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

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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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 a newly decided New Jersey Appellate Division case, Pansini Custom Design Associates LLC v. City of Ocean City, the court, made clear that application of the simpleton approach of merely averaging comparables or the results of competing appraisal reports, will not do. In Pansini, the court found that such an approach to valuation represents a shirking of the fact-finder's responsibility to reach a "reasoned, just and factually supported conclusion of value." The court went on to hold that relying upon such a "simple mathematical formula is an unacceptable methodology for fulfilling one's role as a fact-finder."

Moreover the Tax Court of New Jersey has also recognized that permitting the use of averaging would only serve to encourage appraisal experts to slant their conclusions to the extremes. It has been recognized that permitting averaging to be utilized would mean appraisers would "intentionally distort and skew the values to insure a high or low number without concern that the fact finder must resolve the issue with a careful analysis of data that may result in adoption of one appraisal figure over another.”

In the end, the analysis which must be conducted should instead include a careful assessment of sales data, making appropriate and reasoned adjustments to reflect a host of factors, including: the time of sale, location, amenities, physical characteristics, utility and desirability of the properties held up for comparison. Importantly, the Pansini decision also served to reinforce the well-settled principle that comparable sale data is only of value to a reasoned valuation analysis where the gross magnitude of necessary adjustments to the “comparables” do not serve to belie comparability.

Anytime valuation of real property is at issue, whether in connection with parties’ contractual arrangements, or a tax court or condemnation proceeding, it is incumbent upon parties and professionals alike to ensure that the ultimate value conclusions reached by their appraisal experts are based upon empirical data and observations of existing and surrounding conditions and not simply a mathematical exercise.

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Real estate developers in New Jersey often face a myriad of state and local regulations under which their development activities must comply. The Appellate Division issued a ruling in two lawsuits brought by builders associations against two New Jersey municipalities which should give developers some welcome relief.

In May 2003, Jackson Township passed an ordinance requiring a minimum of 10% to 40% of a parcel contemplated for development, depending on the zoning district in which it was located, be reserved as open space, with a minimum of 50% of such open space consisting of land which could be used for recreational use.

Jackson Township revised these requirements in 2006 by requiring all residential developments provide 12.5 acres of land per thousand projected residents of the development for recreational purposes subject to certain additional specified standards. If a developer could not satisfy these requirements, or if the planning board agreed to a developer’s request, a developer could make a cash contribution in lieu of compliance with these requirements by contributing to so-called “off-tract recreational improvements.” Further, a developer was required to pay its “fair share” for off-site open space and/or recreational land and improvements as a condition of subdivision or site plan approval.

The New Jersey Shore Builders Association challenged the enforceability of these ordinances. The trial court granted summary judgment in favor of the builders association, finding these ordinances to be ultra vires and unenforceable since the Municipal Land Use Law (MLUL) does not give municipalities the right to require on-site dedications of open space (with the exception of planned unit developments, planned unit residential developments and residential clusters) unless the municipality compensates the developer for the portion of the property set aside as open space.

In Egg Harbor Township, ordinances similar to the Jackson Township ordinances were already in place. Residential developers were required to set aside one-half of an acre for recreation and open space for each one thousand persons expected to reside in a proposed development. The Egg Harbor Planning Board had discretion to accept a cash payment in lieu of compliance with the recreational facilities and open space requirements if it determined that “both the area local to the development and Egg Harbor Township’s park and recreation needs would be better served by an agreed cash bequest to the designated parks and recreation budget.”

In addition, developers were required to install recreational facilities in all residential developments requiring those facilities, “on the land that has been set aside for recreational purposes” (such as playgrounds, tennis and basketball courts), based on the number of dwelling units in a development. In lieu of installing these facilities, a developer could, at its option, make a cash contribution to the Township’s parks and recreation budget.

In 2004, Egg Harbor Township passed a new ordinance giving the Township the option to require an off-tract assessment and revising the formula used for determining the recreational facilities in a residential development. Later that year, another new ordinance granted developers the option in designated zoning districts to post such assessments if the developer determined “that the on-site construction of active recreation facilities and/or provision of open space for passive recreation would result in a loss of potential dwelling units on the subject parcel.”

In like fashion to the Builders Association, The Builders League of South Jersey challenged enforcement of the Egg Harbor ordinances; however, the trial court in this action ruled completely contrary to the trial court in the Jackson Township case. The loser in each case appealed the trial court’s decision. The Appellate Division consolidated both appeals given the similarity of the issues in dispute.

In New Jersey, the MLUL is the basis upon which municipalities may control zoning, with the purpose of achieving certain goals that are specified in the statute, such as adequate open space. Both builders groups argued that the MLUL gave municipalities the authority to require dedications of common open space and recreational areas only when planned developments where the subject of the application, and did not provide for payments in lieu of set-asides. The Townships acknowledged this, but argued that the MLUL granted such authority by implication.

The court agreed with the builders groups that the MLUL, while conferring substantial powers to municipalities with regard to zoning, limited such power with respect to set-asides for recreational and open space purposes to planned developments only. The court’s ruling carefully distinguished this power under the MLUL from the more general power provided elsewhere in the MLUL allowing municipalities to impose requirements on developers to contribute toward the cost of off-site water, sewer, drainage and street improvements in lieu of on-site set-asides.
 

In light of this ruling, only time will tell whether the state legislature takes any action to close this loophole.

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On March 9, 2009, the New Jersey Supreme Court decided the case of Pagano Company v. 48 South Franklin Turnpike, LLC. At issue was “whether a purchaser of commercial property is liable for the real estate broker commissions due under the leases it acquired under a general assignment from the seller.” The decision provides useful guidance for the sellers, purchasers and brokers of commercial property.

The plaintiff, Pagano Company (Pagano), entered into an agreement with Heritage III Office Center (Heritage), pursuant to which commissions were payable to Pagano for each lease it procured, including renewals of such leases. Heritage subsequently entered into a contract to sell the property to 48 South Franklin Turnpike, LLC (Franklin). The contract included a fairly typical due diligence provision granting Franklin the right to inspect the books and records of the property. According to the Court’s decision, Franklin reviewed the leases pertaining to the property, but did not review or request a copy of the commission agreement between Heritage and Pagano. At the closing for the sale of the property, Heritage assigned to Franklin, and Franklin agreed to assume, all of Heritage’s obligations under the leases. The parties did not execute any specific assignment of the commission agreement.

At the time of the closing, three tenants procured by Pagano continued to occupy the property. Each pertinent lease expressly bound Heritage and its successors and assigns and contained a specific reference to Heritage’s commission obligations to Pagano. After acquiring title, Franklin refused to pay Pagano commissions that came due thereafter under the terms of the commission agreement.

In order to hold Franklin liable for the commissions, the Court required proof that Franklin had “affirmatively assumed” the obligation. In the absence of an express written assumption of the commission agreement by Franklin, the Court stated that the determination of whether an affirmative assumption had occurred required an analysis of the facts and circumstances surrounding the general assignment of leases and, in particular, the “documentary record” of the sale transaction. The Court reasoned that “[i]f, taken as a whole, the record signals that the assignee agreed to assume the obligation, he or she will be held to it despite the absence of a separate express promise to do so.”

In reversing an earlier New Jersey Appellate Division ruling, the Court held that Franklin had affirmatively assumed the obligation to pay the on-going commissions based on Franklin’s assumption of Heritage’s obligations under the leases, the fact that the leases were expressly binding upon successors and assigns of Heritage, and the clear reference in each lease to the obligation to pay a commission to Pagano pursuant to the terms of a separate agreement. The Court also emphasized that Franklin is a “sophisticated purchaser” that had a sufficient opportunity to request access to the commission agreement, but failed to do so.

Sellers, purchasers and brokers of commercial property should take guidance from this decision. 

For sellers, the Court made it clear that commission obligations are “personal” and do not “run with the land.” Therefore, if a seller’s intention is to transfer its commission obligations to a purchaser, it is imperative that it obtain an explicit written assumption of such obligations from the purchaser at the closing. 

For purchasers, a purchase agreement must contain appropriate seller representations concerning the presence or absence of commission agreements. Purchasers cannot take “a head in sand approach” to its due diligence investigation. If any reference is made to a broker and/or commission agreement, further investigation is necessary. The obligation to pay future commissions should be clearly addressed in a written agreement executed by both parties.

For brokers, a commission agreement should bind the owner, its successors and assigns. It should also obligate the owner to reference the existence (and preferably, the terms) of the owner’s commission obligations in any lease which gives rise to a payment obligation and require the lease to expressly state that the successors and assigns of the owner are similarly bound. Brokers should pursue the inclusion of “due on sale” clauses in commission agreements. Lastly, consideration should be given to recording any commission agreement in the land records of the County in which the subject property is located, although land owners generally object to giving brokers such a right.

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On February 17,2009, the American Recovery and Reinvestment Act of 2009 (the “Act”) was enacted. The Act is an approximately $787 billion stimulus package that is aimed at addressing the current economic challenges prevalent in the United States. The Act contains several business tax reduction provisions. The Act permits some taxpayers the ability to elect to defer cancellation-of-debt income when a taxpayer or a related party repurchases debt issued by the taxpayer.

Generally, under Section 108 of the Internal Revenue Code income resulting from the cancellation of indebtedness is realized at the time the debt is satisfied for less than its principal amount. The Act amended Section 108 by providing for a deferral and inclusion of income arising from indebtedness discharged by the reacquisition of a debt instrument. The Act provides in pertinent part “ At the election of the taxpayer, income from the discharge of indebtedness in connection with the reacquisition after December 31, 2008, and before January 1, 2011, of an applicable debt instrument shall be includible in gross income ratably over the 5-taxable-year period beginning with (A) in the case of a reacquisition occurring in 2009, the fifth taxable year following the taxable year in which the reacquisition occurs, and (B) in the case of a reacquisition occurring in 2010, the fourth taxable year following the taxable year in which the reacquisition occurs.”

This amendment will make it easier for borrowers to restructure debt by deferring tax payments for either 5 or 4 years and then spreading out the tax payments related to cancellation of debt over the next 5 years.

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The Emergency Economic Stabilization Act of 2008 (the “Stabilization Act”) was signed into law on October 3, 2008 to provide, in part, a rescue plan (or as some have called it, a “bailout”) for the U.S. financial markets. The Stabilization Act created a Troubled Asset Relief Program (“TARP”), under which the Secretary of the Treasury is authorized to purchase, insure, hold, and sell a wide variety of financial instruments, particularly those that are based on or related to residential or commercial mortgages issued prior to March 14, 2008. 

On February 17, 2009, President Barack Obama signed into law The American Recovery and Reinvestment Act of 2009 (the “Recovery and Reinvestment Act”), a $787 billion spending and tax relief program, which by any measure is the largest appropriations bill in U.S. history. The Recovery and Reinvestment Act is an emergent attempt to restore confidence in the faltering U.S. economy by, among other measures, preventing further systemic problems in the economy resulting from residential foreclosures and unemployment and creating job growth through public works projects, tax incentives and tax cuts for small businesses and individuals, and aid to states. 

It has been estimated that approximately $400 billion of commercial mortgages will mature in 2009, and another $800 billion will mature in 2010 and 2011 combined. The shutdown of the commercial mortgaged-backed securities (“CMBS”) market together with decreasing market values and the historic tightening of credit standards by banks provide an enormous obstacle to refinancing these commercial mortgages. Despite capital infusion from the U.S. Treasury by programs promulgated under the Stabilization Act, banks have increased reserves and are skeptical about making loans secured by commercial real estate.

One possible solution to jump start the CMBS market is the expansion of the Term Asset-Backed Securities Loan Facility (“TALF”) to newly originated secured loans on commercial real estate properties. TALF is a Federal Reserve credit facility which was established by the U.S. Treasury under the Federal Reserve Act and is part of TARP. The Federal Reserve created TALF to address certain credit needs of individuals and small businesses by supporting the issuance of asset-backed securities (“ABS”) collateralized by student loans, auto loans, credit card loans, loans guaranteed by the Small Business Administration and the recent addition of securities backed by commercial mortgage loans.Pursuant to the Financial Stability Plan which was unveiled by the U.S. Treasury on February 10, 2009, the Federal Reserve plans to expand TALF to $1 trillion from the $200 billion which was originally committed. If approved, the $1 trillion credit facility would be available to eligible owners of certain AAA-rated ABS collateralized by the aforementioned asset classes, including new commercial mortgage loans. 

TALF loans are non-recourse secured by eligible ABS collateral and will have three (3) year terms. TALF loans will either be at a fixed or floating interest rate as elected by the borrower, and may be prepaid in whole or in part during the loan term without penalty. Substitution of collateral during the loan term generally will not be allowed. Borrowers are required to pay the Federal Reserve an administrative fee equal to 5 basis points of the loan amount upon closing of the loan. Unless extended by the Federal Reserve Board, TALF will cease making new loans on December 31, 2009.

An important aspect of TALF for its borrowers is the loans are not subject to mark-to-market or re-margining requirements. These two risk factors have caused turmoil in the CMBS market as investors worried about volatility in CMBS and a return to wider spreads face increased prospects of a loss on their investments.

TALF will commence operations on March 17, 2009, the initial subscription date, and the loans will be funded March 25, 2009. TALF loans will be funded monthly through December 2009, or longer if the Federal Reserve extends the facility. The subscription dates will be the first Tuesday of every month. 

TALF loan will not be available for CMBS in the March funding. However, The U.S. Treasury and the Federal Reserve anticipate that TALF will accept ABS collateralized by new commercial mortgage loans for the April funding. In addition, specifics regarding eligibility criteria for CMBS collateral, including the type and investment-grade rating category are not yet available. Once the specifics regarding TALF lending initiative for CMBS is available, we will provide an update.

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Eligibility details for the Homeowner Affordability and Stability Plan (the "Plan") are now available on the U.S. Department of the Treasury website (www.treasury.gov). The Plan is part of President Barack Obama Administration's efforts to stabilize the housing market and assist certain responsible homeowners that are at risk of foreclosure due to the current recession and declining property values. The Plan has two primary programs - the refinancing of existing conforming mortgages owned or guaranteed by Freddie Mac and Fannie Mae into low fixed mortgage loans and incentives for mortgage lenders to modify existing first mortgages for eligible homeowners that are struggling to make their current mortgage payments. 

Under the refinancing initiative, the Plan will provide refinancing into a 30 or 15 year mortgage loan, at low mortgage fixed rates currently available in the market for 4 to 5 million homeowners who have conforming mortgages owned or guaranteed by Freddie Mac and Fannie Mae that under current rules do not have access to such low mortgage rates. You should contact your mortgage lender to confirm if your mortgage is owned or has been securitized by Freddie Mac or Fannie Mae. Mortgage lenders will start taking applications for the program after March 4, 2009. 

Under the mortgage loan modification initiative, the Plan provides incentives for mortgage lenders to modify first mortgage loans for borrowers that are at risk of foreclosure regardless of who owns or services the mortgage. To qualify for a mortgage modification the borrower must occupy the house as its primary residence; the monthly mortgage payment must exceed 31% of the borrower's monthly gross income; and the loan is not large enough to exceed current Freddie Mac and Fannie Mae loan limits.

If you think that you may be eligible for the refinancing or loan modification programs under the Plan, you should collect the information that you will need to provide to your mortgage lender. This information may include among other information:

• Gross monthly income information including recent pay stubs.
• Recent income tax returns.
• Second mortgage (including HLOC) information.
• Credit card payment and balance information.
• Student loans, car loans and other loan information.

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