Among the last official acts of Acting Governor Donald DiFrancesco was the signing of the Redevelopment Area Bond Financing Law (the “RAB Law”) and the Revenue Allocation District Financing Act (the “Revenue Allocation Act”) (1) which became effective on March 4, 2002. These two laws create exciting new financing alternatives for municipalities seeking to engage in redevelopment projects.
More and more municipalities in both urban and suburban settings have found the broad and expansive redevelopment powers already provided to them in the Local Redevelopment and Housing Law (2) to be helpful, even critical, in enhancing new development in their communities and expanding their tax bases. The RAB Law and the Revenue Allocation Act will provide even more flexibility in dealing with the complex development issues facing all municipalities.
Redevelopment Area Bond Financing Law
The RAB Law can be viewed as the son of the Large Site Landfill Reclamation and Improvement Law (the “Landfill Law”). (3) The Landfill Law, enacted in 1995, allows redevelopment projects in large landfill sites to be financed through municipal bonds secured by payments in lieu of taxes (“PILOTs”) and special assessments. A review of the application of the Landfill Law illustrates its effectiveness as a redevelopment tool and also the intrinsic limitations that led to the enactment of the RAB Law.
The Landfill Law and the Jersey Gardens Outlet Mall
In 1998, the New Jersey Economic Development Authority (the “NJEDA”) issued bonds under the Landfill Law in order to finance certain infrastructure improvements and solid waste remediation in connection with the construction of the Jersey Gardens Outlet Mall in Elizabeth. The bonds were issued in the aggregate principal amount of $140,552,550.30 for a term of 33 years with a fixed interest rate. The proceeds of the bonds were loaned to the City of Elizabeth, on a non-recourse basis, and were used by the City principally to construct a flyover connecting the New Jersey Turnpike to the mall and adjacent areas and to cap a portion of the landfill site for environmental remediation purposes.
Under the Landfill Law, the City authorized a tax abatement for the mall site and entered into a financial agreement with the owner of the property in which the owner agreed to pay PILOTs in an amount sufficient to pay debt service on the bonds.
The City also levied a special assessment against the mall site in the amount of the cost of the local improvements. The Landfill Law allows this amount to be deemed the actual benefit conferred upon the property and dispenses with the need for the standard, more cumbersome procedure to establish the amount of the special assessment under N.J.S.A. 40:56-1 et seq.
The City agreed with the mall owner that the PILOTs would be credited against payments due under the special assessment. The effect is that as long as the owner pays the PILOTs, its obligations under the special assessment will be satisfied. The PILOTs/special assessment are assigned by the City to the trustee for the benefit of the holders of the NJEDA bonds and are sufficient to pay debt service on the bonds until their maturity. The lien of the PILOTs and the special assessment constitute municipal liens for all purposes. The trustee is also assigned the enforcement remedies of the City with respect to delinquent payments of the PILOTs/special assessments.
The reason for the special assessment is to provide bankruptcy protection. An agreement with a developer for the payment of PILOTs may be deemed to be an executory contract. As such, if the developer declares bankruptcy, a trustee could seek to have the contract voided. A special assessment, however, would presumably be considered a statutory lien by a bankruptcy court, and would therefore be immune from avoidance.
Since the City has assigned its right to collect the PILOTs and special assessment, it has divested itself of a means to pay for the municipal services that the mall will inevitably require. (4) The Landfill Law anticipates this issue and, pursuant thereto, the City enacted a franchise assessment of three percent of the gross receipts of the mall site, which it can devote to municipal purposes. Since the mall is in an Urban Enterprise Zone, the sales tax rate is three percent. The franchise assessment effectively raises the amount paid by customers of the mall to the six percent rate they are used to paying in non-enterprise zones.
The chief advantage of the Landfill Law is that it allows funds that would otherwise be paid to the municipality in the form of taxes (or PILOTS) to be leveraged as security for bonds to finance redevelopment. The priority of the lien created by the PILOTS/special assessments provides considerable comfort to the holders of the bonds they secure. Moreover, conventional mortgage lenders are accustomed to their lien being subordinate to municipal tax liens, so the application of the Landfill Law to a project is not troubling to them. A conventional lender has palpable incentive to ensure that municipal liens are current, since they trump the lender’s mortgage, and this motivation provides even more security to the bondholders.
The Landfill Law certainly represents a success story in the development of the Jersey Gardens Outlet Mall, but its applicability is clearly limited. It can only be used in a “Landfill reclamation improvement district,” which is defined as “a tract of land of at least 150 acres in size, which may consist of one or more tax lots, of which not less than 100 acres were formerly or are presently used as a landfill, which has been delineated a ‘redevelopment area’ or ‘area in need of redevelopment’ pursuant to the ‘Local Redevelopment and Housing Law’.” There are only a handful of sites in the State which are eligible for financing under the Landfill Law. Acknowledging the value of the Landfill Law as a means of fostering redevelopment, but recognizing this limitation, the Legislature has plucked several provisions from the Landfill Law and repackaged them into the RAB Law.
The RAB Law adopts many aspects of the Landfill Law, but expands their use. Instead of being limited to huge landfill sites, the RAB Law applies to all redevelopment areas or areas in need of redevelopment under the Local Redevelopment and Housing Law.
Like the Landfill Law, the RAB Law permits municipalities to grant tax abatements to developers and to pledge the PILOTs to the repayment of bonds. The RAB Law also authorizes special assessments as a bankruptcy backstop to the PILOTs. It provides that the municipality may issue the bonds or may apply to the NJEDA, the New Jersey Redevelopment Authority (the “NJRA”) or “other instrumentality created by the State with the power to incur debt and issue bonds and other obligations.” (5)
The PILOTs/special assessments may be assigned as security for the bonds and are not included in the general funds of the municipality. While the Landfill Law dictates that the bonds are to be non-recourse to the municipality, the RAB Law gives the municipality the option to guarantee or otherwise pledge its credit to the payment of the bonds. Of course, if it does pledge its credit, the bonds will be considered as part of the gross debt of the municipality on any debt statement filed in accordance with the Local Bond Law. (6) As is the case under the Landfill Law, the use of the proceeds of the bonds is not subject to local bidding laws. (7)
There are two other significant differences between the Landfill Law and the RAB Law that should be emphasized. One is that the RAB Law does not provide for a franchise assessment to offset the loss of revenues resulting from the diversion of municipal funds to pay debt service. A municipality must consider the cost of services attributable to the project and make provision for them in some other way.
The second difference is that prior to the enactment of an ordinance authorizing a transaction under the RAB Law, the municipality must obtain the approval of the Local Finance Board (the “Board”). The Board will consider whether the project promotes the reduction of congestion, enhances mobility, assists in the redevelopment of municipalities and otherwise improves the quality of life of the State’s citizens. The RAB Law requires the Board to solicit comments from the Office of State Planning and the NJEDA, as well as comments from the public.
Whether the interest on bonds issued under the RAB Law will be tax-exempt or not depends upon the use of their proceeds. In order to be tax-exempt, the bonds will have to qualify for such treatment under the Internal Revenue Code of 1986, as amended. Some examples of such tax-exempt instruments are governmental bonds, 501(c)(3) (not-for-profit) bonds, bonds used to finance manufacturing facilities and bonds used to provide certain exempt facilities such as solid waste disposal facilities, airports, docks and wharves, mass transit facilities, sewerage facilities, water furnishing facilities, electric energy or gas furnishing facilities and qualified residential rental projects.
The RAB Law has the distinct advantage of being the descendent of a law that has been tested in the marketplace and has been accepted in a successful financing. Its cousin, the Revenue Allocation Act, has no such track record, but may also present attractive financing alternatives to municipalities engaged in redevelopment.
Revenue Allocation District Financing Act
In essence, the Revenue Allocation Act allows a municipality to pledge the increase in taxes resulting from a redevelopment project to the repayment of bonds issued to finance the project. This approach is commonly known as tax increment financing or “TIF.” Like the RAB Law, the Revenue Allocation Act applies to redevelopment areas as defined in N.J.S.A. 40A:12A-3. The law permits a municipality to create a revenue allocation district (a “District”) which may consist of all lots and streets in an area, not to exceed 15% of the total taxable property assessed in the municipality (which may be increased to 20% with Board approval) as part of a redevelopment plan approved by the governing body.
The following illustrates the application of the Revenue Allocation Act and the calculation of the amount of the property tax increment:
Formula: PTI = (TR * TVADP) * ((TVADP – PTIB) / TVADP)
PTI: property tax increment
TR: general tax rate levied each year
TVADP: taxable value of all the property assessed within a district in the same year
PTIB: property tax increment base, i.e., the aggregate taxable value of all property assessed which is located within a district as of October 1 of the year preceding the year in which the district is authorized
Assume the property tax rate for 2002 is 3%, the taxable value of all the property assessed within a district is $10,000,000, and the property tax increment base is $3,000,000. The property tax increment is calculated as follows:
PTI = (3% * $10,000,000) * (($10,000,000 – $3,000,000) / $10,000,000)
PTI = $300,000 * .7
PTI = $210,000
Based on the above facts, the property tax increment for 2002 is $210,000. This amount would be eligible to be pledged to the repayment of bonds issued to finance the redevelopment project.
The Revenue Allocation Act authorizes the municipality to designate, by ordinance, a district agent (“District Agent”) which may be the municipality, a county, county improvement authority, the NJEDA, the NJRA or regional planning commission. The District Agent issues bonds to finance the project, which may secured by a municipal guaranty and/or revenues generated by the District, including incremental increases in taxes resulting from the project.
The municipality also approves a preliminary revenue allocation plan (the “Preliminary Plan”) which describes the project, the revenues to be generated, the means of financing and whether there will be tax abatements or exemptions, and it includes a fiscal impact statement. Types of projects include the acquisition of land, demolition, renovation or construction of improvements to effectuate the plan, including highways, utilities, mass transit facilities, infrastructure, public facilities and housing.
After the municipality adopts the Preliminary Plan, it submits the ordinance as an application to the Board for approval. The Board reviews the Preliminary Plan and either approves or disapproves depending upon whether the Preliminary Plan meets with certain criteria including whether:
- the development would be realized without the creation of the District and the financing of the proposed project;
- the revenue increments and other pledged revenues will be sufficient to pay the debt service on the bonds financing the project;
- the credit of the municipality will be impaired;
- the District will contribute to the economic development of the municipality;
- the size of the District and the amount of pledged revenues are appropriate;
- any shortfall in revenues would result in undue financial hardship on the municipality’s taxpayers; and
- the Plan reduces congestion, enhances mobility, assists in redevelopment and otherwise improves the quality of life of New Jersey citizens.
The municipality then approves a final revenue allocation plan (the “Final Plan”) by ordinance which shall include:
- a description of the project, its cost and construction schedule;
- a description of the development to be undertaken by a developer in connection with the project, including an estimate of eligible revenues to be derived therefrom;
- description of the revenues to be pledged to secure the financing of the project;
- a description of other anticipated projects for the District and the anticipated means of financing those projects;
- a copy of the proposed bond resolution; and
- a certification as to the property tax increment base (as defined in the Revenue Allocation Act).
The municipality then submits the ordinance approving the Final Plan to the Board for approval. The Board reviews the Final Plan and either approves or disapproves depending upon whether the Final Plan meets with the criteria it considers in its evaluation of the Preliminary Plan.
Once Board approval is obtained, the District Agent may issue bonds to finance the project. If the municipality is the District Agent, it may guaranty the bonds, subject to the approval of the Board and compliance with the Local Bond Law. (8)
The security for the bonds may include the following:
- incremental payments in lieu of taxes with respect to activities carried on within the District, made pursuant to the “Five-Year Exemption and Abatement Law” (N.J.S.A. 40A:21-1 et seq.) or the “Long Term Tax Exemption Law” (N.J.S.A. 40A:20-1 et seq.);
- incremental revenue from payroll or wage taxes with respect to activities carried on within the District;
- incremental revenue from lease payments made to the municipality or District Agent with respect to activities carried on within the District;
- incremental revenue from payments in lieu of taxes or service charges with respect to property located within the district;
- incremental revenue from parking taxes derived from parking facilities within the District;
- admissions and sales taxes received from the operation of a public facility within the District which the District Agent is authorized by law to retain;
- grants, subsidies, contributions or other payments to be received from the United States of America or an instrumentality thereof, or from any State, county or municipal governmental body or agency;
- first mortgage on all or any property or any part of the property, real or personal, of the District Agent then owned or thereafter to be acquired; and
- any monies, funds, accounts, securities and other funds, including the proceeds of the bonds or notes.
The District Agent must submit its operating budget for the District annually to the Director of the Division of Local Government Services in the Department of Community Affairs. If the District Agent certifies that the budget is in compliance with a Preliminary Plan or a Final Plan and all other relevant statutes and rules, the Director may approve or disapprove the budget.
The RAB Law and the Revenue Allocation Act present two new financing opportunities for municipalities with areas in need of redevelopment. Each provides a funding source created by the project itself to fund debt service. In this way, the RAB Law and the Revenue Allocation Act provide municipalities innovative financing approaches to the daunting challenges posed by modern redevelopment.
(1) N.J.S.A. 40A:12A-64 et seq.
(2) N.J.S.A. 40A:12A-1 et seq.
(3) N.J.S.A. 40A:12A-50 et seq.
(4) PILOTs relate only to improvements on real property. Taxes on the underlying real estate are unaffected and are not assigned to the trustee for the benefit of bondholders.
(5) N.J.S.A. 40A:12A-64.
(6) N.J.S.A. 40A:2A-1 et seq.
(7) Executive Order #1 signed by Governor James E. McGreevey on January 17, 2002 mandates the use of project labor agreements on certain public works projects by a state department, authority or instrumentality. The extent to which this Executive Order applies to projects financed under the RAB Law is unsettled.
(8) N.J.S.A. 40A:2-1 et seq.