In an effort to promote business growth in New Jersey, lawmakers last month created an economic redevelopment and growth grant program that includes tax increment financing and other incentives for developers.
The ERGG program is part of the state's stimulus bill, which Gov. Jon Corzine is currently reviewing and is expected to sign into law. The aim of the stimulus is to increase business activity and job growth by creating new revenue streams and implementing corporate tax breaks.
"Through the use of tax increment financing, tax credits, development fee suspensions, and dedicated economic development revenues, along with a more efficient redevelopment process, New Jersey will be able to restore its economy to economic health and create good-paying jobs for its residents; assist the private development of affordable housing; assist institutions of higher education to develop needed classrooms, laboratories, dormitory rooms, and other educational facilities; and generate revenues for necessary state and local governmental services," according to the legislation, A. 4048.
The ERGG program focuses on new or additional tax revenue that would be realized from new business and residential projects in areas seeking redevelopment or rehabilitation. While New Jersey already has a TIF program, called revenue allocation district, or RAD, financing, many say that law is cumbersome and few projects have actually used RAD bonds.
Instead, ERGG aims to increase the use of tax increment financing by allowing municipalities and developers to tap into future state tax revenues such as corporate income receipts, public utility revenue, sales tax receipts, and others. In addition, local tax revenue would be utilized, including property taxes, payroll receipts, parking taxes, lease payments, and other incremental revenue streams.
"The old RAD law was strictly a local form of assistance, so you could only get what you locally could have collected, and since so many of the taxes in New Jersey are collected at the state level, they just weren't available for pledging," said Thomas Hastie, attorney at McManimon & Scotland LLC, a bond counsel firm that has worked on RAD financings. "And clearly under this bill, it would be a two-tiered approval process between the state and the locals. But a lot of state revenues specific to that project would be available to pledging, which can really make a lot of projects more viable."
The ERGG plan would also expand the areas that would be available for tax increment financing. Before, only localities designated as blighted areas could use RAD bonds, while under the ERGG program, regions deemed as metropolitan planning areas and suburban planning areas - affecting mostly northeastern New Jersey and the greater Camden area in southeastern part of the state, along with transit villages and former military bases - would qualify for ERGG awards and borrowing.
The new program allows local governments and the New Jersey Economic Development Authority to extend grants to developers if the project is determined to be a redevelopment or rehabilitation of an area and will bring in new or additional revenue for the community.
In addition, proponents of the bill said the purpose of the program is to support projects that would not occur without such financing. Local agreements will be reviewed and approved by the municipality and the state's Local Finance Board, a division within the Department of Community Affairs, while contracts between developers and the state will be subject to NJEDA approval as well as the local government.
The developer may receive up to 75% of incremental revenues for up to 20 years as reimbursement for project costs, with the state or municipality retaining the remaining 25%. Contracts would not exceed 20 years and the total amount of reimbursement would not surpass 20% of the development's total cost, according to the bill.
Supporters of the ERGG program believe these grants could help ease the current credit crunch and help developers and businesses acquire loans through private banks to finance infrastructure and construction costs before new tax revenue begins to flow from the project.
"My understanding is this is kind of similar to the way the market developed in Minneapolis and in Chicago where the local governments made the TIF revenues available kind of on the back end," Hastie said. "And once the lending community got comfortable with a worthwhile project, they could count it as either a developer's equity or they could extend a construction piece and use that in qualifying it.
"It helped on pro formas, it helped on financial review by lending institutions," he added. "And I think one of our big challenges is now, collectively [between] municipal governments and the development community, is to get the banking community involved and comfortable with this."
Municipalities and the NJEDA would also be able to leverage the incremental revenue streams, though the grant program may provide faster capital than bonding against future tax receipts. One challenge with securitizing a revenue stream is that bondholders tend to prefer that the new or incremental revenue has a performance history. That forces municipalities and developers to wait longer for needed capital, unless there is an interim financing option.
"[TIF] deals are tough to do," said John Scally, an attorney at Drinker Biddle & Reath LLP. "They're difficult deals, they are time-consuming, and they have a lot of moving parts. Now that being said, the concepts are good, but to date there have not been very many."
A former Navy base in Bayonne called the Peninsula at Bayonne Harbor is moving forward with RAD financing, and earlier this year a portion of the development received initial RAD approval from the Local Finance Board. Chris Patella, executive director for the Bayonne Local Redevelopment Authority, said with proper research and professional assistance, TIF districts are an option for municipalities, even with their complexities.
"The complicated aspects of it are not insurmountable," Patella said. "If you get the right professionals in and if you have a municipal council that is knowledgeable enough, you can move on it."
Newark and Jersey City are two areas that are eager to utilize the new ERGG program. Officials from both cities were present at a public hearing last month on the stimulus bill in support of the initiative.
"Places like Jersey City and Newark, because they are larger cities with infrastructure and mass transit, have the desire and focus to really take advantage of different government programs that are available and different incentives that are available, said Jennifer Credidio, attorney at McManimon & Scotland. "They really have the ability to dedicate staff and resources to working through projects and to help get them going. I think they are uniquely positioned to take advantage of this bill, but I think it's something that pretty much all municipalities can deem some sort of benefit from."
New Jersey Policy Perspective, a nonprofit think tank that researches state issues, has been critical of the ERGG program. In particular, it questions dedicating up to 75% of incremental revenue to developers when new development could generate an increase demand for public service needs.
NJPP believes this could prompt higher property taxes for residents to help offset additional sanitation, policing, and public-school needs, according to Naomi Mueller Bressler, a policy analyst for the group. In addition, it would like to see job standard requirements in the program.
The Department of Community Affairs said it will work with local governments to minimize risk and ensure that ERGG developments generate appropriate revenues for communities.
"If the governor signs the bill into law, we would work to implement any changes set forth in the legislation regarding tax increment financing," the department said via e-mail. "At the same time, we would carefully review any situation where municipalities might use the proposed new financing tools to make sure such tools were necessary for the development; would not cost the municipality more than the development or the jobs and revenue the development generates; and would not threaten the fiscal stability of the municipality."