The New York City Building Code, Chapter 33, requires a developer to safeguard adjoining property during the conduct of all construction and demolition operations. Accordingly, a developer and an adjoining property owner may enter into a license agreement, whereby the adjoining property owner provides the developer with access to its property to install Code-required protections.  In return, oftentimes the developer, among other things, pays compensation to the adjoining property owner for such access.  If the parties cannot reach an agreement, the developer may seek to compel such access through the courts pursuant to Section 881 of the Real Property Actions and Proceedings Law.

While the Building Code does not explicitly provide a right to compensation, when these issues have been brought before them, New York courts have awarded compensation to adjoining property owners.  However, whether compensation is mandated and the amount of compensation is within the courts’ discretion.  Courts often consider the length of time for which access is necessary and the intrusiveness of the developer’s work on the use and enjoyment of the adjoining property by its owner and occupants.  Without clear guidance from the courts, a developer and an adjoining property owner need to give due consideration to the issue of compensation as illustrated below.

In her ruling released late last month, Manhattan Judge Arlene Bluth denied any license fee to the Condominium Board of the Fifth Avenue Tower, an adjoining property owner to the New York Public Library.  The Library will conduct a $200 million overhaul of its main Fifth Avenue branch.  In her decision, Judge Bluth specifically rejected the Condominium Board’s request for a $15,000 / month license fee.  It has been separately reported that the Condominium Board rejected the Library’s offer of a $3,500 / month license fee.  It appears that Judge Bluth may have denied any license fee to the Condominium Board based, at least in part, on the excessiveness of its demands.

In view of the lack of clear guidelines, developers and adjoining property owners should consult with their legal counsel and should be sure not to overplay their hands when negotiating license fees.

The New York City Council approved a bill on Thursday, November 30, that impacts thousands of small business owners located south of 96th Street in Manhattan. The bill modifies the threshold that businesses must meet in order to be exempt from paying the 3.9 percent New York City commercial rent tax, which is imposed upon businesses located south of 96th Street in Manhattan. Businesses operating in the Bronx, Queens, Brooklyn and Staten Island are not subject to the tax and are not impacted by this legislation. Though Mayor Bill de Blasio initially opposed the bill as it is projected to remove $38.6 million in revenue in fiscal year 2019, it is expected that he will sign the bill into law. The measure also had the support of Council Speaker Melissa Mark-Viverito. Once signed, it will become effective July 1, 2018.

Prior to the bill’s passage, businesses who paid more than $250,000 a year in base rent were required to pay the tax. The bill will raise this threshold, allowing businesses who make $5 million or less in annual income and pay less than $500,000 in annual rent to be exempt from the tax. The bill also provides a partial, sliding credit for (1) businesses making $5 million or less a year and paying between $500,000 and $550,000 a year in rent and (2) businesses making between $5 million and $10 million a year and paying less than $550,000 in annual rent.

The bill also provides exemptions for not-for-profit organizations and businesses located in certain areas, such as the World Trade Center area or those areas impacted by the Lower Manhattan Commercial Revitalization Program.

A credit for businesses that pay between $250,000 and $300,000 in annual rent, without consideration of annual income, is left unchanged.

New Jersey courts are continuing their trend of extending insurance coverage for third-party construction defect claims.  Following last year’s NJ Supreme Court decision in Cypress Point Condo. Ass’n, Inc. v. Adria Towers, LLC, 226 N.J. 403 (2016), which broadly interpreted the standard CGL policy to extend an insured developer’s coverage to include claims of damage caused by the work of subcontractors, the New Jersey Appellate Division recently issued a published decision approving a trial court’s use (though not its application) of the “continuous trigger” theory of insurance coverage to third-party construction defect claims, thereby, potentially extending coverage in such cases over multiple policy years.

In Air Master & Cooling, Inc. v. Selective Insurance Co.,  A-5415-15T3 (N.J. App. Div. October 10, 2017), the Appellate Division reviewed a trial court’s decision in a declaratory judgment action filed by a subcontractor against two of its insurers.  Those insurers had declined coverage and refused to defend the subcontractor in a construction defect litigation filed by the condominium association (the “Association”), on whose 101-unit building the subcontractor had performed certain HVAC work on the roof and in each individual unit.  The Association and certain unit owners claimed damage due to progressive water infiltration, which they attributed to defective workmanship, and the subcontractor was joined in the litigation as a third-party defendant.

The subcontractor had performed work at the building from November 2005 through April 2008.   In early 2008, unit owners began to notice water infiltration into their units and resulting damage.  A newspaper article published 2010 detailed the 2008 discovery of leaks by the unit owners.  In May 2010, the Association’s consultant issued a report identifying certain areas of the roof in need of replacement though noting it could not determine when the infiltration had occurred.

The subcontractor had three insurers from 2005 through 2015.  The insurer for the period November 2005 through June 2009, agreed to defend the subcontractor under a reservation of rights, as it was the insurer during the period the work was performed and at the time the first water infiltration was alleged to have been discovered.  The next insurer, Selective Insurance, provided coverage from June 2009 through June 2012, and disclaimed coverage, on the basis that the property damage was alleged to have manifested before the policy periods had begun.   The third insurer, with coverage from June 2012 through June 2015, also disclaimed coverage, and was dismissed from the subcontractor’s declaratory judgment case, without appeal, on the basis that its 2012 coverage commenced long after any leaks had started and any resulting damage manifested.

After some discovery was conducted, Selective moved for summary judgment, which was granted by the trial court.  The trial court applied the continuous trigger doctrine of insurance coverage in analyzing whether Selective owed the subcontractor a duty to defend the construction defect claim.  It determined conclusively, however, that the damage to the building had manifested itself before Selective’s June 2009 coverage began.

On appeal, the Appellate Division, while agreeing that the continuous trigger doctrine was applicable in the construction defect context, disagreed with the ultimate determination – or at least found that the record was not sufficiently developed to make that determination.   The appellate court, therefore, reversed the judgment in favor of Selective and remanded the case back to the trial court with guidance on the application of the continuous trigger doctrine in the construction defect coverage context.

The continuous trigger effectively grants continuous coverage to an insured in connection with a third-party damage claim from the date of the initial exposure to the harm through the date of the manifestation of the injury resulting from the harm.  The appeals court rejected the subcontractor’s attempt to extend the doctrine even further to extend to the date of “attribution” – that is, when the particular damage could be attributed to a particular insured.  Doing so would be akin to transforming policy to claims made policy from occurrence-based, and likely escalate premiums or deter policies from being written.  Instead, the court determined that the endpoint of the coverage, or manifestation (or “last pull of the trigger”), should be the date when the harm has sufficiently become apparent or manifests itself to trigger a covered occurrence.

The Appellate Division, guided by the precedential first-party coverage case, Winding Hills Condo Ass’n v. North American Specialty Ins. Co., 332 N.J. Super. 85 (App. Div. 2000), held that the manifestation occurs at that time of the “essential” manifestation of the injury, and not necessarily at the initial discovery of the injury.  The essential manifestation is “the revelation of the inherent nature and scope of that injury.”  In examining whether the May 2010 report (during Selective’s policy period) or 2008 unit owner observations of water infiltration (before Selective’s policy period) should be used as the manifestation or end date of coverage, the court found the record too sparse to make that determination.   There were no depositions, or other evidence, revealing who knew what and when about these construction defects, and the court refused to rely on hearsay statements of the unit owners in the newspaper article.

Accordingly, the court remanded the case back to the trial court for a determination of what information about the building defects at issue were or reasonably could have been revealed between the time of the unit owner complaints and the start of Selective policy in June 2009.   The appeals court also noted that the matter was further complicated by the fact that the water infiltration associated with the roof was not discovered until the May 2010 expert report, while the newspaper article does not mention the roof.  Thus, there were genuine issues of material fact as to, among other issues, when water infiltration problems on the roof first became known or reasonably could have been known.

The Air Master decision continues a trend in New Jersey jurisprudence of expanding, within reason, CGL coverage to insureds.  In particular, in construction defect cases, the courts have recently liberally interpreted policies and legal theories to afford more coverage to insureds.   Where construction defects cause progressive property damage, as in the common case of water infiltration, Air Master will help to guide insurers, insureds and their respective counsel in analyzing whether, based on the facts alleged by a third-party, coverage is available for particular policy years.   It is also likely to spawn additional discovery and expense in the underlying construction defect cases specific to those issues.

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.