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Perhaps the most commonly sought after form of financial assistance in a redevelopment project is property tax abatements or exemptions. The subject of tax abatement or exemption is sure to engender lively discussion in any public meeting, most of which is not likely to be very supportive. Part of the problem is that the term "abatement" suggests that the property tax is being reduced and the term "exemption" connotes that the property tax does not have to be paid at all. Describing the tool as a property tax "incentive" is a more accurate way to describe the role it plays in the redevelopment process.
Long Term Tax Abatement/Exemption
Long-term tax incentives are actually an exemption of the value of the improvements (redevelopment) of a property for a period of time negotiated in a tax agreement between the redeveloper and the municipality (note: NOT the redevelopment entity). This time period can extend to a maximum of 30 years from the issuance of a Certificate of Occupancy or 35 years from the date that the tax agreement is executed. The property taxes on the land remain, and a service charge, also known as a Payment-In-Lieu-Of-Taxes (PILOT) is paid to the municipality that cannot be less than the total taxes paid on the property prior to the construction of the improvements. The municipality will never receive less on the property than it did prior to the redevelopment project. It will receive less total revenue than it would if it taxed the new improvements at full value, but will receive a significant service charge (PILOT) from the project that it will not have to apportion to the county, school district, fire districts, etc., the way it would revenue from property taxes.
The Long Term Tax Exemption Law (P.L. 91, c.431), replaced the Urban Renewal Corporation and Association Law of 1961, P.L.1961, c. 40 (C. 40:55C-40 et seq.). The new law provides a formula for negotiating the service charge of a redevelopment project. Other than projects providing housing for income-restricted households, the service charge can be negotiated as a "floor" (not less than) of either 2% of total project costs (construction, permits, fees, etc.) or 15% of gross annual revenues (defined in the statute). For income-restricted housing projects, the "floor" becomes a "ceiling" (not more than), and the service charge can be negotiated down to zero.
Short Term Tax Abatement/Exemption
The Short Term Tax Abatement/Exemption is a much different tool than the Long Term Abatement/Exemption. It is intended primarily for substantial rehabilitation projects in either Rehabilitation Areas or Redevelopment Areas, although it may also be used for new construction. The maximum term of the abatement is only five years, but it is far simpler to implement, once a municipality has adopted the required ordinances as set forth in the statute. The short-term exemption has the advantage of being available to all existing property owners within a designated Rehabilitation or Redevelopment Area, including single family homeowners who might have been deferring the expense of a new roof or heating system out of concern for the increase in property taxes resulting from the home improvement.
The municipal ordinance that establishes the short-term tax abatement must deal with three types of land uses. Single and two-family homes are in one category, multifamily residential uses are in the second and commercial land uses are in the third. Multifamily and commercial projects are accomplished through tax abatement/exemption agreements between the property owner and the municipality, while single and two-family abatement/exemptions are accomplished simply by resolution of the governing body.