By: Henry T. Chou, Esq.
In today’s depressed real estate market, certain products that were attractive as little as two years ago are no longer in demand. In most circumstances, economically rational 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. In today’s climate of frequent regulatory changes, economic realities require builders to explore alternative strategies for turning a profit on their properties.
Exploring Potential Changes to Existing Approvals
An example of a housing product that is no longer in great demand 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 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 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 removing the age-restriction if the builder can demonstrate that it serves the interests of both the municipality and the builder to make the change.
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 residential zoning for non-residential zoning. 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.
Preserving and Extending Approvals
Unless the project is protected by “vested” rights or valid, current permits and approvals which are maintained and enforced, 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 have the potential to substantially increase the costs related to the project.
On September 6, 2008, the Permit Extension Act (“PEA”) was signed into law to help developers preserve and maintain their approvals through this economic downturn. The PEA extends most development-related permits and approvals that have been issued by municipalities and counties, State agencies, and regional planning agencies, including site plan and variance approvals, wetlands permits, septic permits, water permits, and others. Specifically, the PEA tolls permits and approvals that lapsed on or after January 1, 2007 and extends them through at least July 1, 2010. It provides that certain permits valid as of January 1, 2007 are extended at least until July 1, 2010, and potentially up to six months afterwards.
A planning or zoning board approval is not extended by the PEA if, as of January 1, 2007, the approval was already expired and the master plan and ordinance had been amended the to rezone the property to industrial or commercial uses. Additionally, permits for certain lands are not extended if those lands are located in “environmentally sensitive areas,” which is defined by the PEA as lands within State Plan Planning Areas 4B and 5 as of September 6, 2008, “critical environmental sites,” most of the Highlands Region, and areas in the Pinelands not designated for growth. The PEA also does not toll or extend federal permits, certifications or approvals issued under the Water Quality Planning Act, center designations pursuant to the Coastal Area Facility Review Act or the State Planning Act, certain DOT permits, and Flood Hazard Area Control Act permits that have not vested.
The PEA does not impede the New Jersey Department of Environmental Protections’ ability to continue to revoke or modify its permits when the permits allow for such action. The PEA also does not affect any NJDEP administrative consent orders. Sewer permits are extended by the PEA; however, the ability to connect is conditioned upon the availability of capacity in the treatment facility, with priority given to those with extended permits as treatment capacity becomes available. The PEA has some additional exceptions and qualifications, and should be analyzed carefully as to each individual permit to determine whether the permit is tolled or extended.
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.
A tax appeal can be pursued in one of two ways. If the assessed value of the property is less than $750,000 then the appeal is filed with the County Board of Taxation with the right of appeal to the Tax Court. If the appeal involves property assessed over $750,000, the appeal may be filed directly with the Tax Court.
Critical to any successful tax appeal is a strong expert report from the property owner’s appraiser. The purpose of the appeal is to determine the true value of the property, i.e., the price a hypothetical willing buyer would pay a hypothetical willing seller, as of October 1 of the pre-tax year. The appraiser’s expert report must be filed at least ten days before the hearing. The initial burden on the property owner that appeals is to overcome the presumption of validity of a municipal tax assessment by presenting evidence sufficient to demonstrate the value of the subject property, thereby raising a debatable question as to the validity of the assessment; in other words, the appellant plaintiff must present evidence sufficient to demonstrate that the appeal is based on sound theory and objective data.
A tax appeal may not help improve the housing recession, but may be one means of partially mitigating the effects of the recession. Such action must be taken by April 1,2009 or it will be necessary to wait until April 1, 2010.
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.