Article

LEGAL STRATEGIES FOR COPING WITH THE CURRENT MARKET CONDITIONS
by Henry T. Chou, Esq., and Donald R. Daines, Esq.

In an ideal world a homebuilder turns land into homes and sells them as soon as possible because undeveloped land cannot be monetized. Additionally, the cost of carry, including real estate taxes, financing costs and completion guarantees, provides strong incentives for builders to keep building. The stronger sales are the more land builders seek to acquire. In this context, the real estate market compels builders to respond swiftly to consumer preferences.

Today’s depressed real estate market is far from ideal, and it presents builders and developers with some daunting challenges. For example, the weak market conditions result in the possibility that approvals and permits may lapse with the passage of time. This article addresses the steps builders may take to preserve and extend approvals for desirable housing products until the market rebounds.

It is also clear that certain products that were attractive as little as one or two years ago are no longer in high demand. In most circumstances, builders who have approvals or zoning for such products cannot carry their undeveloped land indefinitely while hoping that the demand will improve some years down the line. While it is often unappealing to abandon vested approvals in today’s climate of frequent regulatory changes, economic realities require builders to explore alternative strategies for turning a profit on their properties. Thus, this article also explores ways in which approvals for different product types, that are more responsive to today’s market, may be sought.

Lastly, this article touches upon real estate tax appeals, a potential means to reduce the costs of carry pending a return to favorable market conditions.

Preserving and Extending Approvals

Preserving and enforcing rights and protections under approvals and permits is critical. Doing so requires knowledge of the legal rights established by laws and the court decisions interpreting and applying those laws. The passage of time while builders await improved market conditions could result in the lapsing of approvals or permits, or the negative impact of new regulations that do not fairly “grandfather” existing approvals. Analyzing such issues requires that both local zoning and state regulations be considered.

The Municipal Land Use Law (MLUL) provides that preliminary approvals typically grant “vested” approvals against the effects of zoning changes for a period of three years, with final approvals being vested against the effects of zoning changes for two years (unless the resolution of approval grants a longer period of vesting). The MLUL also provides that preliminary and final site plan and subdivision approvals can be extended under certain conditions. Upon application, a planning board can grant one year extensions of preliminary site plan or subdivision approvals, not to exceed a total of two years. Final site plan or subdivision approvals are also eligible for one year extensions, not to exceed a total of three years. Additionally, if anyone has filed a lawsuit challenging the approval, or if there is a moratorium in place, a developer may be entitled to a “tolling” of the approval and additional extensions of the approval.

Similarly, permits granted by state agencies and other entities are typically valid for time periods spelled out in those permits, and there are usually means to seek extensions of those permits as well. Thus, those possessing approvals and permits for projects that have been stalled by the current market conditions, or for any other reason, should explore seeking extensions of those approvals and permits from the appropriate issuing board or agency.

Projects can be imperiled by changes in zoning laws and state regulations. Unless a project is protected by “vested” rights, new regulations have the potential of completely stopping the project by either requiring drastic changes in the design, layout and engineering, or destroying the project’s economic feasibility. These changes also have the potential to substantially increase the costs of projects they do not completely destroy.

In normal circumstances, new laws and regulations are only applied prospectively absent an unequivocal expression of contrary legislative intent. Sometimes new laws and regulations contain a “grandfather” clause which describes projects, developments or approvals that are not subject to, and which are exempt from, the new standards or requirements. However, it is becoming more and more commonplace for state regulations to provide for very limited grandfathering protections.

Do You Have “Vested Rights”?

The first issue regarding vested rights is whether the local approvals and state approvals are still in effect, either due to the time frame governing their initial issuance, or because they have been extended or tolled. A related issue is whether the project is “grandfathered” from the effects of any subsequent change in the law due to grandfathering provisions in such new laws. If not, the next issue is whether a project is nevertheless “vested” against changes in the law.

In the land use realm, the risks of being subject to new regulations or amendments can sometimes be avoided if the developer has obtained “vested development rights” due to expenditures under the earlier scheme. The courts have recognized that, in appropriate situations, the relevant question is whether a claim to vested rights should be sustained even for sections of the development which have not been built. Strong arguments can be made that construction in one phase of a project does, in fact, vest rights to complete the other phases. Expenditures on model homes; installing onsite curbed streets and underground utilities; installing or making contributions for offsite improvements (treatment plants, sanitary sewer, streets, intersections, etc.) are all based upon, and in anticipation of, completing the remaining sections of the development. The size and depth of pipes, pump stations, storm water systems, etc., create the infrastructure and capacity to complete the remaining sections.

In New Jersey, substantial economic reliance by a developer on approvals issued prior to a zoning ordinance amendment will defeat the retroactive application of the ordinance to a project, i.e., vested rights are established. In fact, there are even cases holding that retroactive ordinances should not impede a developer’s right to proceed even where it lacks a building permit.

Since the ultimate objective is fairness to both the public and the individual property owner, a balance must be struck between the interests of the developer in completing the approved work, and the interests of the town in controlling the uses to which land is put.

What Protections are Afforded by Agreements?

A project can be protected by a developer’s agreement; however, the builder must be prepared to fully satisfy the obligations under the developer’s agreement even if the developer reduces the scope (and impacts) of the development. In a recent case, the court held that a developer's agreement which required the developer to pay the entire cost of improvements to a county road was not contrary to public policy, and was still binding on the developer, even though statutes provided that developers could not be saddled with a disproportionate share of the costs of off-tract improvements and the development in question had been reduced in scope subsequent to the developer's execution of the agreements. The developer has appealed to the New Jersey Supreme Court and is awaiting the decision.

An example of a housing product that is no longer in great demand in many locales is age-restricted (55 and over) housing. In recent years, age-restricted housing was an option that was both palatable to New Jersey municipalities seeking to limit the size of their school districts and to builders who could effectively market the product to a particular segment of society. However, the inventory of new age-restricted housing has begun to pile up and demand for the product has waned.

Given the right set of circumstances, builders with zoning or approvals for age-restricted housing may be able to seek a zone change or modify their approvals to allow for non-age-restricted housing. Municipal governing bodies and planning boards that originally preferred age-restricted housing may be amenable to such a change if they realize that the undeveloped land will remain fallow for a long period of time, during which no tax ratables will be generated. While a certain measure of the town’s attitude depends on local politics, experience has shown that it may be possible to remove the age restriction if the builder can demonstrate through expert testimony that the additional municipal costs generated by schoolchildren are offset by the higher property taxes associated with non age-restricted housing.

Additionally, local decision-makers might be agreeable to removing the age restriction if the builder can provide some form of a lawful public benefit, such as a dedication of land for open space or an agreement to provide onsite recreational facilities that would be open to the entire town. Builders seeking a rezoning of their property can also propose alternative development schemes that complement or support projects that are existing or under construction in town. For example, if the builder’s rezoning proposal includes a road or bridge that will link two existing streets or neighborhoods, the town may deem the proposal to be beneficial from a planning and public policy standpoint and view it in a more favorable light.

Similarly, changes to approvals and applicable zoning may be achievable to swap one form of residential development for another (i.e., single family housing for townhouses), or to swap nonresidential zoning for residential zoning (or vice-versa). Obviously, each town has its own set of circumstances, so any rezoning proposal should be based on a thorough understanding of the town’s unique needs and desires along with an analysis of the local market conditions.

In making such decisions developers should consider the impact of the newly unveiled “third round” regulations of the Council on Affordable Housing (COAH), as those regulations may provide for superior development opportunities that will, at the same time, assist in satisfying the dire need for affordable housing in the State of New Jersey.

Tax Appeals

A builder may also choose to pursue a tax appeal if he or she is carrying undeveloped property that has been devalued within the last few years. For tax purposes, many properties continue to be assessed based on the elevated property values at the height of the market. Clearly, the value of land and housing has dropped substantially since that time. By filing a tax appeal, a builder who desires to hold onto an undeveloped tract has the opportunity to lessen the costs of carry. Tax appeals can be filed with either the County Board of Taxation or the Tax Court, depending upon the assessed value of the property.

A tax appeal may not help improve the housing recession, but may be one means of partially mitigating the effects of the recession. Typically, real estate tax appeals must be filed by April 1. Thus, such action for the current tax year must be taken by April 1, 2008.

Conclusion

The strategies mentioned above are only a sampling of the options available to builders during these challenging times. In today’s climate, builders must embrace innovative alternatives in addition to cost-saving measures in order to maximize viability. The Land Use Division at Hill Wallack LLP is dedicated to creating and implementing such cutting-edge strategies on behalf of its clients.

Henry T. Chou is a partner of Hill Wallack LLP and member of the firm’s Land Use Division. His practice is concentrated in the areas of land use applications and litigation.

Donald R. Daines is a partner of Hill Wallack LLP and a member of the Land Use Division. He concentrates his practice in land use litigation, federal fair housing and related civil rights issues. His experience includes extensive litigation in state and federal courts.

Hill Wallack LLP is one of the largest law firms in Central New Jersey, with offices in Princeton and Atlantic City, New Jersey; Doylestown and Newtown, Pennsylvania. Over the past 25 years, Hill Wallack LLP has earned a reputation for comprehensive problem solving. The firm ’s well-known practice groups in Land Use -- Planning, Zoning, Affordable Housing, and Redevelopment -- Environmental Regulation and Litigation, Regulatory and Government Affairs, Workers’ Compensation, Insurance Defense, Real Estate, Community Association Law, Construction and Business Law are complemented by its specialty practices in Gaming Law, Employment, Professional Liability, Government Procurement, and Public Finance.