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[IMGCAP(1)]Consider this scenario: You’ve just spent two years going through the government approval process to develop a residential subdivision. You’ve spent hundreds of thousands of dollars in engineering, architectural, legal and escrow fees. You’ve secured final subdivision plan approval, New Jersey Department of Environmental Protection wetlands permits, stream encroachment permits, sewer connection permits, county approval, soil conservation permits, all the permits required to begin development. But with the severe economic downturn, the bottom has dropped out of the market and there is no demand for your units. To make matters worse, the credit crunch has made construction financing difficult to secure absent a substantial percentage of pre-sold units. As a result, your project is on hold. Your permits are not, however. As the clock continues to tick away, the permits start to expire. Some of those permits may be extended – but only at a high price and with difficulty. Others will be forfeited entirely. And by the time you are ready to build, new regulatory requirements may kill the whole project.

In economic hard times, this combination of poor market conditions coupled with state regulatory pressures wreak havoc on the circumstances of developers and further extend the recovery time after a recession. Recognizing this “vicious cycle of default” and finding that a national recession has drastically affected New Jersey’s economy, particularly the banking, real estate and construction sectors, the Assembly and Senate passed the Permit Extension Act of 2008 on June 23, 2008. The Act, which Gov. Jon Corzine is expected to sign into law, will suspend the expiration of most permits in existence during the extension period from January 1, 2007 through July 1, 2010, including, among others, Wetlands permits, New Jersey Meadowlands permits, and preliminary and final approvals granted by municipalities under the Municipal Land Use Law.

As originally drafted, the Act only excluded permits involving the federal government and municipal approvals for residential developments where the land has been subsequently re-zoned for either industrial or commercial uses. In response to strenuous lobbying from environmental groups, additional categories of permits have been excluded from the protection of the Act, including permits in defined environmentally sensitive areas, permits issued by the Department of Transportation in areas other than rights-of-way, permits issued under the Flood Area Hazard Control Act and some permits issued under the Coastal Area Facility Review Act.

The permit extensions work like this: Let’s say a builder had preliminary site plan approval to construct a housing development but, because of the recession, wasn’t able to get the project going before the approval expired on March 1, 2007. Under the Permit Extension Act, the running of the permit period stops as of Jan.1, 2007 – actually resurrecting this expired permit for the extension period, until July 1, 2010. At the end of the extension period, the permit period begins to run again from where it was suspended as of Jan. 1, 2007, for the two remaining months, making the new expiration date Sept. 1, 2010. The Act only allows covered permits to extend for six months beyond July 1, 2010, so all suspended permits will expire by Jan. 1, 2011.

[IMGCAP(2)]While this Act gives builders and developers who could not start construction prior to the expiration of their permits some breathing room, it’s a marked compromise from the bill that was originally proposed. As originally written, the Act would have suspended the running time of permits from Jan. 1, 2006 through Jan. 1, 2012, would have allowed two additional years beyond the extension period and did not exclude as many permits.

The 2008 Act replicates much of the Permit Extension Act of 1992. According to the Assembly Housing and Local Government Committee Statement, the 1992 Act was passed during a time when the “same external factors” as exist currently were present. The 1992 Act extended all permits to a fixed point in time, Dec. 31, 1996. In contrast, the 2008 Act, as originally introduced, suspended the permits, effectively stopping the clock on Jan. 1, 2006 and not restarting it until 2012, giving developers even more breathing room and avoiding the sudden expiration of all of the extended permits on the same date. The compromise measure passed by the Assembly and Senate, even though worded differently than the 1992 Act, and giving a six month buffer, essentially has the same result: all extended permits expire by a fixed point in the future – Jan. 1, 2011.

Since its introduction, environmental groups criticized the Act as a giveaway to developers. In reality, nothing but a little extra time is being given to developers. The Act only extends the period of existing permits and approvals for projects that have been fully reviewed by every relevant agency and level of government and have satisfied all regulatory requirements, including environmental regulations. The Act as introduced quoted verbatim from the 1992 Act, recognizing that “obtaining extensions of approvals by state government is frequently impossible, always difficult, and always expensive and no policy reason is served by the expiration of these permits, which were approved only after exhaustive review of the application.”

In this time of economic stress, it makes sense to allow developers extra time to start and complete their projects. No environmental regulation is relaxed, modified or abandoned as a result of this Act. No evidence exists that the similar extensions permitted by the 1992 Act had any of the consequences complained about by environmental groups and there is no reason to believe that the 2008 would have any different consequences.

Perhaps most significantly, the Act will preserve the potential for the timely reinitiation of construction projects once the current economic downturn has passed. But for the Act, essentially all currently approved projects will have expired by the time the recession ends. Consequently, when the national economy rebounds, New Jersey’s economy would have to suffer through the additional gap of two to three years required to secure a new round of approvals.

The Act received strong support in both the Assembly and the Senate. After its proposal as A-2867 by more than half of the members of the Assembly on May 22, 2008, the Assembly Housing and Local Government Committee and the Senate Economic and Growth Committee gave the Act unanimous support. On June 23, 2008 the Act was passed by a vote of 70 to nine, one not voting in the Assembly and by a vote of 30 to three, with seven not voting in the Senate. The bill is currently awaiting Gov. Corzine’s signature.

Richard S. Goldman is a partner in the Princeton office of Drinker Biddle & Reath LLP. Cynthia De Lisi is an associate with Drinker Biddle’s Real Estate Practice Group in the Princeton office. They can be reached at [email protected] and [email protected]respectively.

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