New Economic Incentives for Developers of Affordable Housing Are on the Horizon

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ALM | Law.com

April 23, 2024

By: Cameron W. MacLeodKenneth D. McPherson III

As part of the recent legislative package designed to reshape the landscape of affordable housing compliance, the New Jersey Legislature has also adopted in parallel a number of potential incentives and inducements for developers looking to produce the housing vitally necessary to solve New Jersey’s long-standing shortage of affordable housing. In Mount Laurel II, the New Jersey Supreme Court recognized that altruism alone would not lead to the construction of affordable housing in New Jersey, but that instead, “[s]atisfaction of the Mount Laurel doctrine … has to depend on affirmative inducements to make the opportunity real.” S. Burlington County NAACP v. Tp. of Mt. Laurel, 92 N.J. 158, 261 (1983). Simply creating the realistic opportunity through zoning controls alone doesn’t establish economic feasibility; market forces have and will dictate whether housing projects will ultimately be constructed, and more economic tools are necessary to create appropriate incentives to confront and combat the significant housing shortage in New Jersey. In years past, tools such as the suspension of the non-residential development fee, tax abatements, relief of water and sewer connection fees, and even municipal bonding have served to help to incentivize the development of some projects. Given the significant outstanding need in New Jersey for inclusionary and affordable housing, these actions are a clear legislative step, creating fundamental changes in how housing might be incentivized and financed through new payments in lieu of taxation, new abatements from sales and use taxes, proposals for alternative depreciation, and a collective insurance pilot program.

Benefits for Trust Fund Projects

These pieces of legislation create new potential economic benefits for projects financed through the state and municipal affordable housing trust funds. Municipalities and the state collect monies in affordable housing trust funds for the purposes of funding administration and development of low- and moderate-income housing through the assessment of the Non-Residential Development Fee Act, N.J.S.A. 40:55D-8.1 et seq., and municipalities additionally collect funds by way of residential development fees or payments in lieu of construction for inclusionary developments.

One significant change is the authorization for municipalities to negotiate and grant agreements for payments in lieu of taxation (PILOTs), where a project is funded in whole or in part by affordable trust fund monies. PILOTs are typically available only in areas of redevelopment as established by the Local Redevelopment and Housing Law, or for projects funded by low-income housing tax credits under the Housing and Mortgage Financing Agency (HMFA) statute, and would allow an abatement of tax for the improvements on a given property (and in some instances, the land as well). This legislation creates two additional scenarios in which PILOTs are now an available tool to incentivize the development of affordable housing: through grants/loans from the State Affordable Housing Trust Fund and grants/loans from municipal affordable housing trust funds. This language effectively mimics the language under the HMFA statute, with a few interesting additions.

Enacted as P.L. 2024, c. 6, this language permits a municipality to, by ordinance, grant a PILOT for the affordable component of a development being financed in whole or in part by these trust funds. This legislation establishes that developments or programs receiving assistance from either the state or municipal trust funds for constructing housing projects or programs may seek PILOTs for their affordable components, and establishes a floor of 4% of the annual gross revenue for the annual PILOT. It also provides that, after the expiry of the grant or loan that triggers the eligibility for a PILOT, the developer may continue to enjoy the PILOT throughout the period of any affordability controls, which parallels language in the HMFA statute. It is worth noting that this legislation, unlike others in the recent package of bills, is not limited to only developments of exclusively affordable housing, but instead applies “for a housing project or program,” which is defined more broadly by the Fair Housing Act to include work for the purposes of providing housing affordable to persons of low and moderate income and can include infrastructure programs that facilitate the construction of affordable housing. N.J.S.A. 52:27d-307.1 This is more expansive than the language under the existing HMFA statute, which could be of significant benefit to developers building on sites with challenging engineering needs or where utility infrastructure may be lacking. While the PILOT would apply only to the affordable units being developed or preserved by way of the development, this expansion of the potentially eligible projects could create significant benefits for affordable housing developers and those who will ultimately reside in these projects.

Sales and Use Tax Exemptions for Exclusively Affordable Developments

Housing projects located in urban enterprise zones, or those that have secured financing from the HMFA, have typically enjoyed the benefit of exemptions from the state sales and use tax requirements. P.L. 2024, c.3 seeks to put developers and contractors developing projects that are exclusively affordable—i.e., all units are restricted for occupancy only by low- and moderate-income households—in the same beneficial category and on equal footing. This would mean that receipts from the sales made to contractors for materials, supplies, or services for exclusive use in erecting, building, improving, altering, or maintaining exclusively affordable projects, regardless of whether a subsidy is provided, would now be subject to the exemptions from the sale and use tax.

Tax Depreciation Benefits for Inclusionary Projects

The package of bills also generally provides incentive for developers of inclusionary projects related to their corporate business and gross income tax exposures. P.L. 2024, c. 1 permits a taxpayer the ability to depreciate the value of certain capital expenditures based on the percentage of affordable housing within a given development over the following 10 years. The only affordable housing developments, however, to which the benefit would accrue are those (i) not receiving any subsidy intended to support the construction of affordable housing (including those subsidies described herein), (ii) including at least 20% affordable housing, and (iii) not enjoying a payment in lieu of taxation under the Long Term Tax Exemption Law. Given that the majority of affordable housing developed in New Jersey over the past years has been subsidized in some way through tax credit or other incentive, this legislation appears to be an attempt to give some benefit to strictly inclusionary developers who are developing projects with at least a 20% set-aside and no state or local subsidy.

Creating an Insurance Fund for For-Profit Affordable Developers

The final piece of the legislative puzzle proposes to establish a pilot program, for up to 20 years, to create a risk-sharing program within HMFA for exclusively affordable housing developments built by for-profit developers, except those funded through tax credit programs at the Economic Development Authority or conduit funding from HMFA. P.L. 2024, c. 4 appropriates $5 million to fund the Affordable Housing Insurance Fund in the agency, and the monies are to be used to defray costs of insuring against bodily harm and property damage claims related to the projects. It caps the assistance to the developer at $250 annually per unit and $1 million per eligible housing project as well.

Each of the foregoing pieces of legislation are focused principally on exclusively affordable development, which has been the driving factor in recent compliance rounds. As the costs of development increase for inclusionary and affordable developers alike, one wonders whether and what type of incentives may follow for inclusionary developers, or if those projects will simply need to grow in size and scope to make themselves economically feasible, to compete with the subsidies introduced by way of this legislation. As this next round of housing compliance moves forward under the new legislatively pronounced compliance process, there is no doubt that we will see how these incentives ultimately function in practice.

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Reprinted with permission from the April 23, 2024 issue of the New Jersey Law Journal. © 2024 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or reprints@alm.com or visit www.almreprints.com.