Oct 25, 2021

Proposed Legislation Could Threaten Future of Redevelopment Projects in New Jersey

By James E. Polles, Esq.

If enacted into law, A1571/1576 (the “Legislation”) could threaten developers and real estate investors with increased project costs for redevelopment projects in New Jersey. Specifically, amongst other proposed changes in the way development projects will be financed, impactful redevelopment projects subject to a Financial Agreement – those agreements between a municipality and a redeveloper allowing for the payment of a lesser amount of taxes on improvements, for up to thirty years from project completion – would require the prevailing wage rate to be paid to the workforce used on all such projects. The Legislation could have a profound effect on the redevelopment of blighted properties in municipalities, that would not otherwise be redeveloped by private capital without some level of financial incentive. 

Importantly, the Local Redevelopment and Housing Law, N.J.S.A. 40A:12A-1 et seq. (the “LRHL”) provides a mechanism for redevelopment entities, such as municipalities, to determine if properties meet criteria to be designated as “areas in need of redevelopment,” which, amongst other powers, triggers a redevelopment entity’s ability to enter into financial agreements with redevelopers to redevelop properties. The premise is that these “areas in need of redevelopment” would not otherwise be redeveloped with private capital, without a financial incentive to do so. 

The Long Term Tax Exemption Law, N.J.S.A. 40A:20-1 et seq. (the “LTTE Law”), works in tandem with the LRHL, and is the mechanism by which redevelopers that undertake significant improvements to an “area in need of redevelopment” engage in negotiations with municipalities to make a payment in lieu of taxes (“PILOT”): typically, an annual service charge in the form of a percent of the annual gross revenues of the redevelopment project. The PILOT would be considerably less than, and in lieu of, full taxes assessed on a project’s improvements, with payments to begin upon the issuance of a certificate of occupancy or completion issued to a project and continuing for up to thirty years. The incentive and benefits are clear for both parties – municipalities encourage private equity to (re)develop property that would not otherwise be developed by private capital, and developers can account for a key, fluctuating cost in a pro forma agreement, i.e., municipal taxes.

The Legislation would significantly impact redevelopment projects, in that every contract in excess of the prevailing wage contract threshold amount, for which a public body (i.e., municipality) has also authorized a tax abatement for the property or premises (other than certain, non-profit organizations), must contain a provision that in the event it is found that any worker employed by the contractor or any subcontractor has been paid a rate of wages less than the prevailing wage contract threshold amount, then the public body may terminate the contractor’s or subcontractor’s right to proceed with the work.

The practical effect of the Legislation is that certain redevelopment efforts by municipalities could be stymied, or altogether thwarted, due to the significant added cost of paying prevailing wage for labor on projects that are likely, already significantly hindered from a cost standpoint due to, amongst other reasons, significant environmental remediation costs. In addition, redevelopment projects focused on providing 100% of affordable residential housing on-site will likely need to find even more creative ways to have projects financed. Finally, significant infrastructure improvements could be impacted with ever-increasing costs, not only to installation and/or replacement of aged infrastructure, but due to the requirement to pay prevailing wage to workers. Developers and investors should be ever vigilant in tracking the Legislation, while trying to sharpen their pencils to build contingencies in project budgets, wherever possible.

For more information, contact James E. Polles at jep@spsk.com or at (973) 798-4948.