Politics and Real Estate in NJ

Joe Cavaluzzi is a contributor to Real Estate New Jersey, from which this article was excerpted.

New Jersey’s economy and the political concerns of its real estate industry are inexorably linked. That may be why so many in the industry cringed when they read Allied Van Lines’ annual migration survey that found New Jersey, at 60.9%, third only to Michigan and North Dakota in the percentage of moves that were outbound.

The state faces a number of challenges to restore its reputation as a good choice to locate a business and to stem the movement of good jobs to less expensive areas of the country that have developed their own strong skilled labor pools. While some of problems seem outside the reach of government–the nation-leading housing costs, for instance–the state legislature will be addressing a number of complicated issues that impact the cost of doing business here.

Office and industrial building owners as a group are ready to get behind a governor or legislature that takes dramatic steps to address the state’s high property taxes and reduce the expense of government, says Michael McGuinness, executive director of the New Jersey chapter of NAIOP. Cutting government spending on the state level is going to have to be done if the state is to shake its high-tax image and to get municipal governments to adhere to local budget caps that are part of proposed property tax reform. Many, however, fear that the constraints of the state’s debt-laden budget likely will restrain its ability to address tax and development issues.

As far as specific issues on the agenda, the Appellate Court turned back the Council on Affordable Housing’s latest proposals for determining a developer’s share of the cost of building affordable housing. In its late January ruling, the court threw out COAH’s growth-share approach to determining affordable housing commitments and left many in the real estate community relieved and a bit bewildered at the same time.

At the same time, several important DEP decisions are pending, including stream encroachment buffers that could diminish the footprint of waterfront development in Northern New Jersey’s urban centers and redevelopment zones. And a dozen bills have been introduced to regulate the use of eminent domain since the US Supreme Court decision allowing private property to be taken for commercial redevelopment.

In short, those with a stake in New Jersey real estate will be paying a lot of attention to the politics of Trenton in 2007.

As far as some of the specifics, the state’s economic growth rate slowed during the final three quarters of 2006, a function, in part, of it being an expensive place to live. In 2006, New Jersey enjoyed the highest median household income in the nation and endured the highest median home prices. In fact, 2006 saw the largest decline in existing home sales in the state in 17 years.

The state also suffered from a slow rate of job growth last year. “Corporate America is not about to pack its bags and leave New Jersey. But it is making its cutting edge investments somewhere else,” Rutgers University economist James Hughes told the audience during Grubb & Ellis’s annual economic forecast in February. “While pharmaceutical jobs grew in 2006, we were replaced as having the highest number of pharmaceutical jobs by California, which had half as many as New Jersey in 1990.”

As far as dealing with budgetary problems and refocusing the state’s resources on economic growth, asset sales, including the sale of major roadways such as the New Jersey Turnpike and Garden State Parkway, get mixed reviews as a way of freeing revenues from debt service for government operations and lowering property taxes. The state owns thousands of parcels of real estate, many underutilized or not used, says Gil Medina, executive managing director of Cushman & Wakefield of NJ, East Rutherford.

“The state can monetize those assets and invest those resources back into education, helping cities, money for universities and university-private sector joint ventures. We would unleash the value of under-performing assets.” Medina says. “When you place these assets in the hands of people who can bring them to highest and best use, you drive employment growth and growth in tax revenues, and the state performs better.”

Some believe the state should consider another tack, investing in its underutilized assets.”Don’t be so quick to sell those assets. The state should consider looking at investing to develop air rights, for example, for building decks over train stations and parking garages, or even building office space or residential,” says NAIOP’s McGuinness.

Ted Zangari, an attorney specializing in real estate and development law and partner at Newark-based Sills Cummis, says industry leaders will be lobbying elected officials on a number of important issues this year, including establishment of more equitable redevelopment criteria in applying eminent domain.

“No one disputes the need for reform in the redevelopment process with a requirement for more and better evidence that an area is in need of redevelopment,” he says. “No one disputes that businesses or residents whose properties would be condemned deserve more notice and information about the process and more opportunities for public participation. No one disputes that we need pay-to-play laws implemented to avoid corruption or potential for corruption that has occurred from time to time in no-bid redevelopment designations. But the proposed redevelopment and condemnation reform legislation has gone beyond that and some aspects of the current reform efforts I fear would cripple the redevelopment process.”

One example, he explains, is a proposal that landowners whose property would be taken for commercial redevelopment be entitled to more than fair market value, with the municipality–and ultimately the designated redeveloper–required to compensate the landowner with fair market value plus bonus value because of property’s new-found location within a redevelopment zone.

“By itself, this may not look like it would make a deal financially unfeasible, but when you couple it with other costs a redeveloper incurs that go beyond the costs of greenfield development, the cost curve becomes too steep to climb,” Zangari says.

“The other piece of reform legislation we’re watching concerns criteria planning boards must utilize to declare an area in need of redevelopment,” he says. “The proposals make the definition of blight more severe, which we feel shouldn’t apply if the municipality and developer are seeking redevelopment zone status not for the condemnation powers but merely for the tax abatement powers.”

Currently, there is a single blight standard that lawmakers want to make tougher with no distinction between the standards applicable to long-term tax-free financing and the standards applicable to condemnation. Zangari is part of a group working on wording to create such a distinction.

The real estate industry also has its ears tuned to DEP, which is considering regulation changes that include establishing a 300-foot buffer zone along Category 1 streams. While it may be appropriate for rural development, the football field-size buffer could make some urban waterfront sites impractical to develop.

Perhaps, the biggest question going through 2007 will be what COAH does now that the Appellate Division of New Jersey Superior Court has told it to come up with an alternative to the growth-share approach of determining a municipality’s affordable housing obligations. Gov. Jon Corzine has said he wants to see 100,000 affordable housing units built over the next decade, and that could prove to be one of the biggest long-term challenges of his administration. That’s a substantial objective when you consider that 10,000 affordable housing units a year would be about 25% of all new construction permits issued in a typical banner year for homebuilding in the 1990s.

“I think the affordable housing community has it right,” Zangari says. “The towns are gaming the system and skirting their affordable housing obligations with impunity. It was inevitable that at some point we would need to put teeth into the affordable housing program.”

The Appellate Court decision has municipalities and developers wondering what their development fees and in-lieu fees are going to be, as well as how municipal affordable housing obligations are going to be determined, says attorney Susan Rubright, a partner at WolfBlock’s Roseland office, who specializes in land-use law. “I think it left everyone spinning a bit. Everyone is taking a deep breath and saying, where do we go from here,” Rubright says.

The recurring theme of the appellate court’s opinion, Rubright says, was its concern that municipalities could effectively determine that they’re just going to shut down to new development. In theory, tying affordable housing to the amount of development sounds good, but it can be a disincentive that actually rewards towns for not developing. Her clients are also wrestling with in-lieu fees paid to avoid building affordable housing. COAH also has to address the way towns currently determine in-lieu fees, often basing them on average home prices within their borders. Those averages can range from $50,000 to $1.5 million for some communities in Bergen County.

“If the average was $350,000 and you are going in to get a variance to build one house, your in-lieu payment would be one-eighth of $350,000, or more than $33,000. If you were building 10 units, your in-lieu fee would be that $350,000 plus one-eighth of that for the remaining two homes,” Rubright explains. “So, COAH said that was ridiculous and the average should be somewhere around $165,000. I don’t know what’s going to happen to that now that the growth share is out. That might just fall by the wayside.”

Rubright says the court decision was well-reasoned and recognized that there have to be incentives for builders. “If there are no incentives for developers, than they won’t build,” she concludes. “To expect housing to get built for altruistic reasons is not reasonable.”