New Jersey has taken a major step forward in the tax-increment and redevelopment-project-financing world with Governor Murphy's recent approval of P.L. 2018, c. 97 (Act). The Act updated the Redevelopment Area Bond Financing Law, N.J.S.A. 40A:12A-64 et seq. (RAB Law), and the Long Term Tax Exemption Law, N.J.S.A. 40A:20-1 et seq. (LTTEL), and created the Economic Redevelopment and Growth Grant Bond Financing Act (ERGG Bond Act).

Redevelopment Area Bonds (RABs) issued pursuant to the RAB Law are typically used to fill a redevelopment project financing gap, and/or as a negotiating tool with a municipality to lower a payment in lieu of tax (PILOT) arrangement under the LTTEL. RABs are frequently, although not always, secured by all or a portion of a PILOT or a special assessment negotiated between a municipality and the affected property owners. While the full faith and credit of a municipality may be added as security to RABs as a deemed public purpose under the State Constitution, local governments tend to guard their taxing power and debt capacity closely, for obvious reasons. Therefore, RABs also afford bondholders a municipal lien should the portion of a PILOT or special assessment dedicated to the payment of RAB debt service (i.e., the pledged portion) fail to be paid timely and in full. First lien mortgage lenders are therefore incentivized to stand behind these redevelopment projects so that their interest is not primed by the municipal lien holding RAB bondholder.

Notwithstanding the above, there were still real world issues that needed to be addressed in order to make the RAB process more effective in rebuilding our urban areas. The Act addressed many of these issues.

RABs secured by PILOTs always had the hanging concern of federal bankruptcy. If the special purpose, urban renewal entity, limited liability company (URE) were to declare a Chapter 11 filing, could the 30-year financial agreement between such URE and the municipality be deemed an executory contract that could be rejected in federal bankruptcy proceedings? If so, the PILOT could be extinguished, and the RAB bondholders would have lost their primary security. Although the Act, a state law, can never be a panacea for this federal issue, the trend has been for federal law to defer to state law in the instances where the intent of the state law is clear. The Act makes clear the intent that the financial agreement, detailing the terms of the PILOT and providing security for the RAB, should survive any federal bankruptcy proceeding.

There are circumstances when it is more ideal to secure a RAB with a PILOT or with a special assessment. For example, PILOTs do not take effect until improvements are in place, usually evidenced by a temporary or final certificate of occupancy. Special assessments may be imposed at any time, as long as the property owner agrees to the benefit conferred on their property. In addition, a special assessment secured RAB is not impacted by the federal bankruptcy issue noted above. Prior to the act, special assessments were limited to the category of local assessments found in N.J.S.A. 40:56-1 et seq., which includes public roads, sidewalks, water and sewer lines and the like, thereby, limiting the use of special assessments as RAB security. With the Act, a special assessment can be imposed for any improvement undertaken in the redevelopment area, a broad spectrum under the Local Redevelopment and Housing Law, N.J.S.A. 40A:12A-1 et seq. (Redevelopment Law). For redevelopment projects faced with environmental remediation issues, this change provides a possible solution.

Redevelopment projects with significant environmental hurdles, along with multi-phase transactions, were the primary reasons underlying a particular RAB law amendment and the LTTEL amendment portion of the Act. Although PILOTs have a maximum 30-year duration from project completion, prior to the Act, a PILOT arrangement could only be locked in for 35 years from the execution of the financial agreement setting forth that PILOT agreement between the municipality and the redeveloper affiliate URE. That five-year window was found to be insufficient for environmentally challenged projects, along with multi-phase redevelopment projects.

In essence, the redevelopment projects needing PILOT and/or RAB assistance the most were effectively locked out of the process, as redevelopers would not put forth equity or seek other capital stack financing if they could not count on deals with municipalities that would last over time, and through succeeding municipal councils and planning boards. The Act changed the 35-year maximum period to 50 years for multi-phased projects, thereby allowing 20 years for multi-phase projects to be implemented, while still allowing for a 30-year PILOT arrangement. Similarly, the Act extended the maximum time period for projects where environmental remediation is to be undertaken with RAB proceeds to 35 years plus the anticipated duration of such environmental remediation, subject to the review and approval of the Local Finance Board within the Department of Community Affairs.

There are times when a municipality or redevelopment agency, as redevelopment entity under the Redevelopment Law, does not desire to be the issuers of RABs. The Act clarifies that in addition to the above mentioned entities and the State Economic Development Authority (EDA), county improvement authorities are specifically authorized to issue RABs should the municipality apply to this county agency for financing assistance. County improvement authorities are optimal conduit bond issuers for various reasons, and previously had the power to act as redevelopment entities for all purposes of the Redevelopment Law, so this clarification was a natural extension of that authority.

In providing for the ERGG Bond Act, the Act corrected a missing component in the state's tax increment financing (TIF) arsenal since the onset of economic redevelopment growth grants (ERGG) by the EDA in 2009. ERGG's capture a portion of a state and/or local taxing power revenue stream (e.g., sales tax, hotel tax, parking tax, payroll tax, etc.) that otherwise would never have existed, but for the implementation of the redevelopment project. If there is no project, the state and local municipalities receive no additional revenue, so allocating a portion of such revenue back to the project to close a financing gap makes sense. While prior law allowed for ERGGs to either be received over time or to be monetized as security for bank loans, it did not specifically allow ERGGs to be security for bonds, which bond could provide up front capital as the missing component of a capital stack for a financially challenged project (i.e., the institutional lenders were maxed out by some internal underwriting criteria, and could not lend sufficient monies to fully fund some of these projects). These concerns appear to have been addressed by the ERGG Bond Act.

Since, by definition, the ERGG bonds could be issued in addition to a max value bank loan for a redevelopment project, there needed to be additional security to entice bondholders. The ERGG Bond Act provides for same in that, like RABs, holders of these bonds are entitled to the benefit of a municipal lien if authorized by ordinance of the host municipality. Underwriters had previously thought New Jersey's TIF statute showed unfulfilled promise. While the ERGG application was broad, prior to the ERGG Bond Act, there was no mechanism to provide upfront bond capital secured by an ERGG revenue stream and a municipal lien

Incidentally, both RABs and this ERGG monetization through bonds were successfully utilized in the final chapter of the American Dream project in the Meadowlands, and likely were partially the reason underlying the state's remedy of its ERGG program through the provision of ERGG bonds for all redevelopment areas statewide. The ERGG Bond Act was modeled after the RAB Law, and therefore many of the RAB provisions (Local Finance Board approval, municipal liens) are applicable to ERGG bonds. Similarly, possible issuers of ERGG bonds mirror RAB bond issuers, and include the EDA, affected municipalities, and county improvement authorities.

Although the EDA retains the right to terminate ERGGs prior to the issuance of ERGG bonds due to any violation of the EDA agreement with the ERGG developer under applicable ERGG law, this termination may not occur once ERGG bonds have been issued, as such an action would only harm innocent ERGG bondholders.

The Act, including the creation of the ERGG Bond Act, and the updating of the RAB Law and the LTTEL, have corrected a number of issues facing practitioners in the utilization of these financing tools for financially challenged redevelopment projects. The Act was a welcome addition to the redevelopment financing bar, and will hopefully unlock these mechanisms for the most difficult projects in rebuilding the state's economically depressed areas.

Stephen B. Pearlman is a founding partner, and Adam L. Peterson and Nicole E. Charpentier are associates, at Pearlman & Miranda in Bloomfield.