”Ironically, among the long-term consequences of flattening will be the end of suburban sprawl and the dramatic growth of dense urban infill, including high rise habitat. Deja-vu! It has been a half century since property developers have had such an instrumental role to play in reshaping the future of America’s cities and towns.” — Overheard at NAIOP’s CEO Retreat in Scottsdale, Arizona

On May 6, 2008, the Council on Affordable Housing (“COAH”) adopted the substantive and procedural regulations it proposed on January 22, 2008. However, COAH acknowledges that there are flaws with these regulations, so COAH also proposed amendments. The proposed amendments will be published in the June 16, 2008 New Jersey Register and comments can be submitted to COAH by August 15, 2008.

The proposed amendments will change the incentives to be offered to residential and non-residential developers in exchange for developing affordable housing units. A summary of the significant changes in the proposed amendments can be found on COAH’s website, https://www.nj.gov/dca/coah/june08rules.shtml#597.

Very briefly, the proposed new rules establish presumptive densities and minimum setasides, so that, for example, projects in Planning Area One have a minimum presumptive density of 8 du/acre with a maximum of a 25% setaside; Planning Area Two projects have a presumptive density of 6 du/acre with a 25% setaside, and defined urban centers, such as Newark and New Brunswick, have a 22 du/acre density with a 20% setaside. There are many other changes, designed partly to accommodate the fact that the earlier allocations to municipalities were not sensitive to environmental and other issues, causing too much allocation to, for example, the Highlands areas, which mean that more growth will be directed to Planning Areas One, Two and designated centers.

“If you go in and pay a million dollars, and next door someone pays me a million cents, you’re not happy. I’m not a politician, so I can say it: It hurts the rest of the job. For me to build essentially 15 to 20 percent of the job and give it away, that ruins the economics of it.” — Donald Trump, Bergen Record, March 14, 2008

By Robert Axel Kasuba, Associate, Sills Cummis & Gross P.C.

The New Jersey Council on Affordable Housing (“COAH”) published regulations in January 2008, which, if adopted, will likely effectively shut down real estate development in New Jersey. While the financial impact of the regulations is difficult to quantify, it has been estimated that these regulations effectively impose an $18.5 billion tax on new real estate development to be payable over the next ten years to provide for the development of 115,666 new affordable housing units by 2018.

Municipalities may impose this tax by requiring developers to build affordable housing units onsite or to make a financial contribution to be used by the municipality for affordable housing purposes. Municipalities may impose these affordable housing contributions on both residential and non-residential development. The regulations only offer vague assurances that developers will be offered some incentive to make these affordable housing contributions. However, there is no guarantee that the incentive will come close to offsetting the amount of the affordable housing contribution to be made by the developer.

These proposed regulations are COAH’s response to a court decision decided in January 2007, which invalidated many of COAH’s previous regulations and gave COAH time to develop new regulations. The current court-imposed deadline for COAH to adopt new regulations is June 2, 2008. That litigation was just another round in New Jersey’s long history of wrestling with municipal exclusionary zoning practices. No one disputes that COAH has an important mission in promoting the development of affordable housing, but these regulations cannot be the answer, because the affordable housing contributions to be imposed on the development community are simply too high and the effective result will be to shut down almost all development in the State, including the affordable housing sought to be promoted by the regulations.

The regulations will likely require almost all developers to make an affordable housing contribution, which will be the result of a formula. For every four new market rate units, there will be an obligation to develop one affordable housing unit, i.e. a 4:1 ratio. There will be an obligation to develop one affordable housing unit for every 16 jobs generated by non-residential development, i.e. a 16:1 ratio, and, according to the regulations, this means that every 5,714 square feet of office space, 9,412 square feet of retail space, 10,667 square feet of warehouse space and every 13,333 square feet of factory space will generate an obligation to provide for 1 affordable residential unit.

A municipality may require any developer to build these affordable housing units onsite, even commercial or industrial developments, or, at the municipality’s option, the affordable units may be built offsite within the municipality. In lieu of constructing the affordable housing onsite, the municipality may permit the developer to make a payment, known as a payment-in-lieu, to the municipality. The amount of the payment-in-lieu depends on where the development is located in the State and ranges from approximately $146,000 to $183,000 per affordable unit.

The incentives COAH offers are woefully insufficient and will not come close to compensating the development community with the cost of making the affordable housing contribution. COAH will generally accept an incentive of an additional 1 market rate unit for every affordable housing unit built onsite. This means that the construction of 5 market rate units will subsidize the cost of providing one affordable housing unit onsite. If a payment-in-lieu is chosen by the municipality, the municipality will likely be required to offer an incentive of an additional 0.5 market rate units for every affordable unit to be built somewhere else in the municipality. This means that 4.5 market rate units will subsidize the development of each affordable unit, which results in a subsidy of $32,423 to $40,635 per market rate unit. These contributions make most residential development unprofitable according to the developers I have spoken with.

Likewise, the contributions to be imposed on non-residential development make them unprofitable according to every non-residential developer I have spoken with. In theory, a municipality may offer an increase in floor area ratio (FAR) to provide an incentive to a non-residential developer, but there are no standards setting forth how much of an increase will be required. Without any increase in FAR, the amount of a payment-in-lieu contribution for non-residential development is between $25.53 to $32.00 per square foot of office space, $15.50 to $19.43 per square foot of retail space, $13.68 to $17.14 per square foot of warehouse space, and $10.94 to $13.71 per square foot of factory space.

COAH needs to understand that the development industry cannot withstand these affordable housing contributions, and, if these contributions are imposed, most real estate development in the State will stop. As a result, these regulations will hurt New Jersey’s ability to attract new businesses to relocate to New Jersey and to retain existing businesses seeking to expand their operations. As a result, few, if any, jobs will be generated and the State’s economy will suffer. This clearly was not the result envisioned by the judiciary when it interpreted the New Jersey Constitution as requiring each and every municipality to create a realistic opportunity to provide its fair share of affordable housing in the Mount Laurel II decision in 1983 or by the State Legislature when it enacted the Fair Housing Act in 1985 and created COAH.

The federal civil False Claims Act (“FCA”) has been the federal government’s favorite weapon to enforce its antifraud initiatives, particularly in the healthcare industry. New Jersey has now joined twenty other states and the District of Columbia in enacting its own version of the federal law to target alleged fraud by companies that do business with the State. On January 13, 2008, Governor Jon S. Corzine signed the New Jersey False Claims Act (“NJFCA”), which takes effect sixty days later, on March 13, 2008.

The federal act was enacted at the initiative of President Lincoln to encourage citizens to come forward with information about defense contract fraud by authorizing suit in the name of the government and providing a portion of the recovery as a reward. It became known as the qui tam statute based on the Latin phrase for “Who sues on behalf of the king as well as himself.” The FCA provides for treble damages plus civil penalties for making false claims on federally funded programs. The qui tam provisions allow the private citizen who brings the suit, called the “relator,” to receive up to 30% of the recovery.

The federal Deficit Reduction Act of 2005 contained financial incentives for states to enact anti-fraud legislation modeled after the federal statute. Any state with a law patterned sufficiently after the federal act and applicable to Medicaid claims would be entitled to an extra 10% share of recoveries on Medicaid claims. The New Jersey statute, however, like many of those passed in other states, is not limited to Medicaid claims, and will apply to virtually all types of companies that engage in business, directly or indirectly, with the State.

The NJFCA applies to:

• Knowingly presenting, or causing to be presented, a false or fraudulent claim for payment or approval to an employee, officer or agent of the State, or to any contractor, grantee, or other recipient of State funds;

• Knowingly making, using, or causing to be made or used, a false record or statement to get a false or
fraudulent claim paid or approved by the State;

• Conspiring to defraud the State by getting a false or fraudulent claim allowed or paid by the State;

• Knowingly making, using, or causing to be made or used, a false record or statement to conceal, avoid, or decrease an obligation to pay or transmit money or property to the State;

• Having possession, custody, or control of public property or money used or to be used by the State and knowingly delivering or causing to be delivered less property than the amount for which the person receives a certificate or receipt;

•Being authorized to make or deliver a document certifying receipt of property used or to be used by the State and, intending to defraud the entity, making or delivering a receipt without completely knowing that the information on the receipt is true; or

•Knowingly buying, or receiving as a pledge of an obligation or debt, public property from any person who lawfully may not sell or pledge the property.

The “State” is defined to include all agencies and independent authorities of the State government. Though county and municipal government entities are not within the definition, a false claim on a local project could be covered if the claim is submitted to a “contractor, grantee, or other recipient of State funds.”

For more information on this topic please read Mark S. Olinsky’s recent article “Defending Qui Tam Suits Under New Jersey’s New False Claims Act” which was published in the March 2008 edition of The Metropolitan Corporate Counsel.

On Thursday, January 24 the Senate Community and Urban Affairs Committee is scheduled to consider S-159 sponsored by Senator Diane Allen. This legislation (attached) would require the “Main Street New Jersey” program after the effective date of the bill, to be administered by the New Jersey Housing and Mortgage Finance Agency (HMFA) in conjunction with its “At Home Downtown” through an interdepartmental agreement with the Department of Community Affairs. The bill would also make “At Home Downtown” a statutory program. The purpose of the “Main Street New Jersey” program is to provide small business assistance services to local downtown communities, including business owners and entrepreneurs, with a long term goal of revitalizing local downtown areas. The “At Home Downtown” program provides below market-rate mortgage funds to acquire, rehabilitate, refinance and construct residential structures with a storefront component, thereby reviving the mercantile and housing potential of main street and commercial areas of the State.

On December 17, Senate President Dick Codey introduced S-3043 https://www.njbia.org/pdf/f080083.pdf , legislation providing a 100 percent capital investment corporate, insurance or gross income tax credit for certain businesses locating with one-half mile of a train station in select cities. Businesses must invest a minimum of $75 million in new construction, rehab, fit-up or equipment costs. In addition, businesses must employ at least 250 employees at the site, at least 200 of which jobs must be new. Eligible cities include Newark, Paterson, Jersey City, New Brunswick, Trenton, Camden, Elizabeth and East Orange.

The New Jersey Council on Affordable Housing released the long-awaited response to the Appellate Division’s January 25, 2007 ruling striking down the prior ” Third Round” rules, which governed the production and administration of affordable housing. The Appellate Division was concerned with a number of issues, including the amount of affordable housing which needed to be produced, the very great municipal discretion permitted under the prior rules, and the ability of local governments to have up to half of the affordable housing units as “age-restricted”.

The new ” Third Round” rules make a number of significant changes, including:
* The ” Round” now goes from 1999 to 2018.
* The ” need” goes from 52,000 units statewide to 115,000 units.
* Regional Contribution costs go from $35,000 up to a range from $67,000 to $80,000, depending on COAH region.
A number of changes to municipal discretion:
a. No more than 25% of the units may be age-restricted
b. Payments to an affordable housing trust fund in lieu of construction are regulated, by region, and range from $145, 903 to $182, 859.
c. Tightening of the rules granting credits to municipalities for prior efforts.

In addition, the Council on Affordable Housing retains the ” growth share” concept, but now requires one affordable housing unit for each five market rate housing units built in a community ( rather than the one for nine in the prior round) and one affordable housing unit for each 16 jobs created in the community, rather than than one affordable unit per 25 job.

For further information, please contact Thomas J. Hall or Robert Kasuba.

Earlier today, the Appellate Division released its decision in Oceanport Holding, L.L.C. v. Borough of Oceanport, et al., docket no. A-6127-05T3. The issue on appeal was whether the trial court properly granted summary judgment to the municipality on the grounds that the plaintiff-developer did not engage in sufficient negotiations before filing the Mount Laurel litigation and seeking a builder’s remedy. The trial court granted summary judgment and dismissed the entire lawsuit before determining whether the municipality complied with its affordable housing obligations.

The Appellate Division reversed and remanded to the trial court. While on the surface the Appellate Division ruled in favor of the plaintiff-developer, the Oceanport decision restricts a plaintiff-developer’s entitlement to a builder’s remedy by breathing life into the once-thought dead requirement that a plaintiff-developer must engage in pre-suit negotiations in order to obtain a builder’s remedy. As stated on page 10 of the decision, “the requirement set forth in Mount Laurel II that a plaintiff-developer must attempt to obtain relief without litigation is relevant only to a developer’s entitlement to a builder’s remedy.”

The Oceanport decision makes clear that Mount Laurel litigation is to be divided into two phases. In the first phase, the trial court determines whether the municipality has complied with its affordable housing obligations. If the municipality has not complied, the municipality has a period of time to revise its land use regulations and bring itself into compliance. In the second phase, the trial court assesses whether the municipality’s revised regulations comply with the Mount Laurel doctrine and determines whether the plaintiff-developer is entitled to a builder’s remedy.

In Oceanport, the Appellate Division determined that the trial court erred in dismissing the entire Mount Laurel litigation early in the proceedings. Instead, the trial court should have first determined whether the municipality complied with its affordable housing obligations. If the municipality did not, the trial court could then decide whether the plaintiff-developer engaged in sufficient pre-suit negotiations while assessing the merits of a builder’s remedy during the remedial phase.

In Oceanport, the Appellate Division does not reference the numerous unpublished trial court decisions, which determined that pre-suit negotiations are no longer required due to the adoption of the Fair Housing Act, N.J.S.A. 52:27D-301, et seq., in 1985. Those decisions generally reasoned that the FHA creates an administrative procedure for municipalities to voluntarily address their affordable housing obligations and obtain substantive certification, which provides protection from Mount Laurel litigation. Therefore, those municipalities that want to address their affordable housing obligations have a means to do so and avoid Mount Laurel litigation.

In the Oceanport decision, the Appellate Division does not offer any insights as to what a plaintiff-developer must do to satisfy the pre-suit negotiation requirement.