US Regional Real Estate 2023 Comparisons

Real estate law in New Jersey requires attention to a variety of substantive skills and practice areas. In addition to being a good draftsperson, well versed in contract and commercial law, an effective real estate practitioner in New Jersey must view each transaction in the context of the particular property, the asset class, and the client’s goals. In virtually every deal, there are tax issues, corporate issues, government issues, environmental issues, and labor and employment issues, among others.

In addition, an attorney must understand their client’s business objectives and 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.

Trends and deals occurring in New Jersey cannot be shared at this time.

New Jersey conforms to the current Internal Revenue Code (IRC) and 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 31 December 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. The State of New Jersey has 169 census tracts designated as Opportunity Zones, spread across 75 municipalities, or 42% of eligible towns. The bipartisan Opportunity Zones tax credit incentive was designed as a critical tool to create jobs and revitalize neighborhoods. The Opportunity Zones incentive has the potential to unleash much-needed economic growth in underserved communities – communities that investors too often overlooked and have not seen investment in decades.

Other than protections afforded to renters with a household income below 120% of the applicable county’s Area Median Income, New Jersey’s COVID-19-based anti-eviction rules are no longer in effect.

In terms of structures, owners of real estate in New Jersey generally have the same options that are available in other jurisdictions. For commercial properties, the most commonly used investment vehicle is the limited liability company. General and limited partnerships and corporations are, of course, still recognized but are not as favored.

Alternatively, where appropriate, properties are often held by multiple owners as tenants-in-common, typically among closely affiliated partners or in connection with syndicated deals or 1031 tax-deferred exchange transactions. 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:

• ISRA compliance with respect to industrial establishments;
• New Jersey Bulk Sales Compliance;
• “Green Cards” for the conveyance of multiple dwelling properties, motels, and hotel properties; and
• certificates of occupancy or other transfer certificates in certain municipalities.

Industrial Site Recovery Act (ISRA)

ISRA is a unique New Jersey statute which requires that notice be given prior to the sale of a property or a cessation of business operations, where such property is an industrial establishment. Whether or not a business is an industrial establishment and therefore subject to ISRA is based on its NAICS classification, and 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 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. Often, the purchaser also retains an LSRP to confirm 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.

“Green Cards”

The Bureau of Housing Inspection administers the New Jersey Hotel and Multiple Dwelling Law which requires that multi-family properties, 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 should look to ensure they are valid as of the closing date. Green Cards are issued, and state inspections therefore take place, every five years.

Bulk Sales

New Jersey has a bulk sales law which imposes on purchasers an obligation to notify the New Jersey Department of Treasury, Division of Taxation (Division) of any transaction involving the transfer of business assets outside the ordinary course of business of the owners. The purpose is to identify and capture the taxes owed by the owner before sales proceeds are distributed from the closing of the transaction. Failure to comply with the bulk sales law could render a purchaser liable for a seller’s outstanding state tax obligations.

The bulk sale notification process is as follows: the purchaser first submits a Form C-9600 which must be properly completed and include the following: (i) a valid New Jersey tax ID number for the seller and purchaser, (ii) the specific closing date, which must be at least ten business days after submission, (iii) a proper mailing address for each of the parties and/or their respective legal counsel, (iv) the signature of the purchaser or the purchaser’s attorney, and (v) a copy of the executed contract of sale, court order, or assignment agreement clearly showing the sales price and all the terms and conditions of the transfer. Often, the purchase and sale agreement requires that all of the above information be provided in a timely manner so as not to delay purchaser’s bulk sale filing. In addition, if required by the Division, the seller submits a Transfer Tax Declaration form to the Division. The Division generally promises a response within ten business days of the submission of a complete filing, at which time 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. If the Division fails to respond to a completed bulk sale notification within ten business days, the purchaser will not be liable for any state tax obligation of the seller. The purchase and sale agreement also will typically provide that both parties 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 require the issuance of a certificate upon a conveyance, commonly referred to as a CO.

Custom and practice is to 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.

Other Considerations

In New Jersey, for the conveyance of a residential property, additional requirements may be imposed. For instance, the seller must obtain a certificate confirming 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 proper deed with the county clerk for the county in which the subject property is located along with the payment of the applicable taxes and fees in order to perfect the transfer. The deed must be signed, acknowledged, and contain an adequate description of the property. The most commonly used deed is a Bargain and Sale Deed with Covenants Against Grantor’s Acts and it must include a statement, at the top of the first page, which states “Prepared by:” followed by 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 involves 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 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. This allocation of responsibilities has remained constant in recent years, though certain diligence services traditionally performed by attorneys have adapted to innovations in technology. Examples include lease abstracting, where clients have outsourced to independent vendors for a fraction of the cost.

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 and often advisable 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 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 a 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, it is common for a purchaser to insist that the purchase and sale agreement provide that the 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 typically includes, at a minimum, the following representations and warranties:

• organization and formation of the seller along with full right, authority, and capacity to execute the agreement and to perform its obligations under the purchase and sale contract;
• no pending or threatened lawsuits against the seller or otherwise affecting the property;
• the seller’s resident or non-resident status;
• no pending or threatened eminent domain or condemnation proceedings against the property;
• no third parties have any options to purchase the property or other possessory rights which may frustrate the sale;
• no known environmental defects with the real property or any actions being taken by any agency with respect to the environmental condition of the real property;
• the existence of all licenses, permits, and certificates necessary for legal use or occupancy of the real property; and
• no pending or threatened changes in the zoning classification of the property.

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:

• international tax considerations;
• collateral regulatory burdens; and
• the Committee on Foreign Investment in the United States review.

There are no additional regulations for non-US purchasers imposed by the state of New Jersey. Foreign investors must understand whether they will be subject to other federal or state regulatory laws, including securities regulations, environmental laws, foreign corrupt practices statutes, and laws requiring the reporting of the acquisition of ownership of US real estate. If foreign investors will have a controlling interest in the owner, the transaction may be reviewed by the federal government.

The Foreign Investment in Real Property Tax Act can subject foreign investors to federal income tax liability and the withholding of proceeds from a sale or transfer. While recent changes to CFIUS have resulted in modifications to process and breadth, in practice it has not had a major impact.

New Jersey is known for having among the strictest environmental statutes in the United States. Sellers will typically seek:

• a disclaimer of all liability for environmental conditions and a full release by purchaser upon closing;
• a prohibition on purchasers’ use of a Licensed Site Remediation Professional for due diligence; and
• confidentiality provisions which will compel the purchaser to keep all results of its investigations strictly confidential, except as required by law.

Purchasers seek to protect themselves by reserving extensive environmental due diligence rights, including 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 often results 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, so the rules vary by municipality and location. A buyer may have legal counsel perform a zoning analysis of the property during due diligence. Municipalities will typically provide a zoning letter which certifies that a property is compliant with current zoning and/or may be used as intended by a purchaser of the property. Owners who wish to change the zoning of a property may seek to change the municipality’s zoning ordinances, or they may obtain variances or other 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, 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:

• there must be an attempt to resolve the acquisition outside of litigation through bona fide negotiations with the property owner (which includes an offer in writing by the condemnor);
• provided that such attempt does not result in an agreement, there must be a final disposition by judgment of the authority and due exercise of the power of eminent domain by the condemnor;
• there must be a non-binding arbitration of the issue of just compensation by commissioners appointed by the court; and
• there is a trial of the issue of just compensation.

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, termination rights are tied to the taking of a given percentage of the property (eg, 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 certain real estate classified as 4A and where the consideration exceeds USD1 million (including some residential and some commercial, which includes certain office properties).

The RTF is typically paid by the seller, see 8. Tax.

Foreign investors are required to register with the New Jersey Department of Treasury as a foreign entity authorized to do business in New Jersey.

Acquisitions of commercial property are typically financed by mortgage loans, mezzanine loans, and investments of preferred equity.

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.

Mezzanine Loans

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.

Investments

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 typically would.

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 other non-real estate assets.

A mezzanine lender’s lien is secured by a pledge of ownership interests in the property owner 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 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 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 of 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, laws enacted during the 2008 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 default, judicial foreclosure typically requires not less than nine months to 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 perfect, 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 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 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.

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 it or directs its borrower to do so, nor is it 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 does not currently have any existing, pending, or proposed rules, regulations, or requirements regarding recording taxes in connection with mortgage loans or mezzanine loans related to real estate.

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. Other governmental authorities with jurisdiction over the affected site may impose such obligations (see 4.2 Regulatory Authorities).

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 they 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 New Jersey 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 or impose conditions at the grant of 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 municipality will require submission of a site plan application to approve a development that is permitted in the applicable zone. Demolition and construction applications will typically be required where an existing structure is not being retained. In the event the use is not one that is approved in the zone, or the structures are non-compliant with the zoning requirements, a property owner would submit a variance application (or a site plan and variance application) to the applicable municipal zoning agency.

Notice of the application 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 or other person 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 obviously 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. However, it is not uncommon for such approvals to be “conditioned”, with the developer’s agreement, upon the developer addressing appropriate land use issues caused or exacerbated by the proposed development (for example, traffic flow, public safety).

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).

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 usually 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 and pass-through taxation, as well as fewer formalities than corporations.

Corporation

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

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.

Corporation

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. Effective for tax years starting after 1 July 2019, New Jersey requires a combined tax return for corporations with common ownership (more than 50% of the voting stock directly or indirectly commonly owned) and engaged in a unitary business if one or more of the corporations are engaged in business in New Jersey. The income and apportionment factors of all corporations included in the combined return are used to arrive at the New Jersey corporate tax.

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-US investors.

The members of an LLC may agree to preferred distributions (ie, carried interest) and specially allocate gains and losses among the members.

Partnerships

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.

To mitigate the effect of the USD10,000 limitation on individuals deducting state and local taxes under the TCJA, for tax years beginning on or after 1 January 2020, pass-through entities may make an election to pay the Pass-through Business Alternative Income Tax at the entity level. The tax paid is available as a credit for the pass-through partner or member. For tax years beginning on or after 1 January 2022, the credit is also available against corporate taxes, the tax on nonconsenting shareholders and may be carried forward. The election does not eliminate the obligation of an LLC to withhold tax from nonresident members and it does not eliminate the obligation of any member to file a gross income tax return or a corporate business tax return.

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 (or occupancy agreement) will not result in the grant of an interest in property for 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.

However, 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

Commercial leases in New Jersey can be net leases or gross leases. In 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 comprises two parts:

• a base rent payment that is fixed but may increase annually; and
• 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 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

Ground leases are another type of lease in New Jersey. Typically, the landlord leases only the land to the tenant for a term of 20 or more years and 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 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 based on another calculation such a consumer price index adjustment or a similar mechanism used to determine fair market value. Ground leases have much longer terms, typically 25 years or more.

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 and 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, it is common for the tenant to be solely responsible for all repairs and all maintenance.

Rent is typically paid monthly, although ground lease payments may also be 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, 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 factors this allowance in its economics and is 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 directly affects the security that the tenant provides to the landlord.

In this jurisdiction, the landlord is generally responsible for all maintenance and repair of common areas such as hallways, lobbies, elevators, parking lots, and gardens. Leases will 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 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 are typically subject to additional charges for after-hours HVAC service. In some buildings, the HVAC system is designed so that each tenant has its own, 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, landlord and tenant each maintain their 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 are 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 commercial and residential contexts. 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 of 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 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 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 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 the 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 a 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 often 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. Given the eviction moratorium that was in place from 2020 through early 2022, the eviction process may take considerably longer, until the court backlog has been cleared.

After judgment of eviction is obtained, a sheriff is required to enforce the judgment and 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 guidance of the sheriff.

The timing of this 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.

It should be noted that, while commercial eviction and commercial foreclosure proceedings are not, at time of writing, formally stayed under any state governmental orders or court orders, the time to evict a commercial tenant or foreclose a commercial mortgage, etc, has been greatly lengthened due to court closures and the volume of such actions that are being filed as a result of the pandemic.

A lease may be terminated by condemnation; a process which is described in 6.18 Right to Terminate Lease. 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:
1. subject to a guaranteed maximum price; or
2. not subject to a guaranteed maximum price.

Construction engagements are not limited to these approaches, and other project delivery models, such as design-build and construction management agency/multiple-prime, are also used for certain projects.

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 coordination with an architect of record.

For construction, management of the project is often assigned to a construction manager who either is “at risk”, holding all the contracts for subcontractors, or “not at risk”, meaning the owner holds all the trade contracts for the work with the construction manager administering those contracts 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 contract) and other economic provisions and controls (such as shared-savings or other incentives), as well as liquidated damages. New Jersey law prohibits an owner or other party from requiring contractual indemnity for damages arising out of bodily injury to persons or damage to property caused by, or resulting from, the sole negligence of the owner or such other proposed indemnitees.

Parties should, therefore, be mindful to tailor indemnity clauses appropriately so as not to risk having the provision deemed unenforceable. Owners should be mindful to properly review and tailor insurance programs to minimize potential uninsured exposures and require, by contract, that the contractor’s commercial general liability and excess/umbrella coverage be endorsed to include the owner as an additional insured, assuming the intended primary coverage is provided by the contractor and not an owner’s project policy.

There are continued concerns about supply chain disruptions and pricing volatility and as a result contractors and suppliers are qualifying pricing and scheduling commitments more so than historically had been the case. Owners should be mindful of such qualifications and consider appropriate contract contingencies.

Depending Builders’ Risk Coverage

Depending 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; in particular for insured losses caused in whole or in part by the contractor or subcontractors, such as water damage where deductible exposures tend to be higher.

Subcontractor Default Insurance

Owners should also consider the limitations of subcontractor default insurance, which is used with greater frequency over the last several years. These policies do not insure the interests of the owner and often include large deductibles and/or self-insured retention. Policy premiums are often paid up front based upon estimated enrolled volume with an accounting true-up at completion. However, the policies typically will not survive a contract termination (other than for contractor insolvency). It is, therefore, important to assess the coverage afforded under a subcontractor default insurance program and to consider how covered claims are treated under the construction contract.

Contract provisions typically require contractors and subcontractors to adhere to established milestones, with corresponding 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. It is not uncommon for contracts to include liquidated damages for contractor delay and, often, depending on the nature of the project and timing considerations, they may also include early completion bonuses.

Any such bonuses tend to be based on economic terms and, while not uncommon, they are not an industry standard or norm. 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 including potential pricing escalation as a result of such delays. New Jersey law will recognize “no damage for delay” contract limitations (ie, an extension of time being to the exclusive remedy for excused delay) provided that statutes prohibit such limitations in public works contracts to the extent the delay is caused by a contracting entity’s bad faith, active interference, or tortious conduct. Furthermore, New Jersey courts have permitted recovery for delay damages, notwithstanding any such contractual limitation, when:

• the delay was of a type not contemplated by the parties;
• the delay amounts to abandonment of the project or contract; or
• the delay was caused by active interference or bad faith of the party seeking enforcement.

It is, therefore, essential that any such provisions are carefully drafted to reflect the intent of the parties. Relatedly, unpredictability may increase with respect to the treatment of delay claims and such provisions in the wake of the COVID-19 pandemic and surrounding circumstances. The risk allocation, for both schedule and economic impacts, has gained more focus over the last several years, with concerns related to supply chain disruptions and market volatilities continuing to be a point of emphasis. Parties should consider giving careful attention to bid clarifications and contract terms with respect to potential pricing holds and market fluctuation as a result of delays and independent of delays. Owners can receive compensation for delays, including liquidated damages, if provided for in the contract. 

The most common form of additional security to guarantee a contractor’s performance is a performance bond, which is 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.

Subcontractor default insurance programs are also being implemented to mitigate project performance exposures for contractors. These programs insure the contractor for losses associated with defaulting subcontractors. Owners should be mindful that such insurance programs do not include an owner’s ability to pursue insured claims and that contractual provisions are needed between an owner and contractor/policy holder to make certain that the intended benefits of such insurance programs are being realized.

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 the 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 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.

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.

Effective 1 January 2021, a transfer of real property that is an intercompany transfer between combined group members as part of the unitary business is exempt from the transfer tax (New Jersey Statutes Section 46:15-10 (r)).

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 2.2 Important Jurisdictional Requirements 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 2002–05. For tax years beginning after 31 December 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.

Opportunity Zones have attracted real estate investors to underserved communities. The provision provides a flexible deferral mechanism for short- and long-term capital gains for current investments in nearly all asset classes.