Real Estate & Construction Law Monitor : Real Estate & Construction Lawyer & Attorney : Cole Schotz Meisel Forman & Leonard Law Firm : NJ, Mid-Atlantic Development & Building

Last week (on Monday, June 21, 2010), the New Jersey Assembly unanimously passed the long-awaited revisions to the New Jersey Construction Lien Law (N.J.S.A. 2A:44A-1, et seq.) (the “Lien Law”). Next up is the parallel Senate bill which, after its introduction in early May 2010, was referred to the Senate Commerce Committee, where it is expected to remain for review until the Fall. The proposed Lien Law revisions, based almost entirely on the March 2009 final report of the New Jersey Law Revision Commission, seek to fill the gaps in, and improve on the practical application of, the original 1993 Lien Law. Some of the proposed amendments are a codification of decisions of federal and state courts, including the New Jersey Supreme Court, which have sought to interpret the Lien Law since its enactment.

The proposed Lien Law revisions are comprehensive. Among the more critical Lien Law amendments contained in the new legislation are:

1. an increase in the time within which a potential lien claimant may assert a construction lien claim relating to a residential construction contract from 90 days to 120 days from the claimant’s last date of work. The current 90-day period has, in practice, been problematic for prospective lien claimants, who must also file and serve a Notice of Unpaid Balance and Right to File Lien (“NUB”) and a demand for arbitration -- and then obtain an award in arbitration – before they may file lien claims. The extra 30 days provides additional breathing room for the lien claimant to fulfill all of the statutory prerequisites, particularly the arbitration proceeding. Note, however, that the proposed amendment sets a deadline for filing a NUB at 60 days from the claimant’s last date of work and a 10-day deadline thereafter to serve the required demand for arbitration on all parties against whom the lien is asserted. If those deadlines are not met, the extra 30 days to file the lien means nothing, as the lien claimant will be barred from filing its lien;

2. the addition of statutory definitions of “residential construction,” “residential unit,” “real property development,” “community association,” and “dwelling,” and the amendment of the statutory definitions of “residential construction contract” and “residential purchase agreement,” which, together, seek to better reflect the types of construction subject to the residential rules of the Lien Law. For example, settling a contentious issue under the existing Lien Law, the revisions provide that, in general, large-scale residential condominium, coop and townhouse development projects, including, without limitation, mixed-use projects and the common elements of such projects, would be subject to the Lien Law’s residential filing requirements. Projects designed to contain rental units or non-residential units, however, would not be subject to the Lien Law’s residential filing requirements;

3. the clarification of a number of other statutory definitions, as well as the addition of other new definitions, including, without limitation, new definitions of “lien claim” (and the term “value” within the “lien claim” definition), which allow for the inclusion of retainage in the amount of a lien claim, and incorporating within the definition of “contract” the requirement that the lien claimant’s contract be a writing signed by the party in direct privity with the lien claimant and evidencing the consideration to be paid and a description of the improvement subject to the lien;

4. a substantially more thorough description and calculation of the “lien fund” - that is, the amount of money available for distribution among valid lien claimants performing work under any particular line of contracting – and an explanation of how that lien fund is to be distributed among multiple lien claimants at different contracting levels. In fact, the term “lien fund” is not defined or otherwise used in the current Lien Law, so the proposed revisions provide the basic definition of the term. Most of these proposed revisions are a reflection of court decisions interpreting the Lien Law and formulating the concept of the “lien fund.” Among other things, the proposed revisions would make clear for the first time under the Lien Law that the lien fund is not to be reduced by: (i) payments not made according to written contract provisions; (ii) payments made but not yet earned by the time the first lien is filed; (iii) liquidated damages; (iv) collusive payments; (v) the use of retainage to pay a replacement contractor after the filing of the lien claim; or (vi) setoffs or backcharges not agreed to in writing by the claimant or adjudicated in an arbitration;

5. a clarification that the date on which the County Clerk has marked the lien claim as received (rather than when the Clerk has actually indexed the lien claim – which is not within the control of the lien claimant) is to be used to determine whether a lien claim has been timely filed;

6. a much-needed expansion of the existing deficient statutory forms and/or procedures for filing, amending or discharging a lien claim or NUB, and prosecuting a suit to enforce a lien claim; and

7. clarification: (a) of when lien claims may be filed against the owner of real property for tenant improvements (See this article); (b) that work performed on common elements of a real estate development may be filed against “community associations” such as condominium or homeowners’ associations; and (c) that a mortgage takes priority over a lien claim, even when recorded after the filing of that lien claim, where the funds are used for the purchase of and/or improvements to the subject property.

We will likely have to wait until the Fall at the earliest before these proposed revisions, and possibly others the Senate Commerce Committee recommends, are presented for vote in the Senate. In light of the Assembly’s unanimous vote, it is probable that the bill, in its present or slightly modified form, will pass and be sent to the Governor for his review and signature (or improbable veto). The proposed amendments to the Lien Law have been well thought out and debated and are long overdue.
 

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Cole Schotz, along with professional appraisers from Integra Realty Resources, presented an informative seminar to clients and interested commercial property owners, managers and brokers titled "The Time to Fight City Hall is Now -- Why a Real Estate Tax Appeal Makes Sense" on March 3, 2010. The presenters covered the nuts and bolts of tax assessments, the appeal process, strategies to win on appeal, as well as a market-wide survey of current conditions and expectations, laying out a roadmap for action.

Because a property's tax burden can represent one of the more significant components of its operating costs, conducting an annual review of a property's assessment with your professionals: lawyers and appraisers alike, is critical to good management. Last year saw record filings with the tax court. This year, with the commercial real estate market continuing in recession, significant filings are again expected.

Despite this trend, the amount of qualified candidates filing appeals continues however to represent only a fraction of those who should be availing themselves of the tax appeal procedure. In a market where major sectors: Office, Retail, Industrial and Multifamily have experienced increased vacancy rates and greater demand for rent concessions and landlord work letters, the market values of these properties have decreased resulting in overassessments for real estate tax purposes.

Tax appeals must be filed by April 1, 2010.

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On February 9, 2010, Governor Christie signed an Executive Order immediately suspending the operation of the Council on Affordable Housing (“COAH”) and appointing a panel to study the issue of affordable housing and make recommendations to the Governor within 90 days. This comes at the heels of the Introduction of Legislation S:1 by State Senators Lesniak and Bateman to abolish COAH and the existing municipal affordable housing requirements. Instead, low and moderate income housing would be made a part of a municipality’s Master Plan. This is the first step in changing the way affordable housing is provided to New Jersey residents.

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On September 6, 2008, in response to unprecedented economic and financial crisis and as an attempt to protect development permits that were scheduled to expire, then New Jersey Governor John Corzine signed P.L. 2008, c. 78 (N.J.S.A. 40:55D-136.1 et seq.), legislation known as the Permit Extension Act of 2008 (the “Permit Extension Act”). The Permit Extension Act extended the terms of certain governmental development permits and approvals to July 1, 2010, with up to a six-month phase-in period until January 1, 2011. Governor Corzine, as one of his last acts as Governor, signed legislation (Chapter 336, Assembly No. 4347) extending the end of the tolling period under the Permit Extension Act from July 1, 2010 to December 31, 2012.

The primary goal of the Permit Extension Act is to promote development once the economy has strengthened and prevent the abandonment of approved projects and activities. The Permit Extension Act tolls the running of governmental development permits and approvals obtained during the period from January 1, 2007 through July 1, 2010, with up to a six-month phase-in period until January 1, 2011, thus amounting to a maximum four-year permit extension period.

The Permit Extension Act is a compromise between developers and community activists, including environmentalists. As such, it excludes the following categories from eligibility for extension:

1. Permits and approvals issued by the US government or any permit or approval with a duration or fixed expiration date determined by a federal law or regulation;
2. Approvals in “environmentally sensitive areas”;
3. Permits or approvals issued pursuant to the “Pinelands Protection Act” if the extension would result in a violation of federal law or any state rule or regulation requiring approval of the Secretary of the Interior;
4. New Jersey Department of Transportation permits, other than right-of-way permits;
5. Flood Hazard Area Control Act permits, except where work has already commenced; and
6. Coastal centers pursuant to the “Coastal Area Facility Review Act” where (a) an application for plan endorsement was not submitted to the State Planning Commission as of March 15, 2007, and (b) was not in compliance with the Coastal Zoning Management Rules.

The Permit Extension Act does not prohibit the granting of additional permit extensions otherwise provided for under law when its tolling period expires. In addition, the Permit Extension Act does not affect any administrative consent orders issued by the New Jersey Department of Environmental Protection and in effect during the extension period, nor does it extend any approval in connection with a resource recovery facility.

Should you have any questions with regard to the applicability of the Permit Extension Act to any existing project, permits, or approvals, please contact an attorney knowledgeable with New Jersey laws and the Permit Extension Act.
 

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The 2010 Property Tax Environment is Ripe for Appeals and Represents a Real Opportunity for Significant Tax:

With measurable declines in the real estate market, evidenced, by rising vacancy and falling rental rates, the pursuit of a real property tax appeal has never been more compelling. In fact, municipalities are already bracing themselves for what is expected to be a tsunami of tax appeal filings. Last year, unprecedented levels of appeals were filed and towns have been left scrambling since. Adjustments to assessment levels were largely in order for 2009 and will continue to be justified in the present tax year. Towns are aware that their property assessments are not in line with the current economic climate and declining property values. It is therefore expected that significant adjustments are either going to occur voluntarily, through compromise, or involuntarily, by virtue of the mandates of Tax Court judgments. Consequently, for those who take action, it is likely that a reduction in assessment and a resulting reduction in taxes will be achieved.

The only way to take advantage of the opportunity to realize significant tax savings and improve one’s bottom line is to pursue a timely filed tax appeal. The 2010 tax appeal filing deadline is April 1, 2010 so there is little time to waste.

The first step is for a property owner or a tenant, responsible for a majority of the property tax obligation, to review the Property Tax Assessment Notice (post card), which will be mailed to taxpayers by the towns in the next few weeks. This post card identifies the property tax assessment imposed upon the property for 2010.

This assessment number is, however, deceptive, as it does not, without proper adjustment, tell the owner the true value at which the town has assessed the property. Many taxpayers are falsely lulled into believing that their property assessment equals true value and is therefore correct. This error could be an expensive mistake.

Towns employ what is called an average or ”equalization” ratio in order to convert the property tax assessment to the value (the so-called “equalization value”). Only by comparing this adjusted assessment number (“equalization value”) to the actual value of the property, may a proper analysis be undertaken to determine whether an appeal has merit. Taxpayers who take no action are thus often stuck with paying an ever-increasing tax bill.

Once the Property Tax Assessment card is reviewed, a property owner should therefore quickly move to schedule an appointment with an attorney experienced in this area in order to determine the merits of a possible appeal. By taking this simple, but important step, a property owner can ensure that it is paying only its fair share of the municipal real property tax burden. This is where the involvement of an experienced attorney can be of tremendous help. With our experience and relationships with professional appraisers, we are able to perform, at no cost to you, a preliminary analysis to determine if an appeal is warranted. If so, the preparation and filing of a tax appeal complaint will be recommended and pursued at your election.
 

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The creditors’ rights exclusion under a title insurance policy is intended to make clear that a title insurance policy does not provide protection for post-policy challenges to the insured title or to the validity, enforceability, or priority of the lien of the insured mortgage arising solely out of the insured transaction (not one in the past chain of title), whereby the transfer to the insured owner or lender of its interest in the land is determined to be a fraudulent transfer or conveyance, or a preferential transfer, under either state or federal law. With respect to the loan policy only, the creditors’ rights exclusion also confirms that no protection is provided to the insured lender if a challenge is made to the priority of the lien of the insured mortgage based on the bankruptcy doctrine of equitable subordination.

Over the past decade, the request by owners and lenders to delete the creditors’ rights exclusion under a title insurance policy has become standard practice. In 2004, ALTA adopted Endorsement Form 21, which insures against loss under an owner’s or loan policy because of the occurrence, on or before the date of the policy, of a fraudulent transfer or preference under federal bankruptcy law or state insolvency or creditors’ rights laws. It also confirms that the title insurer will pay all costs, expenses and attorneys’ fees to defend the insured against such claims. It expressly excludes coverage for such loss, however, if the insured knew that the transfer was fraudulent or was not a purchaser in good faith. The benefit of this endorsement is that it expressly provides affirmative coverage for creditors’ rights matters.

The ALTA 2006 Loan Policy does give some limited coverage with respect to preferences for the insured mortgage itself. Covered Risk, Section 13(a) of the ALTA 2006 Loan Policy insures against “The invalidity, unenforceability, lack of priority, or avoidance of the lien of the Insured Mortgage” resulting from a prior transfer constituting a fraudulent or preferential transfer, but does not cover that risk for the “transaction creating the lien of the Insured Mortgage.” Exclusion 6 of the ALTA 2006 Loan Policy makes it clear that it only applies to those creditors rights’ issues affecting “the transaction creating the lien of the Insured Mortgage” that are not stated in Covered Risk 13(b). Lender’s generally will not find comfort with this limited protection against creditor’s rights matters from prior transactions and require affirmative coverage against the invalidity, unenforceability, lack of priority, or avoidance of the lien of the insured mortgage. To fill the “gap” created by Covered Risk 13(a) and Exclusion 6, when available the title company will issue affirmative coverage under a Creditors’ Rights Endorsement with respect to the transaction.

Creditors’ rights coverage places additional risk on the title insurer and therefore an additional risk premium for the endorsement is required. Normally, in a deed-in-lieu transaction, reasonably equivalent value will have been given for the deed because the value of the property will have been established by appraisal (supplied to the title insurer) to be less than the amount of the outstanding mortgage debt. Where a creditors' rights issue has been identified because a transfer is being made without the transferor receiving reasonably equivalent value, the title insurer is required to conduct non-title-related due diligence with respect to underwriting the transaction, including an analysis of the transferor’s business and financial statements; its capitalization both before and after the transfer; the amount of secured and unsecured credit obtained by the transferor both before and after the transfer; and a determination of whether the delivery of the deed in lieu of foreclosure will render the borrower insolvent. If the title insurer is willing to issue creditors’ rights coverage in such a situation, it may need to charge a significant additional risk premium to cover the potential liability. In addition, the title company may require that an independent third party with a demonstrated and substantial net worth indemnify the title insurer for the costs of defending an action based on a creditors’ rights defense.

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Bulk Sale Notification Requirements Apply To Deed in Lieu of Foreclosure

Based upon the findings of the Tax Court in N.J. Hotel Holdings, Inc. v. Dir., Div. of Taxation, 15 N.J.Tax 428, 437 (Tax Ct. 1996), the New Jersey Division of Taxation is enforcing recent changes in the New Jersey bulk sales notification requirements contained in N.J.S.A. 54:50-38 on the basis that such requirements apply to deeds in lieu of foreclosure (“deeds in lieu”) of real estate accepted by lenders, regardless of the fact that no monetary consideration is being received by the lender. If N.J. Hotel Holdings, Inc. is upheld it will mean that a lender who fails to comply with the bulk sales notification requirements before accepting a deed in lieu will be deemed by statute to have assumed liability for payment of all of the borrower’s outstanding tax obligations to the State of New Jersey. (For a more general discussion of the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

N.J. Hotel Holdings, Inc. v. Director, Division of Taxation

The question before the Tax Court in N.J. Hotel Holdings, Inc. was whether statutory bulk sales notification applied to assets acquired by way of deeds in lieu. The court unequivocally answered in the affirmative:

In this case the court holds that a person who acquires assets by way of a deed in lieu of foreclosure and a bill of sale, and who fails to give notice to the [Director] under N.J.S.A. 54:32B-22(c), is liable for the sales and use tax liability of the person from whom the assets are acquired. [Note: the Tax Court’s analysis is equally applicable to N.J.S.A. 54:50-38 and it is unlikely the case can be distinguished on the basis of the new legislation].

In N.J. Hotel Holdings, Inc., a bank made loans to several entities, secured by mortgages, assignments, and security agreements on three hotels. Following a modification and transfer of the properties and related obligations, the new owners defaulted on their obligations to the bank. Pursuant to a subsequent foreclosure agreement, the bank acquired all of the hotel assets by way of deeds in lieu. Bulk sale notification of this acquisition was not provided to the Director. As a consequence, the Director deemed the bank liable for all taxes relating to the subject property due by the defaulting owner prior to, and following, the transfer. The arguments presented by the bank in appealing the assessments of the Director can be categorically summarized: (1) a deed in lieu is not a transfer within the meaning of the statute, (2) because the State would have not received payment upon foreclosure, it should not receive payment when transfer is made via a deed in lieu, and (3) because no cash is exchanged in a deed in lieu transaction, there was no escrow mechanism to ultimately comply with the statute.

The court spent minimal time, and found little difficulty, dismissing the claim that a deed in lieu was not a transfer within the meaning of the statute: “It is clear that N.J.S.A. 54:32B-22(c) is meant to extend beyond . . . simple sale for cash . . . and beyond the restrictive definitions of the bulk sales act.” In the present case, “the hotel assets were transferred to plaintiff in settlement of the foreclosure action.” This was evidence enough to satisfy the court that the statute should apply.

The court then goes on to address the contention that had the foreclosure been completed, the State would have no remaining lien on the property and, as a result, would have received none of the sales tax due by the transferor. The court thwarts this argument by citing the business decision rule, reminding the transferee that it was their choice to avoid foreclosure through this asset transfer mechanism, and it is in the public interest of the State to allow such independent decision-making:

The principle that a business decision will be given its tax effect according to what actually occurred promotes public interest in tax certainty and thereby conforms with general business expectations. Indeed, planning by individuals and businesses alike would be frustrated if courts failed to give predictable effect in formal legal documents . . . simply because of asserted ignorance of law. . . .

‘As a general proposition, the answer must be that it is for the taxpayer to make its business decisions in light of tax statutes rather than the other way around.’

Finally, the court focused its attention on whether the statute should be deemed inapplicable because no cash is transferred in a deed in lieu transaction, rendering a cash escrow impossible. The court viewed this as a practicality argument of little merit. The fact that a deed in lieu transaction involves other consideration rather than cash does not relieve the transferee of liability based solely on the structure of the transaction. According to the court, the value of the “choses in action, or other consideration[s]” were greater than the sales tax obligations of the transferor, thus rendering the existence of a cash escrow irrelevant when determining the applicability of the notification requirements. Although the bank cites the interpretation of out-of-state statutes by the courts of other jurisdictions, the court rejects these alternative interpretations on the grounds of differing public policy objectives.

Life After N.J. Hotel Holdings, Inc.

The practical consequences of the holding in N.J. Hotel Holdings, Inc. are significant.

The Division’s application of N.J. Hotel Holdings, Inc. in applying the rules to deeds in lieu, when coupled with N.J.S.A. 54:50-38 which applies the bulk sales rules to a wide array of real estate transactions, effectively gives the State of New Jersey a super priority lien for outstanding taxes if a lender, in accepting a deed in lieu, fails to comply with the notification requirements. This is due to the fact that the lender’s deemed assumption of a borrower’s outstanding tax liability to the State of New Jersey will force a lender, who has accepted a deed in lieu without complying, to first pay the State of New Jersey the outstanding tax liability before it allocates any amounts recovered from the property to the debt.

Lenders must notify the Director prior to accepting a deed in lieu for the real estate encumbered by the security instrument. This is so despite the fact that a lender could proceed to foreclosure without complying with bulk sales notification requirements. Failure to provide such notification under these statutory requirements will render the lender personally liable for all taxes, sales or otherwise, that may be due at the time of the transfer, as well as any taxes determined to be due later (for example, following an audit of the subject property). Once the lender has made the notification, if the Director requires an escrow for outstanding taxes then the lender will either have to secure the amount from the borrower, if the borrower in fact has any funds, or put up the escrow itself. Of course, a lender could foreclose and avoid the escrow, but foreclosure involves its own costs and expenses, therefore this is just one more part of the analysis to be made by the lender of the defaulting loan and the lender’s potential remedies. (For a discussion of how to comply with the new bulk sales requirements under N.J.S.A. 54:50-38, see The New Bulk Sales Notification Requirements and Their Application to New Jersey Real Estate Transactions – Part 1)

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Introduction

Recent changes to the bulk sales notification requirements under New Jersey law have resulted in the application of these requirements to a wider array of real estate transactions and this means that New Jersey real estate attorneys must now, in the greater majority of cases, comply with New Jersey’s bulk sales notification requirements prior to, and as a condition of, closing. Failure to do so will mean that the purchaser is deemed by statute to have assumed liability for payment of all of the seller’s outstanding tax obligations to the State of New Jersey.

New Bulk Sale Notification Requirements

The New Jersey Sales and Use Tax Act, adopted in 1966, set forth bulk sale notification requirements designed to provide the New Jersey Division of Taxation with notice of asset sales for the purpose of collecting any outstanding tax liabilities owed by a seller. However, such bulk sales notification requirements were not applicable to commercial real estate transactions unless the transaction was part of the sale of business assets which included real estate, e.g., the sale of an existing hotel business.

On June 28, 2007, the landscape of bulk sales notification requirements changed dramatically when Governor Corzine signed into law N.J.S.A. 54:50-38, effective June 28, 2007 and operative August 1, 2007. This significantly expanded the scope of the notification requirements to include all transactions in which a bulk sale is made. The new section provides, in pertinent part:

Whenever a person required to collect tax shall make a sale, transfer, or assignment in bulk of any part or the whole of his business assets, otherwise than in the ordinary course of business, the purchaser, transferee or assignee shall at least 10 days before taking possession of the subject of said sale, transfer or assignment, or paying therefor, notify the director by registered mail of the proposed sale and of the price, terms and conditions thereof whether or not the seller, transferrer or assignor, has represented to, or informed the purchaser, transferee or assignee that he owes any tax pursuant to this act, and whether or not the purchaser, transferee, or assignee has knowledge that such taxes are owing, and whether any such taxes are in fact owing.

Whenever the purchaser, transferee or assignee shall fail to give notice . . . or whenever the director shall inform the purchaser, transferee or assignee that a possible claim for such tax or taxes exists, any sums of money, property or choses in action, or other consideration, which the purchaser, transferee or assignee is required to transfer over to the seller, transferrer or assignor shall be subject to a first priority right and lien for any such taxes theretofore or thereafter determined to be due from the seller, transferrer or assignor to the State, and the purchaser, transferee or assignee is forbidden to transfer to the seller, transferrer or assignor any such sums of money, property or choses in action to the extent of the amount of the State's claim. For failure to comply with the provisions of this section the purchaser, transferee or assignee, . . . shall be personally liable for the payment to the State of any such taxes theretofore or thereafter determined to be due to the State from the seller, transferrer or assignor, and such liability may be assessed and enforced in the same manner as the liability for tax under this act.

For purposes of the new law: (i) “‘Business’ means any endeavor from which revenue or consideration is realized for the purpose of generating a profit or loss.” and (ii) “‘Business assets,’ tangible or intangible, include . . . realty if the primaryuse of the realty is to support a business on its premises.” See N.J. Div. of Tax. Tech. Bull. 60 (July 3, 2008).

The obvious consequence of this statutory expansion and the Division’s Technical Bulletin is the applicably of the notification requirements to a far larger class of real estate transactions. On its face, the new law must be presumed to encompass any real estate transaction where the purpose of the real property is to support a business of any type from which revenue (profit or loss) may be realized, and for which the sale is not in the “regular course of business.” This would likely include sales by “single purpose entities”, such as limited liability companies and limited partnerships, which are prevalent in recent real estate transactions, where the sole asset is the subject real property and the sole business is the leasing, operation and management of that property. It therefore seems, with the exception of large building contractors who make sales of single units as inventory in the regular course of their business, single family residencies used solely for that purpose, and other unique transactional situations, that all real estate transactions require statutory notification of sale.

Compliance

In order to comply with the new law and thereby avoid personal tax liability, all New Jersey real estate sale transactions, other than the sale of the seller’s personal residence, should be administered in the following manner:

1.         Contract of Sale. The contract of sale between the parties should include a provision that both seller and purchaser are required to fully comply with the statute. This provision should enumerate the various responsibilities of the parties including, but not limited to: (1) the seller providing the purchaser with all required documentation, (2) the purchaser filing all of the requisite notices with the Director of the Division of Taxation at least ten days prior to closing, (3) withholding from seller’s proceeds at closing of the amount set forth in the Director’s initial reply notification to the purchaser of the State’s claim to seller’s State tax debts owed, which amount will then be held in escrow by the purchaser’s attorney until the State makes a final determination as to the amount owed by the seller (alternatively, this provision may provide that the seller pay the claim directly to the State from the seller’s proceeds at closing rather than utilizing an escrow mechanism), (4) a requirement that the seller post any additional amounts as required to fund the escrow (if applicable), (5) a provision authorizing payment from the escrow account (or direct payment to the State) to satisfy the final determination of the Director, and (6) a provision indemnifying the purchaser from any outstanding liability that may exist following fiscal exhaustion of the escrow account (if applicable).

2.         Division of Taxation Filings (Seller). The seller must prepare and deliver to the purchaser the Asset Transfer Tax Declaration (Form TTD). This form requires the seller disclose information that will assist the Director in estimating the gain on the transfer of asset(s) and the estimated tax on the gain. Form TTD can be found at http://www.state.nj.us/treasury/taxation/pdf/ttdv1.pdf.

3.         Division of Taxation Filings (Purchaser). The purchaser must prepare a Notification of Sale, Transfer or Assignment in Bulk (Form C-9600). This form provides for basic information regarding the sale, transfer, or assignment of property, including the names of the parties, the scheduled date of sale, and the sale prices of the assets being sold, transferred, or assigned. Form C-9600 can be found at http://www.state.nj.us/treasury/taxation/pdf/other_forms/misc/c9600.pdf.

4.         Submission to the Division of Taxation. The purchaser must then submit Form TTD, Form C-9600, and the fully executed Purchaser Agreement including price, terms and conditions thereof by registered mail to the Director at least ten days prior to the date of closing.

5.         Director Notification. Within ten days following receipt of the documents, the Director will notify the purchaser/attorney/designee of any possible claim for State taxes and specify the amount to be escrowed (or paid directly to the State) by the purchaser at closing. This amount may include deficiencies (i.e. underpayments), delinquencies (i.e. unfiled returns), any audit assessment(s) (fixed or pending), and the tax gain from the transfer of the asset(s). The purchaser’s attorney may act as escrow. If no taxes are owed, the Director will issue a letter of clearance.

6.         Closing and Final Payments. After closing, any and all amounts owed to the State will be paid out of the escrow account (or paid directly to the State). When all final returns have been filed and all State taxes have been paid, the Director will issue a letter of clearance authorizing the release of any funds remaining in the escrow account (if an escrow mechanism has been used). Upon receipt of this letter, the purchaser is relieved of any further liability.

Conclusion

Real estate attorneys must be aware of the new statutory notification requirements and advise their clients accordingly.   Although it is relatively simple to adhere to the requirements set forth in the new statute, failure to do so could have drastic financial repercussions for clients engaged in applicable transactions. While the steps set forth above are a good starting point for compliance, it would be prudent for any individual engaged in real estate transactions that are not standard single-family residencies occupied by the seller to seek legal advice regarding compliance with these new notification requirements.Recent changes to the bulk sales notification requirements under New Jersey law have resulted in the application of these requirements to a wider array of real estate transactions and this means that New Jersey real estate attorneys must now, in the greater majority of cases, comply with New Jersey’s bulk sales notification requirements prior to, and as a condition of, closing. Failure to do so will mean that the purchaser is deemed by statute to have assumed liability for payment of all of the seller’s outstanding tax obligations to the State of New Jersey. 

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In the wake of the economic crisis and distress of the real estate markets, issues related to the foreclosure of mezzanine loans have become the subject of much discussion. A mezzanine loan put simply is a loan given to a business entity which is secured by the ownership interests in that business entity. In real estate transactions, the most frequent structure involves a pledge of the membership interests in a limited liability company. This limited liability structure is primarily the result of special purpose entity requirements imposed by commercial lenders to conform to securitized lending guidelines. Mezzanine loans provide an opportunity for an entity which owns commercial real estate to leverage its equity in instances in which the entity’s real estate lender does not allow subordinate mortgage financing.

As a result of the current economic climate and percipitous decline in real estate values, many mezzanine loans are now in default due to reduced cash flow or the inability to refinance the loans. Many mezzanine lenders assume that if they foreclosed on the ownership interests in the entity they could assume management control of the real estate asset including the right to dispose of the asset. That assumption is not necessarily correct.

If the foreclosure is contested, the lender must concern itself with the requirements of the applicable Uniform Commercial Code (“UCC”) and other applicable laws. Section 9-610 of the Uniform Commercial Code requires that a mezzanine foreclosure be conducted in a “commercially reasonable manner.” Every aspect of a disposition of collateral must be commercially reasonable. This requirement explicitly includes the method, manner, time, place and other terms of the disposition. However, the UCC does not define what type of sale is commercially reasonable.

The law of the jurisdiction in which the business was formed, together with the organization documents of the business entity, control what rights a transferee of an ownership interest acquires. Many partnership agreements and operating agreements of limited liability companies limit the rights of a transferee of a partner or member’s interest to an assignment of economic rights including a right to share in the profits and losses. However, many partnership agreements and operating agreements of limited liability companies prohibit a transferee the right to participate in the management of the entity or to take actions which legally bind the entity. Many lenders are aware of this but don’t consider it a problem because the UCC, as adopted in most states, overrules such anti-assignment provisions, so that you can take assignment of economic rights notwithstanding a prohibition in the organizational document. However, the UCC as adopted in some jurisdictions would not protect the lender under the anti-assignment provisions. For example, Delaware, the governing law for many of these agreements, is different. Under Delaware’s UCC, as well as its Partnership Act, Limited Partnership Act and Limited Liability Company Act, if an entity’s organizational documents prohibit assignments of economic interests, the provisions in those documents will control. This means that you need to ascertain which state’s law will govern the assignment of the economic interests. The UCC contains mandatory choice of law rules governing the perfection and priority of security interests, which do not apply to the granting of an assignment of economic interests. Moreover, it is uncertain whether a choice of law clause contained in loan documents will be effective on this question, even though such clauses are generally enforceable. This is because it is doubtful that a lender and a borrower can dictate which law will apply to govern the relationship between the borrower and the entity in which the borrower is invested. Therefore, a lender may not be able to avoid the application of Delaware law, because the applicable law may well be determined by choice of law rules which generally require a rational nexus analysis as well as other factors many of which are outside of the control of a lender.

Whether a mezzanine loan can been foreclosed such that the foreclosing mezzanine lender can gain control of the real estate controlling entity and have proper authority to operate and transfer the assets is not always apparent from an examination of the applicable loan collateral documents, entity organizations or formation documents, public records and applicable laws. In addition to reviewing the laws of the jurisdiction governing the loan collateral documents to ensure the foreclosure is done properly and the organization or formation documents of the transferring entity to be certain that proper authority for the transfer exists, you need to have a thorough understanding of the applicable laws relating to real estate transfers by the particular type of entity. The foreclosing mezzanine lender should also determine if the foreclosure including the control and/or ownership of the entity owning the real estate will result in transfer tax or other tax consequences to the foreclosing mezzanine lender.

In light of these restrictions and impediments, title companies are reluctant to insure any real estate transaction involving a transfer of property by a conveyance from the foreclosing mezzanine lender and will scrutinize the loan collateral documents as well as the entities corporate governance documents and the laws of the jurisdiction of formation. Accordingly, great care must be exercised any time a foreclosing mezzanine lender attempts to exercise its rights under the mezzanine loan documents or agrees to accept an assignment or other transfer in lieu of foreclosure. And, if the mezzanine lender intends to insure the transfer it is recommended that the mezzanine lender get the title company involved early in the process to confirm the transfer is insurable and before any of the lender’s rights are compromised.
 

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