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.

Property owners should be receiving their annual property tax assessment notices (post cards) from the municipal assessor’s office at this time. Receipt of this assessment notice indicates that it is time to determine whether a tax appeal is warranted for the 2015 tax year.  Despite what can best be described as uneven improvement in the real estate market across various commercial segments, the need to carefully evaluate property tax relief opportunities continues. The 2015 tax appeal filing deadline is April 1, 2015 unless a town-wide reassessment or revaluation is in place, in which case the deadline is May 1, 2015.

Consequently, it behooves commercial property owners to review their property tax assessments with their professionals now to ensure that their assessments are in line with the present relatively low property values.  In this way, taxpayers can potentially lock in assessments at historically low levels before values significantly rise.  In New Jersey, the “Freeze Act” compels that assessments be “frozen” at the levels achieved as a result of a successful appeal for a period of two (2) years.  In addition, because assessments are generally not disturbed until a town-wide revaluation or reassessment program is implemented (usually every 5-10 years) there is a real prospect that a lower assessment achieved as a result of a successful appeal this year could have real lasting value and provide savings to taxpayers for years to come.

As a result, there continue to be real opportunities for property owners to realize significant tax savings and lock in the present lower values for the foreseeable future.  Commercial property owners are therefore encouraged to consult with their real property tax professionals to determine if a tax appeal would be warranted in their particular case at this time

Please feel free to contact Carl Rizzo at crizzo@coleschotz.com or by telephone at (201) 525-6350 with any questions.

The New Jersey Tax Court recently ruled in Methode Electronics, Inc. v. Twp. Of Willingboro, Docket Nos. 019012-2010 and 014098-2011 (Tax January 22, 2015) that the assessment on contaminated property located in Willingboro, New Jersey must be reduced to a mere nominal amount due to its undevelopable condition.  In Methode, the property owner manufactured printed circuit boards on a 3-acre parcel.  As a result of the owner’s manufacturing activities, the property became contaminated with volatile organic compounds and metals.  Methode ceased operations in 1999 and no other businesses operated at the property since that time.  Except for the floor slab, all improvements were demolished.  As part of its environmental cleanup obligations Methode installed a groundwater treatment system consisting of a number of wells.  These monitoring wells were required to remain in place indefinitely.  In addition, pursuant to a deed notice, the floor slab was also to permanently remain in place as a cap to prevent off-gassing of toxic vapors from soil and groundwater.  The remaining portion of the property was paved and previously served as a parking lot and loading area for the facility.

In 2010, the Township of Willingboro (the “Township”) assessed the property at $404,600.  That assessment was appealed by the owner and the Burlington County Board of Taxation reduced the assessment to $244,600.  Methode thereafter further appealed its case to the Tax Court.  Subsequently, in 2011, while the case relating to the 2010 taxes was still pending, the Township again assessed Methode’s property at $404,600.  The 2011 tax assessment was then also appealed to the Tax Court and consolidated for trial with the 2010 matter.

In considering this consolidated matter, the Tax Court found that Methode’s proofs provided sufficient evidence to call into doubt the Township’s assessment and thereby overcame the presumption of correctness attaching to all municipal tax assessments.  The Court was then required by law to determine the appropriate value of the property.  In evaluating the property, the Tax Court concluded that the subject property did not have any utility due to the extensive costs associated with a cleanup of an indeterminate duration; the limited amount of land that remains free from encumbrance due to the required presence of remediation equipment and the maintenance of the 6,800 square foot concrete cap in order to prevent vapors from migrating into the atmosphere, and due to the continuing prospect that any owner or future owner would be exposed to continuing liabilities associated with the contamination.

Consequently, the Tax Court concluded that the property was indeed overassessed and reduced its assessment to the nominal sum of $2,000.  In so holding, the Tax Court determined that prior precedence relating to contaminated properties was of little value because here a convincing showing was made that the property lacked utility in its current state and also lacked the prospect for utility into the immediately foreseeable future.

The impact on property value resulting from contamination therefore continues to be a critical component that must be addressed whenever evaluating the merits of a property tax appeal.

In the recent Orient Way Corp. v. Tp. of Lyndhurst (35-2-4760) decision, the Appellate Division upheld the Tax Court’s determination that an arms’ length sale of the subject contaminated property provided credible evidence of true market value. The import of this decision is that where an arms’ length transaction exists, the reliance on the highly subjective process of determining the appropriate deduction to be applied to the value of the property as if “clean” (free from contamination) can now be avoided. As confirmed by a long line of cases, discussed in a previous piece I authored, the valuation methodology in this area requires satisfaction of three critical components:

  • First, the taxpayer needs to establish the appropriate amount of the cleanup costs required to return the property to a “clean” state
  • Second, the taxpayer must establish the reasonable period required to complete the cleanup
  • Third proof must be offered establishing that there has been a cessation of the cause of the property contamination

Once these three elements are satisfied, the cleanup costs can then be capitalized over the expected cleanup period to determine the amount of the appropriate deduction to apply when fixing a final true value for the property in its current contaminated state. While these proofs will undoubtedly continue to be required, the holding in Orient Way makes plain that our courts will now have the ability to afford great weight to an arms’ length sale of the property where the parties were acting with full knowledge of the existing contamination. As the Tax Court recognized in the case below, the impact of the cleanup obligations will have been appropriately built into the sales price and therefore this price will represent the best indicator of the value of the property in its contaminated state.

On September 18, 2013, Governor Christie signed the New Jersey Economic Opportunity Act (the “Act”) into law. The Act is intended to spur job creation, promote redevelopment of underutilized urban and suburban areas, and attract new businesses to New Jersey by expanding state programs that offer tax incentives. In general, the Act extends tax incentive programs to wider geographic areas to include most of the state and significantly lowers program eligibility thresholds. The Act consolidates the State’s five existing economic development incentive programs into two streamlined versions: Grow New Jersey Assistance Program (“Grow NJ”); and the Economic Redevelopment and Growth Grant Program (“Grant Program”). This article provides a general overview of the Grant Program and its potential benefits to any business undertaking a capital investment in a real estate project located in New Jersey.

Under the Act, the Grant Program is now designated as New Jersey’s only redeveloper incentive program and is administered by the New Jersey Economic Development Authority (“EDA”). In particular, the Act expands the existing grant program for economic redevelopment under the Act to close project financing gaps, incentivizes rebuilding public infrastructure vital to redevelopment efforts, and rehabilitates areas impacted by Hurricane Sandy.

For redevelopment, the Grant Program establishes a $600 million cap for qualified projects, which must have a minimum total project cost ranging between $5 million and $17.5 million, depending on the location of the project. A qualified residential redevelopment project refers to a project that is predominantly residential and includes multi-family residential units for purchase or lease, or dormitory units for purchase or lease. Disbursements of the residential redevelopment cap are determined by several categories, broken down by factors such as: county; municipality; net benefits to the community; proximity to urban transit areas; level of economic distress; and designation as a Garden State Growth Zone (“Growth Zone”), presently, Camden, Trenton, Passaic City, and Paterson. Non-residential projects have no financing cap.

For redevelopment grant incentive agreements, the maximum financing disbursement is 100 percent of total project costs for municipal governments or redevelopers, 40 percent for projects located in a Growth Zone, and 30 percent for all other developers. Alternatively, a developer can apply for a state or local incentive grant agreement to recover a credit from the state or local authority of up to an average of 75 percent of the projected annual incremental state and local tax revenues generated by the project or 85 percent of such revenues for projects in a Growth Zone. In the case of a qualified residential project where the state revenues from the project are inadequate to fully fund the grant, the grant award can be converted, at the discretion of the EDA, into tax credits equal to the full amount of the incentive grant.

Each incentive grant agreement entered into is only eligible for funding for a period of 20 years, and the applicant bears the burden of proof to demonstrate the amount required to achieve project feasibility. Developers who have entered into incentive grant agreements are also eligible to sell or assign their rights and interests in their agreements, as well as the incentive grants payable thereunder, to other entities or individuals.

The Act is also designed to achieve a number of laudable public policy objectives by providing a bonus incentive of up to 10% of project costs to projects that fall within one of eleven categories, including: (a) super markets in distressed municipalities; (b) health care facilities in distressed communities; (c) transit projects; (d) disaster recovery projects; (e) tourism destination projects; (f) substantial rehabilitation or renovation of existing structures; or (g) projects located in a Growth Zone. Furthermore, the Act expands the definition of what constitutes a “capital investment” in a Growth Zone to include any and all redevelopment and relocation costs, including, but not limited to, site acquisition, if made within 24 months of application to the EDA, engineering, legal, accounting, and other professional services required; and relocation, environmental remediation, and infrastructure improvements for the project area, including, but not limited to, on-and off-site utility, road, pier, wharf, bulkhead, or sidewalk construction or repair.

As an important reminder, the deadline for developers to apply to the EDA for incentive grants or tax credits under the Grant Program is July 1, 2019.