to taxation.

As a side note, the New York City Department of Finance came to a similar conclusion in a letter ruling back in 2003 as to properties located within New York City with respect to the application of the New York City Real Estate Property Transfer Tax; the full text can be found here.  The full text of the Advisory Opinion from the New York State Department of Taxation and Finance can be found here.

In a recent tax court case, Holy Trinity Baptist Church v. City of Trenton (Docket No. 015909-2014, February 2, 2017), the court overturned the findings of the County Board of Taxation and upheld the tax exemption for religious/charitable use of properties pursuant to N.J.S.A. 54:4-6.3.  This statute exempts properties from taxation where “buildings [are] actually used in the work of associations and corporations organized exclusively for religious purposes, including religious worship, or charitable purposes.”  The Holy Trinity decision comes at a time when municipalities are aggressively challenging tax exemptions and was preceded by two other significant tax court cases discussed below.

Commencing with the tax court’s decision in AHS Hospital Corp. v. Town of Morristown, 28 N.J. Tax 456 (Tax 2015), involving the Morristown Memorial Hospital, it appears that elevated scrutiny by municipalities is calling the exempt status of many non-profit organizations into question.  In Morristown Memorial, the tax court found that the hospital’s entanglement with for-profit activities undermined the hospital’s ability to satisfy the well-recognized three prong exemption test.  This test requires an organization to establish that:  1) The organization is a New Jersey non-profit entity; 2) The non-profit entity is acting consistent with its charter in the performance of religious/charitable functions; and 3) The activities performed on the property are not conducted for profit.  Paper Mill Playhouse v. Millburn Township, 95 N.J. 503 (1984).  In reaching its conclusion the court in Morristown Memorial focused on the hospital’s failure to satisfy the third prong of the test.  In part, the court concluded that the activities conducted and services provided by the many private, for-profit physicians, dictated a finding that a significant portion of the hospital facilities were in fact being used for profit.  The court there also concluded that it was unable to distinguish and segregate those portions of the hospital facilities where the involvement of for-profit activities did not apply.  Consequently, other than in the most distinct and limited areas (e.g., the hospital parking garage, auditorium and in-house fitness center), the hospital facilities were deemed to be taxable.

More recently, the tax court was asked to focus on the exemption afforded non-profit universities.  In Fields v. Trustees of Princeton University, a group of third-party taxpayers challenged the exemption afforded Princeton University.  Although that matter was resolved without a trial, it appears the settlement may have been precipitated by the University’s concern with what has been widely perceived to be an increasingly unfriendly environment for the exempt treatment of non-profits in the aftermath of the Morristown Memorial decision.  The settlement, which only temporarily resolves the ultimate exemption question, requires the University to pay over $18 million dollars in payments to third-parties and contributions to the municipality (in the form of payments in lieu of taxes) through the year 2022 when the University’s settlement obligations expire.

With this recent history and the presence of numerous pending cases specifically attacking the exemptions afforded non-profit hospitals throughout the state, the tax court’s decision in Holy Trinity may offer non-profits, at least religious organizations, some solace from what appears to be a concerted effort on the part of municipalities to challenge the efficacy of real property tax exemptions in all areas.  Importantly, the Holy Trinity court concluded that despite evidence indicating that religious activities on the subject church property had diminished (as the church purchased a new property for its operations and had already commenced the process of shifting its activities to this new location), the church continued to make actual use of the property in furtherance of its religious purposes.  In particular, the Holy Trinity court found that the church continued its schedule of weekly meetings, made the space in question available for future meetings and gatherings, conducted receptions, and stored books at the location in connection with its religious/charitable functions.  As a result, the continued application of the tax exemption was determined to be appropriate in Holy Trinity.

The Holy Trinity court also made clear that neither an intent to sell the property nor diminished use of otherwise exempt property in of itself will destroy the tax exemption.  The court’s decision is consistent with City of Hackensack v. Bergen County, where the listing of the property for sale and removal of certain items to increase the marketability of the property were found to be insufficient to undermine the exemption.  Id. 405 N.J. Super. 35 (App. Div. 2009).  Further, the Holy Trinity court acknowledged that a property remains exempt even where a property’s use is limited to the occasional storage of goods used in furtherance of religious and charitable purposes.  Borough of Hamburg v. Trustee of Presbytery of Newton, 28 N.J. Tax 311, 319-320 (Tax 2015).

Consequently, in the current ratable hungry environment, non-profit organizations must now be more vigilant in ensuring that their properties continue to be used for the organization’s exempt or charitable purposes.  Only by regularly reviewing the entity’s activities and documenting continued property usage for its non-profit purposes, can these organizations improve the prospect of preserving the significant benefits that flow from application of this statutory exemption.

So you’ve managed to successfully file a construction lien claim in New Jersey.  Well, don’t then kick back and relax for too long, because if you fail to take action to enforce that lien claim within the limited time required by statute, the lien will be rendered unenforceable.  Under the New Jersey Construction Lien Law (“CLL”), a lien claimant must file a lawsuit seeking to enforce its lien within one year of the date of its last provision of work, services, material, or equipment.  This is a strict statutory deadline, which cannot be extended based on equitable circumstances.  It is important to note that the deadline is not one year from the date of the filing of the lien claim itself.  It is also important to ensure that the work, services, material or equipment, on which you are basing your last date of provision, was actually required to be provided by your contract, as the following case illustrates.

In the recent unpublished decision, WJV Materials, LLC v. Erin Contracting, Inc. (Docket No. A-2453-14T1, August 12, 2016), the New Jersey Appellate Division affirmed the trial court’s dismissal with prejudice of the claim in a supplier’s complaint seeking to enforce its construction lien claim.  The supplier had filed its complaint on May 2, 2014, which was more than one year after it provided its last delivery of materials on April 3, 2013.   The supplier attempted to argue that its actual last date of work was May 16, 2013, the date its quality control expert visited the site to review and approve the subcontractor’s work product.  The court rejected that argument, as the supplier had been hired solely to provide concrete to the subcontractor at the worksite, which it last did on April 3, and not to unilaterally inspect the work performed with the materials by the subcontractor.  There was no evidence in the record that the subcontractor contracted with the supplier to provide any such inspection services.  Note that this same issue may arise in connection with your initial filing of a construction lien claim, which, on a commercial project, must be filed within 90 days of your last provision of contracted-for work, services, material or equipment.

Many times after filing and serving a construction lien, the property owner or contractor for whom you worked will seek to immediately resolve your lien claim – or will file its own action to discharge the lien if it believes you filed a defective lien.  Often, however, a claimant will file a lien and no immediate action is taken by any party (or the lien is bonded, which still requires you to take timely enforcement action).   Filing a timely and valid construction lien claim is difficult enough.  Once you do so, it is critical that you not fall asleep at the switch and that you file your enforcement action within the time required by the CLL – that is, within one year of the last date of work, services or materials provided pursuant to your contract.

The right to file a mechanic’s lien is established by state statute, allowing those providing work, services, materials or equipment to a construction project with additional valuable security in the event of non-payment of amounts due under a contract for such work, services, materials or equipment.  As a pair of recent unpublished New Jersey Appellate Division decisions illustrate, the proper exercise of those rights can make a significant difference in attempting to obtain payment.

The Construction Lien Law (“CLL”), N.J.S.A. 2A:44A-1, et seq. sets forth the requirements for qualifying for and filing a lien claim against a private commercial or a residential property in New Jersey.   The Municipal Mechanics’ Lien Law (“MMLL”), N.J.S.A. 2A:44-125, et seq. sets forth the requirements for qualifying for and filing a lien against the funds of a project contracted by a New Jersey public agency (though not projects contracted by the State of New Jersey).  In the two recent cases discussed below, a subcontractor on a public project succeeded in obtaining a remedy after filing a lien under the MMLL, while a subcontractor on a private project deprived itself of a potential remedy by failing to file a lien under the CLL.

In Vincent Pools, Inc. v. APS Contractors, Inc. (Docket Nos. A-2670-13T3, A-2688-13T3, Decided March 18, 2016), a subcontractor, Vincent Pools, Inc. (“VP”), was retained by a general contractor, APS Contractors, Inc. (“APS”), to install the plaster work for two swimming pools that were part of a larger municipal pool complex project that Jersey City had contracted with APS to construct.  Upon the completion of VP’s work, a dispute arose over the quality of that work.   Jersey City demanded that the pools be re-plastered, while APS offered, instead, to acid wash the pool.   Jersey City terminated APS’s contract and claimed that it had paid APS in full for the work completed on the pools prior to the termination, though it admittedly did not pay APS for certain outstanding change order work.  APS, in turn, withheld $162,468.92 from VP.  VP then filed a municipal mechanics’ lien claiming a lien on the project funds due and owing from Jersey City to APS, and filed suit seeking, among other things, the enforcement of its lien against Jersey City.  At trial, a jury rendered a verdict in favor of VP on its lien claim in the amount of $150,498.92, as well as substantially more in favor of ABS in connection with ABS’s contract claims against Jersey City.

On appeal, as it related to the verdict in favor of VP on its lien claim, Jersey City argued that it would be double paying if it paid VP any funds on account of VP’s lien, because it had already paid APS in full from the funds appropriated for the pool project.  The Appellate Division recognized that a lien filed under the MMLL is limited to the amount owed by the public agency to the general contractor at the time of the filing of the lien or what thereafter becomes due under the prime contract.  A public agency, therefore, cannot be liable for more than the amount of the public contract if it pays the general contractor pursuant to the contract terms and withholds amounts sufficient to cover any liens filed.  The court determined that the MMLL refers to the full amount of the public contract as the amount to which a lien may attach, and not just the amount that may be allocated to a specific portion of the contract.  Thus, although Jersey City claimed to have paid APS in full for the particular work performed by VP, because Jersey City still owed money to APS on the contract as a whole, plus change orders, VP’s lien attached to those funds.   In fact, to ensure Jersey City was not double paying for VP’s work, the trial court reduced APS’s award to offset amounts previously paid to APS for Jersey City’s prior payment on account of VP’s work, which had not yet been paid to VP.   The Appellate Division further noted that because the MMLL, and New Jersey’s Bond Act and Trust Fund Act are to be read cumulatively, VP’s ability to recover under any one of those acts does not preclude recovery under any of the others.  Thus, the Appellate Division affirmed the verdict in favor of VP on its lien claim.

The unpaid subcontractor in Exterior Walls Systems, LLC v. 3D Contracting of Central Jersey, Inc. (Docket No. A-0383-14T4, Decided February 18, 2016), was not so fortunate.   There, Exterior Wall Systems, LLC (“EWS”) subcontracted with 3D Contracting of Central Jersey, Inc. (“3D”) on a private construction project for JSN Deli Corp. (“JSN”).  EWS claimed that 3D failed to pay it in full for its work. EWS brought suit against 3D, ultimately obtaining a default judgment against it in the amount of $48,000.  As the Appellate Division aptly noted, “[i]mportantly, EWS did not file a lien, pursuant to the provisions of the [CLL] for its work done.”  That is critical, because instead of having a lien on JSN’s interest in the real property on which EWS’s work was performed, and perhaps having had JSN withhold payment to 3D to satisfy EWS’s lien, EWS was left with a potentially uncollectable judgment against 3D.

EWS attempted to levy on any and all of 3D’s assets, to the extent there were any, including any amounts claimed due by 3D from JSN under 3D’s contract with JSN.  JSN, however, had earlier won a dismissal of a lawsuit 3D had filed against it for amounts allegedly due under that contract, based on the statute of limitations.  EWS, thereafter, filed a motion seeking an order compelling JSN to turn over to EWS funds allegedly owed by JSN to 3D, which the trial court denied.    EWS appealed, and the Appellate Division determined as a matter of law that, based on the facts before it, there was no “debt” from JSN to 3D that would be subject to EWS’s execution or garnishment under the relevant New Jersey statutes.  The Appellate Division, therefore, affirmed the trial court’s denial of EWS’s turnover motion, leaving EWS without a remedy against the owner and, instead, attempting to collect the debt directly from 3D, which may or may not have assets sufficient to satisfy EWS’s judgment.

While, in the above cases, VP still may have been able to recover from APS even if it had not filed a lien, and EWS still may not have been able to recover on its claim even if it had filed a lien, there is no question that the filing of a valid lien claim provides subcontractors and others contributing to a public or private project in New Jersey with substantial valuable additional protections and rights when attempting to collect a debt.  All potential beneficiaries of the CLL and the MMLL should understand when and whether they are entitled to assert a lien claim under these laws, and the deadlines and any other conditions precedent to filing a lien, so that their rights under these laws are not inadvertently lost, waived or otherwise diminished.

On April 14, 2016, the New Jersey Appellate Division, in a precedential decision, determined that injured parties are not obligated to serve pre-suit tort claims notices under the New Jersey Tort Claims Act (“TCA”) on private government contractors.

In Gomes v. County of Monmouth, et al. (A-1679-14T4, approved for publication), plaintiff filed a lawsuit against, among others, Correct Care Solutions, Inc. (“CCS”), alleging that she had been injured after being unlawfully denied access to her prescribed antibiotic medication during her incarceration at the Monmouth County Correctional Institution (“MCCI”).  CCS is a private company that, during the relevant time, provided medical services to inmates housed at the MCCI pursuant to a contract with the County of Monmouth.   The trial court ruled that plaintiff’s claims were barred as against CCS because she had failed to serve CCS with notice of her claim within ninety days of the accrual of the claim, as the trial court determined was required by the TCA under N.J.S.A. 59:8-8.  On appeal, the Appellate Division reversed, holding that there was no obligation, “either in the language of the Tort Claims Act or one logically compelled by the policies underlying the statutory scheme[,]” requiring a plaintiff to provide a tort claims notice to a public entity’s private contractor.

The Gomes court, however, was careful to point out that its holding was limited to the TCA’s pre-suit notice provisions, and did not extend to any other possible protections offered by the TCA to government contractors.  For example, the court expressly “recognize[d] that, in appropriate circumstances, private contractors retained by State and local governments to perform some of their functions may be protected by the TCA’s immunities and special defenses under the concept of ‘derivative immunity.’”  One of the cases cited by the court where such immunity was found to have applied was Cobb v. Waddington, 154 N.J. Super. 11 (App. Div. 1977), certif. denied, 76 N.J. 235 (1978).  In Cobb, plaintiff was injured in an automobile accident, and sued, among others, a Department of Transportation (“DOT”) contractor that had been performing road construction work at the site of the accident and had set up barricades which plaintiff struck during the accident.  The barricades, however, had been specified in type and configuration by the DOT, and the contractor merely followed the DOT’s specifications in purchasing and setting up the barricades.  Because the DOT was found to be immune from liability under the TCA based, among other things, on its protected exercise of discretion, and because the contractor was merely acting pursuant to the DOT’s exercise of discretion, the DOT’s immunity was deemed extended to the contractor.

Contractors, including construction contractors, who perform work for any governmental entity in New Jersey, as well as their counsel, should be aware, in light of the Gomes decision, that they are not entitled to the protections of the TCA’s pre-suit tort claims notice provisions, although they still may be subject to other protections afforded by the TCA, such as derivative immunity.