When Is an Affordable Housing Development Fee Not Really a Development Fee?


New Jersey Law Journal

October 22, 2018

Not all affordable housing development fees are actually “development” fees. Instead, in MEPT Journal Square Urban Renewal v. City of Jersey City, ___ N.J. Super. ___ (Docket No. A-2281-16T4, App. Div., Aug. 9, 2018), the Appellate Division drew a bright-line distinction between development fees assessed and negotiated as part of a payment-in-lieu-of-taxes agreement, and those that typically would be assessed as a development fee on the prospective development. This article summarizes the Appellate Division’s holding establishing this clear distinction and briefly looks at the impacts this decision could have on both the assessment of development fees and the negotiation of financial agreements going forward.

Summary of the Litigation

This litigation arises out of efforts to develop certain properties located in Journal Square in Jersey City. At the time, the three plaintiff urban renewal entities (“the MEPT entities”) proposed two towers totaling approximately 1,615 residential units and approximately 280,395 square feet of gross commercial space. The MEPT entities entered into financial agreements with the City of Jersey City in May 2009, each of which contained the specific terms and conditions of tax abatements for the particular projects. MEPT, ___ N.J. Super. at 12. These financial agreements supplemented the tax abatements granted by the City by ordinance and were granted consistent with the Long Term Tax Exemption Law, N.J.S.A. 40:20A-1 et seq. Each agreement contained language that levied certain fees as affordable housing contributions and also required the prepayment of a portion of the annual service charges. The affordable housing fees were due in four installments, with the first due “on or before the execution of the exemption Financial Agreement, but not later than 60 days after the adoption of the Ordinance approving this tax exemption,” and the remaining installments tied to milestones in the construction of the development. Id. at 12. All the contributions were considered material conditions of the financial agreements, and, upon passage of the Ordinance approving the tax exemptions, the MEPT entities paid $2 million as a prepayment of its annual service charges and $710,769 as the first installment of the affordable housing fee under the financial agreements. Id. at 14. After approximately five years, the MEPT entities sold the undeveloped property to other, unrelated redevelopers and urban renewal entities, and the financial agreements were not assigned. Id. at 18.

The MEPT entities commenced an action against the City, seeking relief requiring the City to refund both the prepayment of annual service charges and the initial contributions to the City’s affordable housing trust fund. The trial court found that the prepayment of annual service charges was unlawful under the Long Term Tax Exemption Law, and the affordable housing contributions were not permitted under the Fair Housing Act, N.J.S.A. 52:27D-301 et seq. MEPT, ___ N.J. Super. at 4. The trial court held that the “‘fairness and reasonableness of imposing an AHTF contribution fund payment on [the MEPT entities] evaporated when [the MEPT entities] no longer possessed, enjoyed, or consumed the land.’” Id. at 4-5.

On appeal, the Appellate Division affirmed the trial court in part and reversed in part. In an opinion written by Presiding Judge Fuentes, the panel held that certain negotiated prepayments of the annual service charges under the financial agreements were indeed unlawful and agreed with the trial court that the City had exceeded its statutory authority in requiring the prepayment of the annual service charges as a condition of granting the tax abatements. MEPT, ___ N.J. Super. at 8. However, in reviewing the affordable housing contributions, the panel reversed the trial court, holding that the negotiated payment schedule was permissible under the terms of the Local Housing and Redevelopment Law and should not have been analyzed as a development fee under the Fair Housing Act. Id.

In 2003, the Legislature amended the Local Housing and Redevelopment Law to provide that municipalities “may, by ordinance, require, as a condition for granting a tax abatement, that the developer set aside affordable residential units or contribute to an affordable housing trust fund established by the municipality.” N.J.S.A. 40A:12A-4.1. As part of such an ordinance, the municipality would be required to lay out standards for the extent of the contribution “based on the value of construction for market rate residential or non-residential construction,” a schedule of the payments “based upon phase of construction,” and parameters governing the use and allocation of those funds. N.J.S.A. 40A:12A-4.2. In this case, the MEPT entities and the City had agreed that the fees would be $1,500 per market rate unit and $1.50 per square foot of commercial construction, consistent with the statutory maximums. Id. These provisions both predate the 2008 amendments to the Fair Housing Act and the Statewide Non-Residential Development Fee Act, which amendments created the statewide non-residential development fee and established the statutory standards for collection and expenditure of affordable housing development fees. See N.J.S.A. 40:55D-8.1 et seq.; see also N.J.S.A. 52:27D-329.2.

The panel reviewed the language of the 2003 amendments to the Local Redevelopment and Housing Law and found that the MEPT entities were contractually obligated to pay the affordable housing fees, and that the fees assessed against the MEPT entities were appropriate under the terms of N.J.S.A. 40A:12A-4.1. MEPT, ___ N.J. Super. at 26. The panel reviewed the enabling ordinances granting the tax abatements and found that the language thereof was also consistent with the statutory terms. Id. Even though the MEPT entities never developed the project, the panel viewed the affordable housing development fees assessed by the financial agreements as part of a permissible contract between the City and the redeveloper and allowed the City to keep the $710,769. Where the trial court had analyzed whether retaining the payment was authorized under the 2008 amendments to the Fair Housing Act and the standards of Holmdel Builder’s Association v. Holmdel, 121 N.J. 550 (1990), the panel reviewed these under a strict contract framework. This approach differentiated clearly between the fees as assessed under the Local Redevelopment and Housing Law under N.J.S.A. 40A:12A-4.1 and those assessed under the Fair Housing Act or the Statewide Non-Residential Development Fee Act.

Contractual Development Fees versus Traditional Development Fees

Implicit in the opinion is the clear distinction between traditional development impact fees and the negotiated development fees. Negotiated development fees are designed as an incentive to grant a tax abatement under the Local Redevelopment and Housing Law and should be viewed through a strict contractual lens, as opposed to an impact fee assessed against developers to fuel future development of affordable housing under the Fair Housing Act. The two fees, while both considered “affordable housing development fees,” have very different objectives and purposes in the broader statutory scheme.

By way of this ruling, the panel clarified and made express a bright-line distinction. The interplay between the Local Redevelopment and Housing Law provisions and the 2008 amendments to the Fair Housing Act was not clear before this decision, and this decision drew a clear line in the sand. However, the decision also may have opened the door to other fundamental questions regarding negotiated development fees versus the traditional impact fees.

For instance, it appears that these fees would not be creditable against future affordable housing development fees assessed against the project, because they are designed to incentivize the tax abatement, rather than serve as an impact fee against the market-rate residential or non-residential construction. Furthermore, it remains unclear whether the fees collected by the negotiated development fees could be used for broader purposes than those identified under the Fair Housing Act, even though the monies are being deposited in the same trust fund.

From a practical perspective, developers should be wary of a negotiated development fee payable prior to the commencement of construction to avoid the very issues suffered by the MEPT entities here. The statute, N.J.S.A. 40A:12A-4.2, expressly provides that the payments should be based on phase of construction, and this decision seems to expand the phases of construction to include pre-construction and negotiation of the financial agreement. This decision may also encourage developers of residential developments seeking tax abatements to provide affordable housing units in the development as a set-aside, instead of paying a development fee to accommodate the incentive for the municipality to provide the tax abatement, where that fee is non-refundable if the development is never constructed.

Reprinted with permission from the October 22, 2018 issue of the New Jersey Law Journal. © 2018 ALM Media Properties, LLC. 
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