Real Property & Environmental Law Alert : New Jersey, New York, Pennsylvania & Delaware Lawyers & Attorneys for Real Estate Development & Environmental Law

Of the pre-closing due diligence triad, the property investigation almost always covers the most ground. While representations and warranties will help you spot and clarify issues during the negotiation of the Agreement of Sale, and title review will identify and locate recorded encumbrances, the property investigation is where the Buyer gets its hands dirty.

At a recent presentation with co-panelists Michael Moyer of Land Services USA, Inc. and Aileen Schwartz of Hill International, entitled “Real Estate For In-House Counsel: An Examination of Title Issues, Contracts and Negotiations in Real Estate Deals” at the Association of Corporate Counsel (Delaware Valley Chapter)’s 2nd Annual In-House Counsel Conference in Philadelphia, Pennsylvania, I discussed many of the areas a Buyer can explore in evaluating the property.

The scope of a property investigation is transaction-specific and can have many components, including feasibility review, environmental review, zoning review, and structural review.

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A standing-room only audience of more than 500 business owners, senior executives and industry representatives throughout the state attended a conference on August 19, sponsored by Gibbons P.C. and EisnerAmper LLP - Solar Energy for New Jersey Businesses, Developing & Financing Your Own On-Site Solar Facility - at the Woodbridge Hilton in Iselin, NJ.

The program (as covered by NJBIZ) featured elected officials, state representatives, and industry executives, who discussed the state of solar energy projects for business and other organizations in New Jersey - the second most active state for solar power installations and the seventh for venture capital investments in clean energy projects.

Speaking about real estate and development considerations affecting solar facility design and installation, Douglas Janacek, Co-Chair of the Gibbons Real Property & Environmental Department, emphasized the widespread desire of stakeholders to see construction of alternative energy facilities. In New Jersey, Mr. Janacek noted that there are a myriad of opportunities to locate solar facilities not just on new sites, but also existing, developed sites of all types and sizes.

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The compliance deadline for EPA’s 2008 lead paint rule, requiring contractors engaged in renovations of pre-1978 residences, schools and childcare facilities to be certified by April 22, 2010 was extended in June of this year in response to industry and congressional outcry. The reprieve was not sufficient for everyone. On July 8, the National Association of Home Builders, joined by other industry groups, filed suit against EPA seeking review of the final rule. In particular, they challenged EPA’s removal of the opt-out provision from the final rule.

As originally drafted, the rule provided for opting out of the lead paint rules for homes where there were no children under the age of 6 years. In the final version, the opt-out provision has been removed. According to NAHB Chairman Bob Jones,

About 79 million homes are affected, even though EPA estimates that only 38 million homes contain lead-based paint. Removing the opt-out provision extends the rule to consumers who need no protection.

The additional requirements for lead safety add an average of $2,400 to a project. Apparently EPA changed the rule without any new scientific data indicating a need. In a tight economy, it seems counterproductive to increase the cost of renovations without a clear benefit.

Susanne Peticolas is a Director in the Gibbons Real Property & Environmental Department.

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In the most recent case decided in New Jersey on the issue of the adequacy of a land use public notice, the court continued the trend of requiring applicants on development applications to put as much information in their notices as possible to make the general public aware of the nature of the matter under consideration. In Neshanic Coalition for Historic Preservation v. Hillsborough Township Planning Board, Judge Buchsbaum ruled that the applicant’s public notice failed to meet the statutory requirement of setting forth the “nature of the matters to be considered” under the New Jersey Municipal Land Use Law because it omitted the fact that the building to be demolished was located in an historic district.

The court made this ruling despite the fact that the notice had properly identified:

• the size and location of the property,
• the dimensional variances being applied for, and
• the need for a stream corridor waiver.

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It has been almost two decades since the last edition of the State Environmental Quality Review Act (SEQR) Handbook was released by the New York State Department of Environmental Conservation’s (NYSDEC) Division of Environmental Permits. Despite significant amendments to the SEQR regulations, 6 NYCRR Part 617 in January 1996 and tens of hundreds of cases of distinction on SEQR substance and procedure, many land use and environmental practitioners have been left to fend for themselves without up-to-date technical regulatory guidance from NYSDEC until now.

For those who are unfamiliar with the SEQR Handbook, it is a practical reference guide for agencies, project sponsors and the public with respect to the procedures prescribed by the State Environmental Quality Review Act. It has a user-friendly table of contents and each topic in the handbook is addressed through question and answer format. The questions range from basic information such as “What is the Environmental Notice Bulletin (ENB)?” to “How should a generic environmental impact statement (EIS) address required content differently than a site or project specific EIS?” In addition, the handbook provides a roadmap of the Part 617 SEQR Regulations before and after the 1996 Amendments and several helpful charts including one which shows all of the relevant steps in the SEQR process, the number of calendar days in which those steps must be addressed and provides citations to the section of the regulations that govern each step. Although not available in hard copy, a .pdf version of the SEQR Handbook is available for download or printing from NYSDEC’s website. Get your copy today by clicking here.

Jennifer M. Porter is an Associate in the Gibbons Real Property and Environmental Department.

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Title review, like the negotiation of representations and warranties discussed in my earlier post, is an invaluable tool in determining whether to purchase a property. Analysis of the encumbrances recorded against the parcel is akin to reviewing a vehicle history report on a used car before you buy it. Both will tell you whether the item is a lemon.

At a recent presentation with co-panelists Michael Moyer of Land Services USA, Inc. and Aileen Schwartz of Hill International, entitled “Real Estate For In-House Counsel: An Examination of Title Issues, Contracts and Negotiations in Real Estate Deals” at the Association of Corporate Counsel (Delaware Valley Chapter)’s 2nd Annual In-House Counsel Conference in Philadelphia, Pennsylvania, many of my remarks focused on title review.

Typically there are two times when title will become a issue in the context of the Agreement of Sale:

• During the negotiation of the title provision; and
• During the review of title within the due diligence period

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On August 19, 2010, just over two months after identical bills were introduced in the NJ Assembly and Senate, Governor Chris Christie signed the Offshore Wind Economic Development Act into law. By creating offshore wind renewable energy credits and financial assistance to qualified projects, it is hoped that the new law will spur economic development and job growth in the state.

The new law establishes an offshore wind renewable energy certificate program that will require a percentage of electricity sold in NJ to come from offshore wind energy. The New Jersey Board of Public Utilities will be authorized to accept and approve applications for qualified offshore wind projects. The New Jersey Economic Development Authority will have the authority to provide financial assistance to qualified offshore wind projects and associated equipment manufacturers and assembly facilities in the state.

The new law represents another step in implementing the energy policy outlined by the governor on April 20, 2010, making renewable energy a key component of New Jersey’s strategy for economic recovery and growth.

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The New Jersey State Comptroller released a report Wednesday entitled “A Programmatic Examination of Municipal Tax Abatements.”  The Comptroller’s report is critical of both five year abatements and long term abatements granted by municipalities and was being widely reported in the press yesterday.

Referring to five year abatements (NJSA 40A-21-1 et seq.) and long term abatements (NJSA 40A-20-1 et seq.), the Comptroller’s report finds “numerous weaknesses in the regulation, implementation and oversight of these programs” including:

• PILOTs paid to municipalities are at the expense of counties, school districts and other taxpayers;
• There is lack of transparency and centralization of information about abatement agreements;
• Criteria and processes for evaluating potential abatement agreements are weak;
• Directly affected stakeholders are not adequately involved in the decision making process;
• Municipal follow up on abatement terms and benefits is lacking;
• Redevelopment areas in which abatements are granted are not periodically reviewed to account for neighborhood changes or improvement;
• Municipalities often fail to use abatements to bring in the type of redevelopment that would address community needs or bring appropriate improvement;
• The State does not closely monitor the use of abatements or offer significant guidance to municipalities on how to interpret relevant statutes or implement abatement programs.

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Despite potential substantive merit to Plaintiffs’ federal and state constitutional claims, the Federal District Court of the Northern District of New York in Rivendell Winery LLC v. Town of New Paltz dismissed Plaintiffs’ complaint for lack of subject matter jurisdiction on ripeness grounds as a result of the Plaintiffs’ failure to either obtain a final variance decision or to satisfy the relatively high burden for showing that an application for a variance from the Zoning Board of Appeals would have been futile. The crux of the decision lies in the Court’s reiteration of an important principle that although the success of a land use application may seem doubtful, doubt alone is insufficient to establish that the decision maker has dug in its heels and made certain that the application will be denied. As such, absent facts establishing that a final decision was obtained or that seeking a decision would be futile, constitutionally-based claims or challenges to other pre-decision actions taken by a governmental agency or its officers or employees may not be ripe for adjudication.

In this case, the Plaintiffs, Rivendell Winery, LLC and its principal owner, Susan L. Wine, had sought to reopen a winery and grape-growing business and had acquired two parcels of land in the Town of New Paltz, New York for this purpose. The property was located in the A-1.5 Zoning District which permits agricultural uses as of right. Although the term “agricultural” is not defined under the zoning definition section of the Town of New Paltz Town Code, it is defined elsewhere in zoning provisions as:

[a]ll agricultural operations and activities related to the growing or raising of crops, livestock, or livestock products, and agricultural products, as such terms are defined in or governed by the Agriculture and Markets Law of the State of New York on land qualified under Ulster County and NYS law for an agricultural exemption by the Assessor of the Town of New Paltz.

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You would never buy a used car without first having it thoroughly inspected. Purchasing a piece of real estate should not be any different. The due diligence provisions of an agreement of sale are like taking the used car to your mechanic, a way you can investigate a potential property prior to closing.

I recently gave a presentation called “Real Estate For In-House Counsel: An Examination of Title Issues, Contracts and Negotiations in Real Estate Deals” at the Association of Corporate Counsel (Delaware Valley Chapter)’s 2nd Annual In-House Counsel Conference in Philadelphia, Pennsylvania. My co-panelists were Michael Moyer of Land Services USA, Inc. and Aileen Schwartz of Hill International. The drafting and negotiation of due diligence language in an agreement of sale was one of the main focuses of our seminar.

There are three common areas in an agreement of sale where due diligence is addressed:

• Seller’s representations and warranties,
• Title review and
• Property investigation.

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On August 6, 2010, the Appellate Division upheld the decision of the Director of the New Jersey Division of Alcoholic Beverage Control (“ABC”) to issue a special concessionaire permit to the proposed Benihana restaurant in the controversial Meadowlands Xanadu Project. The ruling will allow Xanadu bars and restaurants to avoid acquiring costly plenary retail consumption licenses from existing East Rutherford licensees.

Typically, to serve alcoholic beverages in New Jersey, a bar or restaurant must obtain a plenary retail consumption license. State law caps the number of plenary retail consumption licenses available in each municipality, with fewer than 20 plenary retail consumption licenses currently in circulation in East Rutherford, where Xanadu is located. Instead of purchasing one of the existing licenses, which The Record reports would have set back each Xanadu restaurant $500,000 (if the existing licensees were even willing to sell), the Xanadu businesses will now qualify for a $2,000 special concessionaire permit issued directly from the State ABC.

To obtain a special concessionaire permit, a business must still must meet three basic criteria:

1. be located on property owned or controlled by the State;
2. enter into a contract with the State or a political subdivision authorizing the sale of alcoholic beverages; and
3. demonstrate its fitness to serve alcohol.

Thus, although the ruling is good news for public/private development partnerships on State-owned or controlled property, it does not open the flood gates for the issuance of special concessionaire permits for every large entertainment complex.

Jennifer P. Smith is an Associate in the Gibbons Real Property and Environmental Department.

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Russell B. Bershad, Esq., Co-Chair, Gibbons Real Property & Environmental Department, contributing author, Commercial Real Estate Transaction in New Jersey (3rd Ed., 2010, NJICLE), will be a speaker at the New Jersey ICLE Program, Distressed Real Estate: Defaults, Workouts & Opportunities, Wednesday October 27, 2010.

The all-day program will provide a comprehensive and coordinated team approach to structuring, negotiating and documenting a successful workout or restructuring troubled assets. Mr. Bershad will discuss acquiring distressed real estate loans from lenders.

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On July 23, 2010, Governor David Patterson signed into law, legislation that amends the New York State Multiple Dwelling Law to define permanent and transient occupancy. The new illegal hotel law forbids most residential apartment units to be rented out for stays less than 30 days.

This legislation may be a reaction to City of New York v. 330 Continental LLC, a 2009 Appellate Division - First Department holding, which relied on the fact that the critical terms “transient” and “permanent” are not defined in either the Multiple Dwelling Law or the New York City Zoning Resolution. The ambiguity created by this omission has hindered the City of New York from taking enforcement actions against illegal hotels, a problem in New York City, where landlords have been able to convert vacant apartments into temporary housing for tourists, a practice made easier by internet advertising. According to the law’s co-sponsor, State Senator Liz Krueger, over 300 New York apartment buildings had such temporary rental rooms.

Mayor Bloomberg praised the new law, stating:

When housing designated for permanent occupancy is illegally converted into a hotel, unsafe conditions are created, the residential character of City neighborhoods is harmed and the supply of much-needed units of housing is depleted. The bill provides a clear definition of what constitutes transient and permanent occupancy, which will allow City agencies to issue summonses and initiate other enforcement actions against illegal hotels.

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New Jersey’s Highlands Water Protection and Planning Act (Highlands Act), which created and granted substantial powers to a regional Council, has engendered significant controversy, especially with respect to the strict development restrictions it imposes within a statutorily defined preservation area. Certain redevelopment projects, however, are exempt from those restrictions, and a recent Appellate Division upheld the New Jersey Department of Environmental Protection’s (NJDEP) interpretation of key statutory provisions when it determined that a multi-purpose redevelopment project qualified for such an exemption.

Since its enactment in 2004, the Highlands Act has spawned a number of judicial opinions regarding its constitutionality, its retroactivity, and the validity of certain implementation regulations promulgated by NJDEP. (One such case is the subject of a recent post by Gibbons attorney Christina Fullam.)

In In re August 16, 2007 Determination of NJDEP of Exemption, the Appellate Division reviewed NJDEP’s decision to grant Christ Church an exemption from the statute for a project on a 100-acre lot in Rockaway Township that was already the site of office and industrial buildings constructed by a previous owner in the 1990s. The exemption application required NJDEP to determine whether the project qualified for the exemption as a “reconstruction” project that was within 125% of the existing “footprint” of “lawfully existing impervious surfaces” and did not increase that impervious surface by one-quarter acre or more.

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In 2007, just as regulations began to force New Jersey development into its urban areas, where the use of redevelopment is a virtual necessity, the New Jersey Supreme Court decided Gallenthin Realty v. Paulsboro. There, the Supreme Court rejected a municipality's designation of an area in need of redevelopment because the underlying investigation was insufficient under the Local Redevelopment and Housing Law criteria.

In the years since Gallenthin, New Jersey courts have repeatedly rejected redevelopment area designations as not meeting the statutory criteria, thereby stalling redevelopment efforts throughout the State and creating developer angst about the future of development in New Jersey.

But recently, the Appellate Division upheld a city’s designation of a portion of its central business district as an area in need of redevelopment. In Suburban Jewelers, Inc. v. City of South Plainfield, the Court found that the City's preliminary investigation of the area met the substantial evidence burden because it contained specific findings on the condition of each property and detailed how those conditions met the applicable statutory criteria. The report further demonstrated how those conditions were detrimental to health, safety, and welfare and to surrounding properties.

This decision offers some guidance as to the necessary elements of a redevelopment investigation and gives the real estate industry a glimmer of hope that redevelopment remains a viable mechanism in New Jersey in the post-Gallenthin world.

Michael Miceli is an Associate in the Gibbons Real Property and Environmental Department.

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The Supreme Court of the United States recently declined to review a multi-plaintiff citizen challenge to the New Jersey Highlands Water Protection and Planning Act. The case, Shope v. State, which has been floating through the New Jersey court system since April 2007, finally met its end when the Supreme Court denied the petition for certiorari on June 28, 2010.

At the trial level, the plaintiffs based their challenge on the following constitutional grounds:

• the development restrictions and preservation area boundaries set forth in the statute violated the property owners’ equal protection rights.
• the program initiated to transfer owners’ development rights did not adequately compensate the property owners in the Highlands conservation area.

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A recently enacted New Jersey law encourages the use of solar energy by allowing solar panels to be excluded from the computation of impervious coverage when determining whether a development project complies with impervious coverage limitations. The new law, P.L.2010, c.4 , amends the Pinelands Protection Act, Coastal Area Facility Review Act, Highlands Water Protection and Planning Act, County Planning Act, Waterfront Development Law, and Municipal Land Use Law, as well as laws pertaining to the conversion of age-restricted community developments.

In each of these laws, the amendment defines a solar panel as “an elevated panel or plate, or a canopy or array thereof, that captures and converts solar radiation to produce power, and includes flat plate, focusing solar collectors, or photovoltaic solar cells and excludes the base or foundation of the panel, plate, canopy, or array.” Any solar panel meeting that definition can be excluded when computing impervious coverage.

The new solar panel law is just one of the initiatives which encourages the use of solar and other green energy sources. As recently reported on this blog in a post titled New Jersey Proposes Addition of Solar Power Facilities to its Green Initiative, identical bills, Senate S2126 and Assembly A3139, are pending before their respective house of the New Jersey’s legislature and would amend the MLUL to provide that Solar and Wind Energy Generation Facilities, when installed on the sites of former landfills, quarries and other extractive industries, are permitted uses. If the proposal is enacted, this status would be equally applicable to both public and private sites where landfills, quarries or other extractive industries are closed or closing.

Clearly, New Jersey is serious about alternative energy and is working legislatively to make it a reality.

Howard D. Geneslaw is a Director in the Gibbons Real Property & Environmental Department.

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Inter-company transfers of real estate have always been subject to the NJ Realty Transfer Fee. However, in an October 2009 decision of the Tax Court, such transfers between commonly-owned entities were held to be exempt when the transfer is a sale of unencumbered property for less than $100 (as compared to a capital contribution of property by the grantor to the grantee with a simultaneous delivery to the grantor of equity in the grantee).

In Mack-Cali Realty, L.P. v Clerk of Bergen County, the Division of Taxation argued that the transfer between commonly owned entities always results in a benefit to the grantor, and absent an ability to quantify that benefit, the tax would be imposed based on the property value. The Tax Court rejected this position, relying on the statutory definition of “consideration.” In discussing consideration, the court noted that it:

• comprises only elements that are directly given by the grantee, with the exception of the mortgage balance
• does not include an indirect benefit of the kind imputed by the Division

The statutory definition of "consideration" has not been amended in the aftermath of Mack-Cali Realty, however, the Division, in what certainly appears to be a direct attempt to avoid the holding of this case, has modified Form RTF-1 (the required transfer tax form delivered by a seller).

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In New Jersey, it is very typical for a municipality’s building department to refuse to accept a developer’s construction drawings until the developer has received all of its local, county, state, and other applicable agency approvals (e.g. site plan approval, an NJDEP permit; or an NJDOT permit). This should not be happening.

In 2009, the section of the Uniform Construction Code dealing with plan review was amended to state:

[i]f required State, county, or local prior approvals have not been granted, plan review shall proceed provided that the application for permit is otherwise complete and the plan review fee has been paid. No permit shall be issued until all State, county and local approvals are in place.

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Despite the new licensing program for environmental consultants in New Jersey, they still remain open to professional tort claims without the necessity of an affidavit of merit. As required by N.J.S.A. 2A:53A-27, a plaintiff making a claim for malpractice or negligence against a “licensed person” must provide an, “affidavit of an appropriate licensed person that there exists a reasonable probability that the care, skill or knowledge exercised or exhibited in the treatment, practice, or work that is the subject of the complaint, fell outside acceptable professional or occupational standards or treatment practices.”

Fifteen different types of “licensed persons” are subject to this requirement. N.J.S.A. 2A:53A-26. However, “licensed person” does not include “environmental consultants” broadly, though environmental engineers, licensed pursuant to N.J.S.A. 45:8-27, do fall within the definition of “licensed persons.” Those environmental consultants who are geologists by education and training and/or in the past, licensed pursuant to the requirements of the Underground Storage Tank Certification Program, N.J.S.A. 58:10A-24.1-8, are not included within the definition of “licensed person.”

In establishing Licensed Site Remediation Professionals (“LSRP”) in the Site Remediation Reform Act, N.J.S.A. 58:10C-1 et seq., the legislature did not add LSRP’s to the definition of “Licensed Person” for purposes of compliance with New Jersey’s affidavit of merit statute. Perhaps the issue is the mandate of the LSRP to, first and foremost, protect the “public health and safety and the environment,” N.J.S.A. 58:10C-16, as opposed to first serving the interest of their clients, though requiring an affidavit of merit does not appear to be inconsistent with such broad goals. In any event, LSRP’s must be aware that this new license alone does not appear to afford them the potential protections from frivolous law suits afforded by the affidavit of merit statute.

David A. Brooks is an Associate in the Gibbons Real Property and Environmental Department.

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