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The Opportunity Zone program enacted as part of the 2017 federal Tax Cuts and Jobs Act is designed to spark long-term capital investment into low-income and urban communities. The 169 Opportunity Zones (or tracts) designated in New Jersey by Governor Murphy are a complete game changer and contain attractive investment incentives for developers and investors.

Via the Opportunity Zone program, developers and investors can tap into and reinvest their unrealized capital gains without paying capital gains for a period of time, if at all. For example, capital gains invested or reinvested in an Opportunity Fund will receive a step up in basis of 10 percent if held for at least five years and by an additional 5 percent if held for at least 7 years, excluding up to 15 percent of the original gain from taxation.

An even greater savings is realized if the investment in the Opportunity Fund is held for at least 10 years. The gain accrued while invested is permanently excluded from taxable income of capital gains upon the sale or exchange of the investment.

With these tax incentives in place, Senator Corey Booker (NJ) believes the barriers between communities and the capital needed to generate economic growth and opportunity will be broken down.

The Opportunity Zones were designated based on key economic indicators in certain neighborhoods and communities such as income, unemployment rate and property values but also consideration was given to accessibility to mass transit and the value of existing investments. The 169 tracts were approved by the US Department of the Treasury on April 9, 2018. You can view the interactive map of designated Opportunity Zones for New Jersey by clicking here.

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.

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.