Tax Exemption and Abatement Laws of New Jersey

PL1991, c.431 with final amendments retroactive to August 5, 1992 consolidated, into one more flexible law, the various long-standing tax exemption laws under which municipalities may agree with private entities to undertake redevelopment projects in exchange for tax exemptions.

PL1991, c.441, effective for the first full tax year beginning after enactment January 18, 1992, consolidated the various five-year tax credit and exemption laws into one more standardized law to govern all tax credits and exemptions, regardless of structure type.

Long Term Tax Exemption Act

Prior to 1993, the first full year of long-term implementation of the new tax exemption law, under the provisions of NJSA40:55C-40, the Urban Renewal Corporation and Association Law of 1961, commonly known as the Fox-Lance Act, may a qualified municipality (a municipality with “areas in need of restoration”) reduce taxes on newly built industrial, commercial, cultural or residential projects of a company with profits beyond the limited 15 to 20 years. profits returned to the municipality, or from 30 to 35 years for condominium projects. Condominium projects were given 30 to 35 years to provide a realistic period of permanent financing. Also, prior to 1993, under the provisions of NJSA55:16-1 et seq., the “Limited-Dividend Nonprofit Housing Corporation or Association Law,” a qualified municipality could reduce taxes on newly built housing for up to 50 years. Further, under NJSA55:14I-1 et seq., a qualified municipality could reduce taxes on newly built senior housing for up to 50 years. Finally, prior to 1993, under the provisions of NJSA40:55C-77, the “Urban Renewal Nonprofit Corporation Law of 1965”, essentially the same types of properties and projects as the Fox-Lance Act could be reduced with all profits for 20 to 25 years are returned to the municipality. In all cases, property tax exemptions in lieu of tax payments were required under these exemption laws.

As of 1993, the provisions of NJSA40A:20-1 et seq. allowed a qualified municipality to reduce property and project taxes in the same manner as the pre-1993 law, with the following notable exceptions:

A new flexible tax revenue formula was introduced with a gradual introduction of payments instead of taxes, both under the percentage of gross rent formula and under the percentage of total project cost formula.

The formulas for calculating payment instead of taxes for both office projects and residential projects have changed. Minimum annual service charges for office buildings were reduced from 15 to 10 percent of the project’s annual gross revenue or units. Municipalities retained the option to charge tax at as much as 2 percent of the total project cost or the total cost of project units. For housing projects, the annual service costs have changed from a minimum of 15 percent to a maximum of 15 percent of the annual gross proceeds of the project or from a minimum of 2 percent to a maximum of 2 percent of the total project costs or total project unit costs.

For all other types of industrial, commercial or cultural projects, the tax payment formula remains essentially unchanged.

Five-year Exemption and Reduction Act

Prior to 1993, the first full year that the new five-year exemption and abatement law was in effect, there were three types of property to which a qualified municipality (one with “areas in need of restoration”) granted a partial exemption and reduction for a period of time of five years.

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These types of real estate include:

Homeowner improvements (including additions and extensions) to one- and two-unit residential homes that were more than 20 years old. As provided by the ordinance, the first $4,000, $10,000, or $15,000 in capital appreciation from improvement of each unit may be exempt from tax (see NJSA 54:4-3.72 to 3.79).

Commercial and industrial improvements and construction projects (with less than a 30% increase in construction volume) can have the full appraised value of the improvement exempt from payments in lieu of taxes at 2% of the project cost or 15% of annual gross revenue or a phased rather than tax payment. (see NJSA 54:4-3.94 to 3.112).

Multiple home improvements or conversion of other types of construction into multiple homes may be exempt up to 30% of the full value of the improvement or conversion change. No in lieu of tax payment was required (see NJSA 54:4-3.121 to 3.129).

As of 1993, the provisions of NJSA 40A: 21-1 et seq., the “Five-Year Exemption and Abatement Law,” which consolidated all provisions of the preceding five-year reduction statutes, allowed a qualified municipality to grant partial exemptions and reductions to residential dwellings, non-residential structures and multiple dwellings in the same manner as the pre-1993 law, with the following notable exceptions to the new law:

A new, unified definition of “areas in need of restoration” was created to cover all exemptions and reductions that, if chosen, could allow an entire municipality to be designated as an area in need of restoration (allowing new structures are made possible to facilitate infill constructions).

The new five-year law also allowed tax cuts and exemptions for the first time for new construction of single- and multi-family homes and non-residential structures rather than just improvements or expansions of such properties.

The new law also increased the allowable maximum value added tax exemptions with improvements from $4,000, $10,000, and $15,000, respectively, to $5,000, $15,000, and $25,000, as the city ordinance may specify.