Tax Increment Financing in New Jersey Through the Economic Redevelopment and Growth Grant Program

On July 27, 2009, Governor Corzine signed into law the New Jersey Economic Stimulus Act of 2009 designed to minimize the impact of the ongoing global fiscal and economic crisis on New Jersey businesses and residents and to spur investment in the State through the implementation of several development incentive programs, including the creation of the Economic Redevelopment and Growth Grant Program (the “Program”). The Program replaces the State’s previous tax increment financing law, the Revenue Allocation District Financing Act enacted in 2002 (the “Prior Law”). Due to its burdensome and time consuming approval process, only two municipalities in seven years, the cities of Millville and Bayonne, were able to successfully navigate the statutory process to create a revenue allocation district under the Prior Law. The Program, like its predecessor, is a tax increment financing law whereby estimated resultant incremental tax revenues derived from qualified redevelopment projects are redirected to developers to defray a portion of the project costs thereby promoting the undertaking of such projects. The main thrust of the Program is to encourage the undertaking of private and public redevelopment projects in “qualifying economic redevelopment and growth grant incentive areas” through the provision of State and/or municipality derived incentive grants to reimburse private and public developers for all or a portion of their project financing gap for such projects.

Unlike under Prior Law which required qualifying projects to be located in designated areas in need of redevelopment, developers under the Program benefit from a more expansive definition of “qualifying economic redevelopment and growth grant incentive areas,” which should incentivize private and public developers to utilize tax increment financing as a means to bridge the gap in financing more of such projects in a greater number of locations in the State. Qualifying areas of redevelopment under the Program include Planning Area 1 (Metropolitan), Planning Area 2 (Suburban) or a center as designated by the State Planning Commission, a community with a bus, train, light rail, or ferry station that has been designated by the Commissioner of Transportation as a transit village, and federally owned land approved for military base closure.

Under the Program, a private or public developer may apply to either the State or the municipality or both for redevelopment incentive grants, to be derived from incremental tax revenues resulting from the project, to finance all or a portion of its project costs. Such grants may be pledged or assigned as security for a loan to the developer with the consent of the State Treasurer in the case of a State grant or municipality in the case of a municipal grant. Any such assignment shall be an absolute assignment for all purposes, including the federal bankruptcy code. A developer must demonstrate a project financing gap in order to qualify for such grants. A project financing gap is demonstrated by a developer by certifying that additional capital cannot be raised from other sources, after the developer has contributed at least 20% of its own capital to the project and has made all good faith attempts to secure additional capital from investors and financial entities. Up to 75% of the projected annual incremental State and municipal revenues from the project may be pledged towards the redevelopment incentive grant. In either case, redevelopment incentive grants to a developer cannot exceed 20 years in duration. Furthermore, the combined amount of reimbursements under redevelopment incentive grant agreements between a developer and the State or municipality shall not exceed 20% of the total project costs.

The process for obtaining a municipal redevelopment incentive grant begins with the submission of an application to the municipality which must receive final approval from the Local Finance Board in the New Jersey Division of Local Government Services. However, a municipality only may submit for final approval for municipal incentive grants for (i) the construction of infrastructure improvements in the public right-of-way, or (ii) publicly owned facilities. The Local Finance Board, in deciding whether or not to approve a municipal incentive grant will consider, among other factors: (i) the economic feasibility of the redevelopment project, (ii) the likelihood that the redevelopment project will, upon completion, be capable of generating new tax revenue in an amount in excess of the amount necessary to reimburse the developer for project costs incurred, and (iii) the degree to which the redevelopment project enhances and promotes job creation and economic development. Additionally, the chief financial officer of the municipality must make a finding that the incremental revenues to be realized from the redevelopment project will be in excess of the amount necessary to reimburse the developer for its project financing gap. Such a finding must be based upon appropriate documentation and calculations supporting the decision. Additionally, the developer must indicate on its application whether it is also applying for a State redevelopment incentive grant. Further, municipal redevelopment incentive grants are made directly to the developer and can be derived from the municipality’s incremental property taxes, payments in lieu of taxes, payroll taxes, sales and excise taxes, parking taxes, hotel and motel taxes and other local taxes.

The process for obtaining a State redevelopment incentive grant begins with the submission of an application to the New Jersey Economic Development Authority (the “EDA”), which in conjunction with the State Treasurer, must make a finding that the State revenues to be realized from the redevelopment project will be in excess of the amount necessary to reimburse the developer for its project financing gap. Additionally, the EDA, in deciding whether or not to approve a State incentive grant will consider, among other factors: (i) the economic feasibility of the redevelopment project, (ii) the likelihood that the redevelopment project will, upon completion, be capable of generating new tax revenue in an amount in excess of the amount necessary to reimburse the developer for project costs incurred, and (iii) the degree to which the redevelopment project enhances and promotes job creation and economic development. Further, State redevelopment incentive grants are made directly to the developer and can be derived from the State’s incremental income taxes, corporate business tax, public utility franchise tax, utility tax, sales and use taxes and certain other State taxes.