Contributed By Greenberg Traurig, LLP (Florham Park)
Real estate law in New Jersey requires attention to a variety of substantive skills and practice areas. An effective real estate practitioner in New Jersey must be a good draftsperson, well-versed in contract and commercial law, since at the heart of every real estate deal there is a written agreement. In virtually every deal, there are tax issues, corporate issues, government issues, environmental issues, labor and employment issues, among others. In addition, an attorney must understand his/her client, the client’s business objectives, and the client’s tolerance for risk. A real estate attorney must take a holistic approach to any transaction to ensure careful examination of each issue that could create risk, impact practice areas outside of what is strictly 'real estate' or otherwise frustrate the spirit of the contemplated transaction.
The most significant trend we have seen in New Jersey over the past 12 months has been the continuous rise of industrial facilities for use as sorting centers for e-commerce companies, as well as delivery hubs and fulfillment centers. The industrial trend has been noted in many US jurisdictions; however, the proximity of New Jersey to New York City has led to substantial activity in this jurisdiction and has resulted in a greater influx of investment capital pouring into the state. Recently, Amazon announced plans to redesign its New Jersey facilities for use as sorting centers, Amazon Fresh delivery hubs and print-on-demand book sites. It should be noted that many parts of New Jersey still have shortages of affordable housing and it is often noted that there is an increasing deterioration of the state’s infrastructure, including roads, transit and utilities, all of which would need to be upgraded to support continued growth in the state.
New Jersey conforms to the current Internal Revenue Code (IRC) and also follows the IRC deferring capital gains invested in Opportunity Zones, which has been the most significant tax-based program affecting real estate in recent memory. The Opportunity Zones program was introduced with the 2017 federal Tax Cuts and Jobs Act with the goal of encouraging capital investments into low-income rural and urban communities. Private investors are incentivized to support investments in distressed communities through participation in Qualified Opportunity Funds and, as a result (i) reinvested capital gains are deferred from taxation until the earlier of an exit from a Qualified Opportunity Fund or December 31, 2026, and (ii) the original gains reinvested in Qualified Opportunity Fund investments are taxed at reduced rates, with taxable gains discounted by 10% at the five-year mark, 15% at the seven-year mark permanently, and excluded entirely from the capital gains tax at the ten-year mark.
In terms of structures, owners of real estate in New Jersey generally have the same options available in other jurisdictions. For commercial properties, owners will typically take title in the form of a limited liability company. General and limited partnerships and corporations are, of course, still recognized but are not typically used. Multiple owners may also seek to hold properties as tenants-in-common, most often as a result of one or more owners looking to take advantage of a 1031 tax-deferred exchange. Owners of residential real estate may also select ownership in the form of joint tenancy with the right of survivorship or tenancy by the entirety for married couples.
There are several jurisdictional requirements that purchasers of real estate in New Jersey must keep in mind with any purchase and sale transaction, the most common of which are the following:
Industrial Site Recovery Act (ISRA)
ISRA is a unique New Jersey statute which requires notice to the State of New Jersey for a sale of a property or a cessation of business operations, if the property is an 'industrial establishment. Whether or not a business is an industrial establishment and therefore subject to ISRA is based on (i) its NAICS classification, and (ii) the presence of hazardous substances in its operations. If both conditions of this test are met, in connection with an ISRA-subject conveyance, the seller is required to comply with ISRA’s provisions, which entails notice to the state and the retention of a Licensed Site Remediation Professional (LSRP) by the seller to evaluate and then propose and oversee remediation, if necessary. If the property is ISRA-subject, appropriate provisions must be inserted in the purchase contract in order to ensure compliance by the seller and protection of the purchaser. The actions of the LSRP are tightly regulated by the state to ensure compliance with the state’s laws by a non-state entity. Oftentimes, the purchaser also retains an LSRP to confirm that the seller’s LSRP is performing its services appropriately. ISRA is a complex and detailed statute and its provisions cannot be adequately summarized in this format.
The Bureau of Housing Inspection administers the New Jersey Hotel and Multiple Dwelling Law which requires that multi-family properties as well as hotels and motels maintain valid 'Green Cards' which are issued after property is registered, inspections and reinspections have been conducted, all violations are corrected and all fees paid. As part of any transfer of property relating to this subject asset class, purchasers should request to see Green Cards as part of their diligence efforts and would look to ensure that they are valid as of the closing date. Green cards are issued, and state inspections therefore take place, every five years.
This jurisdiction also maintains a bulk sales law which imposes on purchasers an obligation to notify the state. Failure to comply could render a purchaser liable for a seller’s outstanding state tax obligations. For this reason, if an entity owns real estate in New Jersey and looks to dispose of it, a bulk sales filing should be made to the New Jersey Department of Treasury, Division of Taxation (Division). The purpose is to capture the taxes owed by the seller entity before it distributes its sales proceeds to its owners. The bulk sale notification process is as follows: the purchaser first submits a Form C-9600; the seller then submits a Transfer Tax Declaration form; within 10-20 days of the latter filing, the Division will either issue a tax clearance letter, directions for an escrow of a portion of the seller’s proceeds, or a demand letter. The purchase and sale agreement will typically provide that both parties will agree to comply with the instructions of the Division.
Certificates of Occupancy
There are over 500 municipalities in New Jersey and each has its own ordinance with respect to transfers of property. Accordingly, many such municipalities require the issuance of a certificate upon a conveyance. The name differs in each locality but it is commonly referred to as a CO. Custom and practice is to typically contact the zoning or building office in the municipality where the property is located in order to determine the specific requirements. Each municipality will impose its own rules such as requiring the cure of violations, deferred maintenance obligations, and/or closing out open permits. The property owner usually must complete the application for inspection and issuance of the CO along with payment of a fee. In the event of a new construction, the builder or seller must obtain a CO; however, even in transactions for property that are not new construction, the seller is the record title owner and must therefore handle the process (the purchaser has no standing); accordingly, the purchase and sale agreement should place the obligation to provide a CO on the seller and this should be listed as a closing deliverable.
In New Jersey, for the conveyance of a residential property, additional requirements may be imposed. For instance, the seller must obtain a certificate confirming that there is a functioning smoke detector, carbon monoxide detector, and fire extinguisher on the premises. There may also be additional requirements such as a well water test certification in the event the property has a private well.
In New Jersey, lawful and proper transfer of title to real estate is effectuated by execution, delivery, and recordation of a deed with the county clerk for the county in which the subject property is located. The most commonly used deed in this jurisdiction is a Bargain and Sale Deed with Covenants Against Grantor’s Acts and it must include a statement on its face, at the top of the first page, which states “Prepared by:” and includes the name of the New Jersey attorney that drafted the deed. In nearly all cases, a statement of the true consideration for the transfer must be recited in the deed, the acknowledgment, the proof of the execution, or an appended affidavit by one of the parties to the deed. If the conveyance is for new construction, the words "NEW CONSTRUCTION" in upper case lettering shall be printed clearly at the top of the first page of the deed and an affidavit must also be submitted.
It is generally advisable and customary for purchasers of real estate in New Jersey to conduct due diligence prior to closing. Typically, there is a period of time following execution of a contract, during which time all such diligence activity is conducted and, during such time, the deposit remains refundable to the purchaser in the event of a termination by the purchaser for any reason or no reason. This is often referred to as a 'free look'. In a residential context, this is often as simple as a home inspection and a title review process handled primarily by the purchaser’s legal counsel. In a commercial context, the due diligence process is more complicated and the level of scrutiny would depend on the facts; typically, this will involve the review and inspection of the following by the purchaser’s attorneys: title reports, surveys, rent calculations for compliance with rent regulations, leases and tenant estoppel certificates, service contracts, warranties, property condition reports, zoning, environmental reports (Phase I and Phase II), and certificates of occupancy. Sophisticated clients will typically handle some of the above diligence activities on their own; specifically, review of rent rolls and rent calculations, operating statements, and service contracts on the property.
It is worth noting that the diligence process in New Jersey is not dissimilar from the process in other jurisdictions; however, the environmental diligence is more nuanced as a result of New Jersey’s environmental laws. In this context, it is typical for a seller of real estate to prohibit a prospective purchaser from using a Licensed Site Remediation Professional from entering the property or otherwise having any involvement with purchaser’s investigations.
In New Jersey, purchase and sale agreements will have representations and warranties of both purchaser and seller. Typically, a seller’s representations and warranties are significantly more involved and are heavily negotiated, though sellers seek to limit representations to the types of discoveries that purchaser would otherwise be unable to uncover with diligent efforts. A purchaser’s representations are typically limited to authority and financial ability to consummate the closing. In addition, as with other jurisdictions, it is common for a purchaser to insist that the purchase and sale agreement provide that seller’s representations and warranties survive closing for a given period of time. Survival periods vary, and are a typical negotiation point in most deals. If such representations do not survive closing, a merger clause will merge any and all representations made into the deed. To backstop the representations and warranties post-closing, sellers will occasionally agree to either a post-closing holdback escrow or a guaranty from a credit-worthy guarantor.
In commercial transactions, a purchase and sale agreement would typically include, at a minimum, the following representations and warranties:
Foreign investors must register with the New Jersey Department of Treasury as a foreign entity authorized to do business in the State of New Jersey. Foreign investors that are non-US entities or persons should pay attention to the usual issues on a federal level such as: (i) international tax considerations; (ii) collateral regulatory burdens; and (iii) the Committee on Foreign Investment in the United States review. There are no additional regulations for non-US purchasers that are imposed by the State of New Jersey.
New Jersey is known for having among the strictest environmental statutes in the United States. Sellers will typically seek:
Purchasers seek to protect themselves by reserving extensive environmental due diligence rights which would include the right to conduct a Phase I environmental assessment and, if required, a Phase II which would include soil samples and borings. These issues are often very heavily negotiated by sellers and purchasers. As a general matter, the contract negotiation will often result in the purchaser and seller allocating responsibility in the purchase and sale agreement, each taking responsibility for any conditions on the property that were caused during its respective period of ownership and indemnifying the other during such period.
In New Jersey, zoning matters are governed by state law and by municipal ordinances or by-laws, so the rules vary by municipality and location. A buyer may have legal counsel perform a zoning analysis of the property during due diligence. Some municipalities will provide a zoning letter which certifies that a property is compliant with current zoning, but most municipalities will provide only a statement of the existing zoning classification for a property. Owners who wish to change the zoning of a property may seek variances, approvals and permits from local municipalities
While it is typically only a remote risk, governmental taking through eminent domain or condemnation is possible in New Jersey where such power has been delegated to various agencies and public bodies and public utilities. New Jersey’s exercise of condemnation rights is most typically seen with respect to widening roads and highways and otherwise in connection with utilities. As a general matter, the condemnation process is as follows:
Issues relating to condemnation are typically addressed in the purchase and sale contract and will often recite that upon any taking by a governmental authority, the parties would have the ability to terminate the transaction and the purchaser would receive a refund of the deposit. Occasionally, such termination right is tied to the taking of a given percentage of the property (for example, upon a taking of 10% of the property or a taking that affected access, visibility or a main tenant, the purchaser would be entitled to terminate).
New Jersey does not have any mortgage recording taxes. However, New Jersey does have a Realty Transfer Fee (RTF), a Controlling Interest Transfer Tax (CITT), and a Mansion Tax. The Mansion Tax, paid by purchaser, is 1% of the consideration and applies to purchases of real estate (including residential and commercial, which includes office properties). The RTF is typically paid by the seller and is discussed more fully in section 8 Tax, below.
Foreign investors are required to register with the New Jersey Department of Treasury as a foreign entity authorized to do business in the State of New Jersey.
Acquisitions of commercial property are typically financed by mortgage loans, mezzanine loans and investments of preferred equity. With regard to mortgages, New Jersey is a lien theory state and therefore, regardless of the language of the mortgage, title to real property does not vest in the mortgagee but remains with the borrower. A mortgage is generally accompanied by an assignment of rents and leases, which should be an 'absolute' assignment in order to protect the rental stream from other creditors’ claims in bankruptcy. The mortgage and assignment of rents and leases must be acknowledged and are recorded in the county wherein the property is located. Commercial mortgages are also typically supported by various types of guaranties from the borrower’s principals.
In situations where the borrower’s principals lack sufficient equity, a mezzanine lender, whose loan would be secured by a pledge by the borrower’s principals of their ownership interests in the borrower, can be requested to provide mezzanine financing for the acquisition. Since mezzanine financing is not as secure as mortgage financing, the interest rate is typically higher than in a mortgage loan. The borrower may seek additional capital by accepting an investor from a 'preferred equity' source, usually a privately-held fund established for such purposes. Here, the preferred equity investor becomes a partner in the borrower and demands a 'preferred return' on its investment and a portion of the profits from the property in exchange for its investment. Both the mezzanine lender and preferred equity investor will be able to exert a fair amount of control over the borrower, much more than a mortgage lender would typically do.
As noted above, the security provided to a mortgage lender typically consists of a first-priority mortgage loan and an assignment of leases and rents. In certain circumstances a first-priority lender may allow secondary financing (ie, a second subordinate mortgage). Priority of a mortgage is based on its recording date and although it is not required, some lenders elect to file UCC-1 financing statements (in the state where the borrower was formed) to secure its lien on fixtures (or on other non-real estate assets).
A mezzanine lender’s lien is secured by a pledge of ownership interests and such security interest can be perfected both by the filing of a UCC-1 financing statement in the state where the pledging principal of the borrower resides and, if the lender requires the borrower to 'opt-in to Article 8 of the UCC, delivery of actual ownership certificates.
See above, 2.6 Important Areas of Law for Foreign Investors. There are no specific New Jersey laws relative to this issue other than general corporate laws which require all entities which earn money from businesses located in New Jersey to be authorized to do business in New Jersey. Earning money from a borrower located in New Jersey sufficiently constitutes doing business in New Jersey such that authorization (to do business in the state) is required. If such authorization is required and not obtained, the lender may be barred from utilizing the courts in New Jersey until such time as all required state taxes have been paid.
New Jersey does not currently have a mortgage tax. If a lender forecloses on its mortgage and accepts a deed in lieu of foreclosure and seeks to have the mortgage survive the conveyance, the RTF will be applied on the outstanding balance of the mortgage loan. In addition, the 'mansion tax' will be imposed on the transaction (certain classified properties) if the outstanding balance of the mortgage exceeds USD1 million. If the lender elects to discharge its mortgage prior to or simultaneously with the deed in lieu transaction, there will not be any RTF or mansion tax imposed.
Generally, there are no New Jersey laws or requirements that require compliance by an entity providing security to a lender. Lenders and title insurance companies will review a borrower’s organizational documents to confirm that all approvals and consents from the borrower’s owners and/or officers required thereunder have been obtained.
With respect to commercial transactions only, debtor protections, if any, would appear in the loan documents. These might include notice and an opportunity to cure a default before it becomes actionable by the lender. With respect to residential foreclosures, recent laws enacted during the recent recession require mortgage lenders to take many time-consuming steps before they can foreclose a mortgage loan.
As a practical matter, New Jersey permits only judicial foreclosures, which are lengthy proceedings; even with respect to a non-contested commercial loan, judicial foreclosure typically requires between nine months and one year to conclude. This time frame may enable a borrower to attempt to seek alternative financing or an amicable resolution of the dispute between it and the lender.
Once a lender elects to commence an enforcement action, there is nothing it needs to do to in order to perfect or create or enhance the priority of its mortgage. New Jersey is a race-notice state and, therefore, once a mortgage is recorded, its priority is established. Within the foreclosure process, there are steps that a lender needs to take to maintain the priority of its mortgage, such as conducting a rundown title search to make sure its foreclosure complaint lists all junior lienors. The interests of those junior lienors will need to be extinguished through the foreclosure process. Counsel for the foreclosing lender will also file a lis pendens in the county where the property is located to ensure that any new lienors cannot interfere with the foreclosure and will be bound by its outcome, even if not a party thereto. Real estate taxes, municipal water and sewer charges and certain environmental liens will always have priority over a mortgage, regardless of when such charges are imposed.
A lender entitled to priority on its mortgage may agree to subordinate its priority to a subsequent mortgage lender’s mortgage through a subordination or postponement agreement.
New Jersey also recognizes the doctrine of equitable subordination. Under this doctrine, a mortgagee who negligently accepts a mortgage without knowledge of intervening encumbrances will subrogate to a first mortgage with priority over the intervening encumbrances to the extent that the proceeds of the new mortgage are used to satisfy the old mortgage. This provides the new lender with the same priority as the old lender. Please note that if the new lender has actual knowledge of the prior encumbrances, it is not entitled to the priority described above.
Lenders in New Jersey may be exposed to environmental liability for hazardous substances affecting their collateral under federal and state laws. However, New Jersey has created 'safe harbors' for lenders which, in general, should shield lenders if they act properly under the law.
New Jersey law provides that if a lender does not participate in the management of a facility, it is not deemed an owner and therefore not the discharger of hazardous substances. A lender is not deemed to be involved in management if it responds to an environmental issue and remediates same or directs its borrower to do so, nor is a lender required to perform an environmental inspection prior to making a loan to avail itself of this safe harbor. In addition, taking title to the property after a foreclosure sale with the intention of selling it in order to realize on the collateral falls within the safe harbor.
If the borrower becomes insolvent and is the debtor in a bankruptcy proceeding, any enforcement actions previously commenced will be subject to the automatic stay of the Bankruptcy Code. However, provided that the mortgage was properly recorded and there are no defects in the mortgage itself, the priority of the lender’s mortgage will remain intact. Throughout the pendency of the foreclosure action, the property will typically be operated by a receiver, if requested by the lender.
Until the actual sheriff’s sale after a foreclosure proceeding, the borrower retains its equity of redemption and can regain control of the property by paying off the then balance of the mortgage loan, together with all costs, attorneys’ fees and interest as calculated in accordance with applicable law. If the borrower files a bankruptcy proceeding after a sheriff’s sale, title will nonetheless pass to the successful bidder.
New Jersey has adopted the Municipal Land Use Law which imposes certain uniform requirements on municipalities with respect to land development. However, New Jersey is a home rule state and, accordingly, controls with respect to design and appearance are primarily local in nature and vary by municipality. However, other governmental authorities with jurisdiction over the affected site may impose such obligations as well (See 4.2 Regulatory Authorities, below). The method of construction is not customarily different than the Uniform Construction Code, which has been adopted with modifications by New Jersey, but each municipality applies the requisite inspection and approval obligations in its own procedural manner. Unique design and/or construction requirements are routinely imposed with respect to, among others, waterfront properties, properties within flood zones, and properties in or bordering on wetlands areas. In addition, municipalities often have a historic preservation committee which opines on development applications.
Generally, municipalities are responsible for regulating the use of real property within their jurisdiction. Counties and other governmental authorities may also regulate development and use of property within their jurisdiction through, for example, various county planning boards and the State Planning Board. All such governmental authorities have the right to designate what uses may be made of real property within designated zones, and may grant relief from such requirements in appropriate cases (through variances or rezoning). In addition, depending on the nature and location of the proposed development, the NJ Department of Environmental Protection, the Port Authority of New York and New Jersey, the New Jersey Department of Transportation, the Pinelands Commission, the Hackensack Meadowlands Commission, various watershed management agencies, sewerage authorities, affordable housing agencies, storm-water management agencies and the county in which the property is located may have input into development and, in some instances, have the authority to grant or deny the application.
The nature of the requisite approvals varies depending upon where the property is located and the magnitude of the proposed development. As a general guideline (addressing municipal approvals only), a site plan application with variances or variance application would be required by municipalities to approve a development. The nature of the application would depend upon whether the use is a permitted one in the zone in which the real property is located and whether the structures themselves comply with the requirements of the zone. Notice must be provided to real property owners within 200 feet of the proposed development and all members of the public, and anyone purporting to be affected by the proposed development may appear and object at the hearing. Objectors also have the right to present evidence and expert testimony. The variance process may take as little as three to six months for a simple application or as long as 12 to 15 months for major variance applications. Applications involving multiple agencies, particularly those located in sensitive ecological areas, may take up to several years.
An applicant aggrieved by a municipal zoning decision, or any other person who believes he/she is aggrieved by a municipal zoning decision, has the right to file an appeal within 45 days of publication of the decision of the municipality in a newspaper of record. The Superior Court will then schedule a trial and a single judge will determine whether, on the record created before the municipal agency, the zoning decision should be affirmed or reversed. Municipal zoning decisions are given great weight and are upheld unless they are determined to be “arbitrary, capricious or unreasonable”. In the case of a denial of a variance or application for development, the municipality would not issue any permits pending the appeal; in the case of a grant of an application for a variance or development, a municipality may issue such permits pending appeal, typically upon the posting of a bond by the applicant to ensure that in the event the appeal results in a reversal of the grant of the variance or zoning application, the site can be restored. Many municipalities will not issue such permits during an appeal by objectors.
Agreements between developers and municipalities are properly available only in limited circumstances. In the ordinary course, a developer would have to proceed through a request for rezoning or an application for site plan approval (with or without variances) to obtain municipal approvals. It is not, however, uncommon for such approvals to be 'conditioned', with the developer’s agreement, upon the developer addressing issues raised by the municipality. Further, in the case of applications not requiring a use variance, it is typical for the municipality’s professionals to meet with the developer’s professionals to attempt to reach agreement as to any of the issues presented on the application. In certain other contexts, primarily with respect to blighted or distressed areas, Redevelopment Agreements and PILOT (Payments In Lieu of Taxes) Agreements are commonly used in New Jersey, but their use is not applicable to all properties. For a Redevelopment Agreement, the municipality must first designate the property at issue as an area in need of redevelopment (pursuant to state statutory criteria). Then a Redevelopment Agreement can be negotiated, executed and approved by the municipality’s governing body (though it is common for such details to be agreed upon prior to the designation of a site for redevelopment). PILOT programs similarly incentivize developers to restore distressed or blighted areas and PILOT agreements are often executed in conjunction with a Redevelopment Agreement.
Municipalities typically employ code enforcement officials who respond to complaints, monitor ongoing construction and conduct routine town inspections to ensure that unauthorized and/or unlawful developments are identified and appropriate municipal or court action is taken. State and county agencies also employ engineers and inspectors to oversee construction and development within their jurisdictions. In the case of construction (as distinct from unlawful use), a 'stop work' order is typically issued by a code enforcement officer with a violation of such order resulting in fines, which can be significant. In the case of an unlawful use, a notice of violation would be served upon the property owner; again, violations of the permitted uses of a given property would typically result in fines. Each day of non-compliance with the applicable uses in a zone, or with construction that is not permitted, constitutes a separate violation. In addition, municipalities will typically not issue permits until it has first been ascertained that the construction has been authorized and that the use is a permitted one.
New Jersey recognizes various business entities that are available to owners of real estate including, limited liability companies, corporations, and partnerships. The most common entity is the limited liability company, which affords the most flexibility, pass-through taxation, and fewer formalities than corporations.
A corporation in New Jersey, as elsewhere, provides a separation between the shareholders, directors and officers. The shareholders are the owners of the corporation and they elect the board of directors. The directors manage the business trajectory and activities of the corporation. The directors appoint officers who manage the day-to-day business and affairs. The main benefit of a corporation is that shareholders have no personal liability for the corporation except for certain specific instances such as a breach of fiduciary duty or a breach of the duty of loyalty.
Limited Liability Company
A New Jersey limited liability company (an LLC) has many of the same benefits of a corporation but is preferred for its flexibility of management while affording liability protection to its members. In addition, unlike corporations, LLCs are not taxed on the entity level but, rather, tax liability passes through to each of the members individually. For that reason, the LLC is the preferred form for structuring the acquisition of real property in New Jersey.
Partnerships have become far less common in recent years, especially with the increased popularity and ease of LLCs. Partnerships in New Jersey are more likely to be limited partnerships which combine a limited partner and a general partner. The limited partner is insulated from unlimited liability, but does not participate in the management or operation of the business. In this structure, the limited partner is only liable for its investment; accordingly, this form was primarily beneficial for a limited partner that sought to avoid unlimited liability and a general partner who sought investment capital without material interference in the business activities.
A corporation in New Jersey is typically subject to income tax at the corporate level; however, certain corporations may make an election to eliminate the corporate level income tax and pass the income and losses directly to its shareholders. These corporations, called S corporations, must first make the appropriate election with IRS, then register with the New Jersey Division of Revenue and Enterprise Services and then must make a New Jersey S Corporation Election Form CBT-2553. Out-of-state corporations who have not received authorization to do business in New Jersey must also attach the S Corporation Certification with their filing.
Limited Liability Company
A single-member LLC can be treated as a disregarded entity that is not separate from its owner for income tax purposes. An LLC with two or more members is classified, by default, as a partnership for income tax purposes although a multi-member LLC can elect to be taxed as a corporation. This election to be taxed as a corporation is not common in traditional real estate investments and is generally limited to circumstances in which it is necessary to accommodate investment by tax-exempt investors or non-U.S. investors.
The members of an LLC may agree to preferred distributions (ie, carried interest) and specially allocate gains and losses among the members.
New Jersey partnerships are generally not subject to income tax. Instead, the income and losses pass through to the partners who pay income tax on their share of the partnership income. There are no requirements or conditions on either the partnership or its partners to take advantage of this 'pass-through' tax treatment. Additionally, partners may agree to preferred distributions (ie, carried interest) and specially allocate gains and losses to the partners.
In all instances, annual reports must be filed with the State of New Jersey Division of Revenue and Enterprise Services.
While New Jersey does recognize licenses and occupancy agreements, the most prevalent form of arrangement for the use of real estate is a lease. A license (often referred to as an occupancy agreement) will not result in the grant of an interest in property in the licensee/occupant but will rather confer a lesser right for limited use that is often terminable and revocable at the will of the property owner.
On the other hand, the lease creates a possessory interest in property and affords the tenant greater rights, including exclusivity and assignability (as permitted by the landlord) and is not generally terminable prior to the expiration of the lease term, absent a default by the tenant or other narrowly-construed circumstances.
Commercial leases in New Jersey can be net leases or gross leases. If a lease is a gross lease, the landlord typically provides certain building services and charges a fractional share of the costs back to the tenants. In this scenario, the tenant will typically pay rent to the landlord that is comprised of two parts: (i) a base rent payment that is fixed but may increase annually, and (ii) additional rent payments which would include operating expenses for the property such as taxes, insurance, maintenance and utilities. Sometimes, these payments of 'additional rent' are structured as payments of increases over a specified base year; other times, especially with retail leases, it is a flat percentage of the building’s square footage. Typically, gross leases are seen in shopping centers, office buildings, and other properties where there are multiple tenants in a single building. Conversely, with a net lease, the tenant pays a base rent payment to the landlord and also separately contracts for and/or pays other costs and expenses of the property directly to the service provider or other proper payee. In a triple-net lease, for instance, the tenant would pay a fixed rent to the landlord monthly and separately pay all costs and expenses of the real property such as taxes, insurance, maintenance and utilities.
Ground leases are another type of lease in New Jersey. Here, the landlord typically leases only the land to the tenant for a term of 20 or more years. The landlord maintains a reversionary interest where, upon expiration of the lease, the land and all improvements will be owned by the landlord. During the term of the ground lease, the tenant is responsible for constructing improvements and maintaining the property.
New Jersey does not regulate commercial rents.
Leases typically range from an initial term of five years to 15 years and will often afford the tenant at least one option to renew. The terms vary based on each deal; however, the rent during the renewal term is usually a fixed percentage increase over the rent previously in effect, or is based on another calculation such a consumer price index adjustment or a similar mechanism used to determine fair market value. Ground leases will have much longer terms, typically for 25 years or more.
Typically for space leases, the tenant has all repair and maintenance obligations within the premises; the landlord is responsible for maintaining the structural components of the building, the roof, common areas and the building systems. Typically, leases provide that if the tenant fails to make its required repairs in a timely manner then, following notice and opportunity to cure, the landlord has the right to make such repairs and then charge back the incurred costs to the tenant. In a ground lease context, it is common for the tenant to be solely responsible for all repairs and all maintenance.
Rent is typically paid monthly, although it is not unusual for a ground lease to provide that payments are made quarterly or annually.
Typically, base rent will increase at certain trigger points that are negotiated as part of the economics of the lease deal (such increase could be every three years, every five years, or another interval). The amount of the increase varies but is usually a pre-determined percentage. Escalation charges are usually computed annually, with estimated payments until actual expenses are known and reconciled. In a retail context, the tenant will often be required to pay the landlord a 'percentage rent' with a computation commonly done on an annual basis and with payments to be made on an estimated basis until actual sales figures are available.
The amount of the increase is usually known at the time of lease execution and is determined by either a fixed dollar amount, a figure based on cost per square foot, or another fair market valuation calculation or formulation such as the Consumer Price Index.
There is no VAT payable in New Jersey.
Other than rent payments, diligence costs, legal fees and costs associated with posting a security deposit, the tenant may incur costs associated with obtaining permits for its intended use and any construction or fit-out costs associated with constructing or remodeling the premises. Typically, with a gross lease, the landlord will provide the tenant with a broom-swept empty space in a stated condition and provide a monetary sum to be used as a 'construction allowance' for the tenant’s fit-out. The tenant would then factor this allowance in its economics and be responsible for any costs exceeding the allowance. Alternatively, the landlord may agree to a 'build-to-suit' lease or provide a 'turnkey' space to the tenant where the landlord would handle all construction and deliver a space to the tenant that is substantially complete. Of course, the cost differential is factored into the rent specified in the lease and also directly affects the security that the tenant provides to the landlord.
In this jurisdiction, the landlord is typically responsible for all maintenance and repair of common areas such as hallways, lobbies, elevators, parking lots and gardens. Leases will typically specify the services that will be provided by the landlord and will often include seasonal services such as landscaping and snow removal. The costs are typically passed to tenants as either operating expenses or common area maintenance and each tenant pays its pro rata share based on the percentage set forth in the lease. Often these costs are estimated at the start of the year and billed monthly to tenants but are reconciled when actual costs and expenses are determined. In a ground lease, the tenant is commonly responsible for all maintenance and repair costs.
The method of payment for telecommunications and utilities will vary based on the property. For electricity, the cost to the tenant is usually determined by a direct meter or a submeter. The landlord may also reserve the right to charge a flat rate to the tenant. Charges for heating, ventilation and air conditioning (HVAC) will also depend on each property. Most commonly, tenants are all served by a single universal HVAC system during business hours (with the expenses to be built into the base rent and escalations) and such tenants are typically subject to additional charges for after-hours HVAC service. In some buildings, the HVAC system has been designed so that each tenant has its own HVAC system, with such expenses being charged to the respective tenant. Additionally, tenants may have their own supplemental air conditioning and cooling systems for data and telecom rooms, or to provide after-hours service, the expense of which is borne by each tenant.
In New Jersey, each of landlord and tenant maintains its own insurance. Typically, the landlord will impose an obligation on tenants to maintain specific forms of coverage and to include the landlord as an additional insured. Such insurance will usually include general commercial liability and personal injury in certain amounts and limits that will vary depending on the premises and the use. Often, landlords are not required to maintain any insurance but will do so as a matter of business practice and will look to cover the common areas, structures, and roof as well as general commercial liability and personal injury, with such costs to be included in the operating expenses payable by tenants.
This jurisdiction permits landlords to impose restrictions on the tenant’s use of the premises which is typically set forth in the lease. The permitted uses are usually a narrowly tailored list of activities and will usually also include prohibited activities, which often relate to an adverse effect on the reputation or character of the building or otherwise would negatively impact the landlord or other tenants. In addition, for retail centers, tenants are often granted exclusives on use and, accordingly, the landlord will restrict other tenants from uses which could violate such rights.
Tenants must typically request the landlord’s prior written consent as to any alterations or changes to be made within its leased premises. This is especially important for a landlord in terms of any potential tenant alterations that could reach beyond the tenant’s own premises and potentially affect the structural portions of the building, the building systems, or affect ingress and egress. Often, the lease will provide that a tenant may make alterations without the landlord’s consent provided that such alterations are cosmetic in nature, do not exceed a dollar threshold, do not require a building permit, and/or do not affect the structure, the roof, the building systems, or ingress to or egress from the building.
All tenants in New Jersey are entitled to the right of quiet enjoyment. Residential tenants are given greater rights relating to a warranty of habitability.
In addition, case law in New Jersey imposes an obligation on landlords to mitigate damages in the event of a tenant default. This applies in the commercial context as well as a residential context. Accordingly, in the event of a tenant default where the lease is terminated, the landlord must use commercially reasonable efforts to relet the premises.
The tenant’s insolvency in a lease context is governed by applicable bankruptcy, insolvency and creditor’s rights statutes. When the tenant files for bankruptcy under federal bankruptcy law, an 'automatic stay' is imposed which initially restricts the enforcement of remedies or the termination of the lease by the landlord, absent relief from the bankruptcy courts. Thereafter, there are specific requirements under bankruptcy law with respect to whether a lease, which is a contractual agreement, is to be assumed or rejected, and which establish the methods for calculation and recovery of rents unpaid as of the date of the bankruptcy filing. The lease is an executory contract and bankruptcy law may impose rules and obligations on how this must be treated.
Typically, landlords will require a security deposit at the outset of the lease in the form of either cash security or a letter of credit or a guaranty from a well-capitalized parent entity. A letter of credit or a parent guaranty is generally considered more desirable to a landlord than a cash security deposit as such forms of security deposit may place the landlord in a better position in the event of the bankruptcy of the tenant. The amount of the security deposit is specifically negotiated but is often based on monthly rent or a multiple thereof. In addition, for long-term leases, tenants will often negotiate a 'burn-down' where the amount of the security can be reduced over time with good behavior.
New Jersey has a holdover statute which may impose on tenant the obligation to pay up to 200% of the current rental rate or the actual fair market value of the premises (whichever is greater) in the event of a holdover, but a common provision is for 150% of the current rent. When a tenant remains in possession of the premises after the lease is terminated, the lease may continue as month-to-month lease and the tenant will be required to continue to comply with the terms of the lease. At that point, the tenant can be evicted by the landlord upon 30 days’ notice.
In this jurisdiction, landlord and tenant typically have a right to terminate in the event of a condemnation by a governmental authority and/or a casualty event that either exceeds a dollar amount or requires a stated period for remediation. In addition, landlords reserve the right to terminate a tenant’s lease if that tenant defaults on its lease obligations and fails to cure following notice from the landlord. In a retail lease, tenants will typically seek the right to terminate the lease if they fail to hit certain revenue milestones; all such rights are often referred to as a 'kick out'. Recently, early termination clauses have become more prevalent whereby tenants can terminate a lease prior to expiration by giving notice to the landlord together with payment of a termination fee of a fixed amount plus reimbursement of a portion of the landlord’s unamortized leasing costs such as its build-out expenses and brokerage commissions paid.
In New Jersey, a landlord may terminate a lease and force the tenant to vacate its premises in the event of a default under the lease, such as failure to pay rent. Self-help is generally not permitted; the eviction process is pursued in court. The timing of the process varies but in a non-payment or rent case the process, from notice to judgment, should be expected to take no less than three months. After judgment of eviction is obtained, a sheriff is required to enforce the judgment and actually evict the tenant. The sheriff’s eviction may be complicated by the tenant’s inventory or machinery located at the premises. In such cases, the landlord may need to arrange for a contractor to remove the tenant’s property under the guidance of the sheriff. The timing of the process varies but, from notice to judgment, the process should be expected to take no less than three months. Even if obtaining a judgment of possession is not problematic, it could be a hurdle to having a sheriff remove the tenant, especially if the tenant has an inventory or machinery.
A lease may be terminated by condemnation, a process which is described in 6.18 Right to Terminate Lease, above. In the event of a condemnation, the award is given to the property owner, though tenants are often permitted to make separate claims for moving expenses. In addition, a mortgage lender may have rights to foreclose and terminate tenancies.
In New Jersey, common pricing models for construction projects include: fixed price (also referred to at times as lump sum or stipulated price); and cost plus, either (i) subject to a guaranteed maximum price, or (ii) not subject to a guaranteed maximum price.
The responsibility for design in New Jersey is, by law, assigned to a licensed professional architect or engineer. The architect often leads the design team, employing additional core disciplines, although these disciplines and other consultants may also be separately engaged by an owner to work in co-ordination with an architect of record. For construction, the management of the project is assigned to a construction manager who either is (i) 'at risk', holding all the contracts for subcontractors, or (ii) 'not at risk', meaning that the owner holds all the trade contracts for the work with the construction manager administering those contract as the owner’s agent. Owners that elect to use a general contractor may also elect to engage a project manager or other owner’s representative to assist the owner with project oversight and management.
Construction risk in this jurisdiction is often managed by, among other things, indemnification, warranties, limitations of liability, delay damage limitations and other waivers of damages, provisions relating to insurance, bonding and subcontractor default insurance, subcontract pass-through provisions, contingency (in the case of a guaranteed maximum price contracts) and other economic provisions and controls (such as shared-savings or other incentives), as well as liquidated damages. New Jersey laws impose contractual indemnity obligations for damages arising out of bodily injury to persons or damage to property caused by, or resulting from, the sole negligence of the promisee, its agents or employees, is against public policy or is void and unenforceable. Owners should require by contract that the contractor’s commercial general liability and excess/umbrella coverage be endorsed to include the owner as an additional insured. Builders' risk coverage, which may be provided by either the owner or contractor, will insure property loss to the work in progress and is typically provided with the insurer’s waiver of claims for subrogation for such insured losses. In such cases, the parties should consider allocation of deductible responsibilities.
Contract provisions require contractors and subcontractors to adhere to schedules prepared by the contractor or construction manager. In particular, the contractor’s work should be subject to a 'time is of the essence' clause, and construction schedules should identify key interim and completion milestones, as well as critical path activities. Delay events should be subject to prompt and timely notice with an obligation to substantiate impact to the critical path of the work. Owners should consider the extent of weather events that may be assumed within the contractor’s construction schedule, and clearly define force majeure events. Also to be considered are economic impacts from delays, and/or for potential price/labor escalation as a result of such delays. Owners may look to provide an extension of time as an exclusive remedy for excused delay; however, for public works contracts, such provisions would not be enforceable in New Jersey if the delay is caused by a contracting entity’s bad faith, active interference, tortious conduct, or other reasons uncontemplated by the parties that delay the contractor's performance. Owners can receive compensation for delays if provided for in the contract.
The most common form of additional security to guarantee a contractor’s performance is a performance bond. Performance bonds are required for most public projects. In private projects, there may also be completion guarantees provided from parent or related companies, depending on the nature of the transaction and the parties involved.
Contractors and designers may file liens to encumber property in the event of non-payment pursuant to New Jersey Lien Law. Under New Jersey law, statutory liens for the prime contractor and subcontractors generally must be filed within 90 days of last providing labor or materials (120 days for residential projects) and the action to enforce the lien claim instituted within one year of last provision of labor or materials to the project. The owner can remove a lien by posting a bond equal to 110% of the lien or by payment of money into court. A mortgage lien filed prior to a statutory lien being recorded, or a lien claimant’s properly filed and served Notice of Unpaid Balance, will generally have priority over such liens, but statutory limitations apply and should be considered. In New Jersey, it is important to note that the New Jersey Prompt Payment Act provides that the contractor’s billing shall be deemed approved and certified 20 days after the owner receives it unless the owner provides, before the end of the 20-day period, a written statement of the amount withheld and the reason for withholding payment.
Generally, a certificate of occupancy must be obtained before a building may be occupied following new construction. There are certain exceptions and rules that will otherwise govern renovations and improvements, not all of which will require a certificate of occupancy.
New Jersey imposes a tax on real property transfers (RTF).
The Division of Taxation has released tables showing the combined RTF on real property transfers, plus the fee on new construction. For consideration not more than USD1 million, the RTF is USD6.05 for each USD500 of consideration.
As noted above, New Jersey also imposes a 1% CITT applicable to transfers of controlling interests of corporations, partnerships, associations, trusts or other organizations that own real property in New Jersey. The tax is 1% of the consideration paid for the transfer of the controlling interest in an entity that possesses a controlling interest in commercial properties, if the equalized assessed value of the real property exceeds USD1 million. If the entity possesses commercial and other property, the tax is 1% of that percentage of the equalized assessed value of the commercial property that is equal to the percentage of the ownership interest transferred.
The transfer tax is paid by the seller.
Federal and New Jersey corporate tax will be due on the gain from the sale of real property. The New Jersey corporate tax rates range from 6.5% for corporations with entire net income of USD50,000 or less; 7.5% for corporations with entire net income of USD50,001 to USD100,000 and 9% for corporations with entire net income more than USD100,000.
A deed or controlling interest transfer is only subject to tax if consideration exceeds USD100. The New Jersey Tax Court held that where there is no debt on the property and consideration stated is less than USD100, no tax is due.
The RTF includes a local component.
See discussion in 2.2 Important Jurisdictional Requirements, above, regarding bulk sales law.
Taxpayers may increase their basis in real estate sold to the extent a New Jersey tax benefit was not received due to limits on depreciation and net operating loss deductions in place for tax years 2002-2005. For tax years beginning after December 31, 2013, income is apportioned to New Jersey based upon receipts allocated to New Jersey. Having eliminated a property factor from the apportionment formula, owning real property in New Jersey will not increase the apportionment to the state.
New Jersey conforms to the current Internal Revenue Code and has not decoupled from the interest expense deduction limits of the TCJA. New Jersey also follows the Internal Revenue Code deferring capital gains invested in Opportunity Zones.