Real Estate New Jersey

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On Oct. 30, 2009, the New Jersey Tax Court, in the matter ofMack-Cali Realty, LP, et al. vs. Clerk of Bergen County, et al.,Tax Court of New Jersey Docket No. 000037-2008, granted summaryjudgment in favor of the plaintiffs seeking an exemption frompayment of the Realty Transfer Fee. The plaintiffs were representedby Mark K. Follender, a partner with Scarinci Hollenbeck.

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Contrary to the position urged by the Division of Taxation, thecourt held that the state could not impose a blanket exclusion ofcorporate transfers from the statutorily-permitted exemption fortransfers involving less than $100. The result of the case avoidedthe payment of a deed recording fee of over $190,000.

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In 1968, New Jersey adopted N.J.S.A. 46:15-1 et seq. ("RealtyTransfer Fee" statute), which imposed a fee upon the recording of adeed. The fee was a percentage based on the actual considerationreceived by the grantor. A specific provision of the statute,however--N.J.S.A. 46:15-10 (a)--provided an exemption from paymentof the fee for transfers involving consideration of less than$100.

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In the instant matter, the plaintiff sought to transfer twoparcels of real property from one corporately owned entity to twoothers under common control, and asserted that the transfer was forless than $100. There was no mortgage encumbering the realty andthe transfer was being performed for internal corporate purposes.Consistent with the past practice of 38 years, the plaintiffprepared an affidavit of consideration asserting consideration ofless than $100 and properly expected to pay no realty transferfee.

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Upon presentation of the deeds and affidavit to the BergenCounty clerk's office, the deeds were rejected with a reference toa newly enacted regulation from the Division of Taxation (N.J.A.C.18:16-6.1), effective Aug. 1, 2006, asserting that no corporate tocorporate transfer of real property, even though under commonownership, could occur without consideration.

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Given that the property was unencumbered by a mortgage, theclerk advised that the realty transfer fee to be paid should becalculated upon the fully equalized assessed value of the property.The clerk also asserted that, because the property was a commercialoffice building and subject to the mansion tax, a total fee inexcess of 2% of the equalized assessed value of the real propertywas required and made a fee demand of over $190,000.

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In upholding the clerk's conduct, the Division of Taxationreasoned that since there was no mortgage, the value of theconsideration was indeterminable and therefore, the only propermeasure of the value of the transaction was the fully equalizedassessed value.

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Ruling N.J.S.A.46:15-5(C) specifically defines "consideration toinclude the balance of a mortgage encumbering real property."Earlier cases held that in a corporate to corporate transaction,where a mortgage is present, the tax is calculated only on thebalance of the mortgage. The plaintiff's position urged that thelack of an open mortgage should not redound to a recording party'sdetriment.

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Based on the earlier decisions, the tax court rejected thestate's arguments and sided with the plaintiff, reasoning that theimposition of an exorbitant fee, on a transaction that involved nopayment of money, specifically because there was no mortgageencumbering the property, created an inconsistency and anomaly notcontemplated by the statute.

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The ruling of the court has significant implications as itaffects among other things commercial mortgage financing and properestate planning.

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In commercial financing, lenders frequently require that aproperty must be held in a single asset or single purpose entity.If a corporate entity holds two or more parcels and desires tofinance only one, it will most typically create a new entity andtransfer for no consideration the identified parcel into the newlycreated entity. The state's position would require payment of a feein such nominal transactions.

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Similarly, in the absence of this ruling, a parent-controlledentity that may decide to contribute for no payment the real estateowned by that entity to a newly created entity for purposes of afamily limited partnership or other valid estate planning vehicle,would again be required to pay a full realty transfer fee as thoughan actual sale had occurred even though there were truly noconsideration and no money changed hands. (Please note that in allof such instances, these illustrations contemplate there being nopresent mortgage encumbering the real property to betransferred.)

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Accordingly, the ruling of Judge Pizzuto properly tracks thestatute and the express intention of the legislature and clears theway for the recording of deeds without a realty transfer fee innominal consideration corporate transactions.

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Mark Follender is a partner with the law firm of ScarinciHollenbeck. He may be contacted [email protected]. The views expressed here are theauthor's own.

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