3rd AnnualFall Conference

October 14, 2005

Metro New Jersey Chapter

of the

Appraisal Institute

Redevelopment in New Jersey – Implications of the Kelo Ruling

Presented by Anthony F. Della Pelle, Esq.Paul Phillips, P.P., A.I.C.P.

Redevelopment – Hot! Land Values Increasing Generally Diminishing Supply - Open Space Acquisitions Diminishing Supply – Environmental Regulation,

e.g., septic rules Diminishing Supply – NJ State Development and

Redevelopment Plan Diminishing Supply – Talk to Developers Brownfields legislation

Is on the front line with the public, the government and the redeveloper.

Participates in crucial steps in the process. Relied upon for area / site selection and

feasibility by developers. Assists other professionals. Market and Feasibility Analyses

The Appraiser

What’s Redevelopment?

An area of land is going to be changed from existing uses to new uses.

The Practical Problem: Others already own the land. Others already use the land. Land assemblage is too difficult for private

enterprise. The Federal and State Constitutions prohibit

taking private property for private use and only permit taking private property for public use.

The Solution: Make the change in use a public use. Establish standards to control governmental

discretion in determining which areas can be affected and avoid arbitrary governmental selection of areas.

Amend the Constitution and pass enabling Legislation to carry out the program.

Constitutional Provision

Article 8, § 3, ¶ 1: The clearance, replanning, development or redevelopment of blighted areas shall be a public purpose and public use, for which private property may be taken or acquired.

Municipal, public or private corporations may be authorized by law to undertake such clearance, replanning, development or redevelopment; and improvements made for these purposes and uses, or for any of them, may be exempted from taxation, in whole or in part, for a limited period of time during which the profits of and dividends payable by any private corporation enjoying such tax exemption shall be limited by law…

Legislation

Local Redevelopment and Housing Law, N.J.S.A.40A:12A-1 et seq.

How It Works 1

An area can be: “In need of redevelopment” or, “In need of rehabilitation”

A determination that an area is “in need of rehabilitation” does not authorize involuntary takings.

How It Works 2

If an area is “in need of redevelopment” then:

Government can take the land. Government can make deals with

redevelopers. Redevelopers can assemble and can

qualify for tax abatements.

Procedure – Direction to Investigate

Governing Body Planning Board The governing body, by resolution,

authorizes the planning board to investigate whether a proposed area is a redevelopment area.

N.J.S.A. 40A:12A-6(a)

Procedure – Map and Statement

A map of the boundaries of the proposed redevelopment area and a statement setting forth the basis for the investigation is prepared and made available to the public.

N.J.S.A. 40A:12A-6(b)(1)

Procedure - Notice Planning board sets date for public

hearing Notice by publication – twice - with last

publication not less than 10 days in advance of the hearing.

Individualized notice by mail to last known owner as reflected on assessment

N.J.S.A. 40A:12A-6(b)(2) and (3)

Procedure - Hearing The planning board conducts a public

hearing at which time all interested persons may be heard.

The hearing record is the basic record for for purposes of judicial review.

N.J.S.A. 40A:12A-6(b)(4)

Procedure - Recommendation Planning Board Governing Body Following the hearing, the planning

board recommends to governing body whether the proposed redevelopment area, or any part thereof, constitutes a redevelopment area under the statutory criteria.

N.J.S.A. 40A:12A-6(b)(5)

Procedure - Determination After receiving the recommendation from

the planning board, the governing body, by resolution, may determine that the proposed redevelopment area, or any part thereof, constitutes an “area in need of redevelopment.”

N.J.S.A.40A:12B-6(b)(5)

The “in need of” determination is significant:

Tenants won’t renew, leave, or won’t come in, except on unfavorable terms.

The property becomes unmarketable except on speculative terms.

Further deterioration and tax arrears can be anticipated.

The Redevelopment Plan Adopted by Ordinance. No evidential hearings – regular ordinance

procedures followed. Sets up new zone, or overlay zoning, for Area. Identifies properties to be acquired Provides for relocation Must be consistent with Master Plan or passed

by a majority with reasons for inconsistencies.

N.J.S.A.40A:12A-7

Upon adoption of Redevelopment Plan: Involuntary acquisitions are authorized New infrastructure can be installed Contracts with redevelopers are

authorized Relocation assistance authorized Other related powers

N.J.S.A.40A:12A-7

Agreements with Redevelopers Public bidding not required. Must contain covenant that only uses in

Redevelopment Plan will be constructed. Must contain deadlines for

commencement of construction. Must restrict resale of project prior to

completion without municipal consent

The Criteria: Why this Area?

What makes an area

“In Need of Redevelopment” ?

(i.e.,)

Owner: “Why is this happening to me?”

(or)

Developer: “Can we do it to them?”

The Criteria – Planning Analysis The municipality (often in conjunction

with a prospective redeveloper) commission planning reports which demonstrate that the delineated area satisfies one or more of the statutory criteria.

This is where the Appraiser should be involved and typically is not.

The Criteria A delineated area may be determined to

be in need of redevelopment if, after investigation, notice and hearing ... the governing body of the municipality by resolution concludes that within the delineated area any of the following conditions is found:

N.J.S.A.40A:12A-6

Remember this:

Only ONE of the criteria need be found in order for the area to qualify as “in need of redevelopment.”

The Criteria – Section “a” a. The generality of buildings are substandard,

unsafe, unsanitary, dilapidated, or obsolescent, or possess any of such characteristics, or are so lacking in light, air, or space, as to be conducive to unwholesome living or working conditions.

The focus is on the condition of buildings. The generality of the buildings, not just one.

The Criteria – Section “b” b. The discontinuance of the use of

buildings previously used for commercial, manufacturing, or industrial purposes; the abandonment of such buildings; or the same being allowed to fall into so great a state of disrepair as to be untenantable.

The focus is on occupancy and lack of it.

The Criteria – Section “c” 1

c. Land that is owned by the municipality, the county, a local housing authority, redevelopment agency or redevelopment entity, or unimproved vacant land that has remained so for a period of ten years prior to adoption of the resolution, and that by reason of its location, remoteness, lack of means of access to developed sections or portions of the municipality, or topography, or nature of the soil, is not likely to be developed through the instrumentality of private capital.

The focus is on the character of the land.

The Criteria – Section “c” 2

Mere ownership of the land by government does not qualify under “c”.

The land must also be of the “unlikely to be developed by private capital” variety.

Winters v. Voorhees Twp.

The Criteria – Section “d” d. Areas with buildings or improvements

which, by reason of dilapidation, obsolescence, overcrowding, faulty arrangement or design, lack of ventilation, light and sanitary facilities, excessive land coverage, deleterious land use or obsolete layout, or any combination of these or other factors, are detrimental to the safety, health, morals, or welfare of the community.

The Criteria – Section “e” e. A growing lack or total lack of proper

utilization of areas caused by the condition of the title, diverse ownership of the real property therein or other conditions, resulting in a stagnant or not fully productive condition of land potentially useful and valuable for contributing to and serving the public health, safety and welfare.

The Criteria – Section “e” 2

Section “e” is the “battleground du jour.”The prior criteria focused on objective physical

conditions. What is “proper utilization”? Is it the same as a “stagnant or not fully

productive condition of land”?Whatever “proper utilization” is, the statute says

the lack of it has to be caused by the condition of the title, diverse ownership of the real property therein or other conditions...

The Criteria – Section “e” 3

What “other conditions” are we talking about? How productive is “fully productive”? Does Subsection “e” authorize redevelopment

of occupied areas, in good physical condition, where taxes are current and assessments are stable so as to permit higher and better uses which are “potentially useful and valuable for contributing to and serving the public health, safety and welfare.”?

The Criteria – Section “f” f. Areas, in excess of five contiguous

acres, whereon buildings or improvements have been destroyed, consumed by fire, demolished or altered by the action of storm, fire, cyclone, tornado, earthquake or other casualty in such a way that the aggregate assessed value of the area has been materially depreciated.

The Criteria – Section “g” g. [In Urban Enterprise Zones, tax

exemptions and tax abatements can be employed as if the area were determined to be “in need of redevelopment.” No other redevelopment powers may be utilized unless the area meets one of the other criteria and the procedures of the LRHL have been followed.]

Remember this:

A single lot can qualify as an area in need of redevelopment.

Maglies v. Planning Bd., Township of East Brunswick

Remember this: A redevelopment area may include lands,

buildings, or improvements which of themselves are not detrimental to the public health, safety or welfare, but the inclusion of which is found necessary, with or without change in their condition, for the effective redevelopment of the area of which they are a part.

Translation:

Just because your property is… In excellent physical condition Functionally state of the art Fully tenanted at market rates Current in its taxes

…doesn’t mean the government can’t take it along with the bad stuff.

Remember this:

The mere passage of time since the determination that the area was in need of redevelopment… or

The fact that the area has begun to rebound…

…does not undo the redevelopment designation.

Translation:

Once you’re in, you’re IN.

And you’re probably staying in.

Practical Impacts Determination lays foundation for

subsequent taking Redevelopment Declaration not usually a

taking De Facto taking can occur Marketability concerns Passage of time does not itself invalidate

declaration

Project Influence Ordinarily, the effect upon value of a proposed

redevelopment project – either up or down - must be disregarded in valuation Highest and best use issues - zoning Physical condition of subject Selection of sales or leases Adjustments to sales or leases Income method considerations

Project Influence

The property is valued as if the redevelopment project never occurred

Problems caused by passage of time Project influence issues are heightened in

redevelopment cases

Highest and Best Use Redevelopment Plan and Zoning

Considerations Legal permissibility and reasonable

probability

Physical Condition and Status Does the subject fall into disrepair? Economic motivations of owners Occupancy status Rental values of subject Status and impacts on approvals Conditions in neighborhood

Date of Value The appropriate date of value in the

redevelopment context is presently unsettled.

Two Statutes and the Constitutional requirement for just compensation require reconciliation.

The issue is now pending before the courts.

Date of Value – The Problem It is generally assumed that values will decline

after a redevelopment or “blight” designation and they often do.

Sometimes values continue to increase. What happens in the case of a 1996 designation

and a 2005 condemnation action? Who gets the benefit of the increased value – the owner or the redeveloper?

Date of Value Constitutional requirement

Just compensation is the fair market value of the property as of the date of the taking, determined by what a willing buyer and a willing seller would agree to, neither being under any compulsion to act.

Kelo v. New London: 90 acre waterfront site Existing mixed uses Proposed for redevelopment to

residential, office, hotel/conference, etc. Most owners sold voluntarily City condemned the “holdouts”,

including Kelo and other homeowners

Kelo v. New London: Connecticut State courts sided with City

and developers Review by US Supreme Court sought and

granted 5-4 decision of Supreme Court upholding

taking issued in June, 2005

Kelo v. New London Focus on permissibility of “economic

development” taking Reliance upon Connecticut statute specifically

allowing taking Majority of court relies upon comprehensive

nature of redevelopment plan Limitation to determination as to whether

takings constituted “public use” Reliance upon historic precedent of Court

Kelo v. New London Dissent by Justice O’Connor – broad

implications of ruling: “all private property is now vulnerable to being taken and transferred to another private owner, so long as it might be upgraded”

Concurrence by Justice Kennedy – cautions the result might be different if action showed favoritism in particular case

What’s Next? “Blight” requirement in NJ Constitution Inconsistent use by municipalities and of

judicial review Heightened public awareness of issue Possible creation of political backlash Possible effect on judges and juries

The Fallout: Legislation (Federal) – limitation of federal

funds New Jersey –

S-2775 (Connors) – prevents use of condemnation to acquire homes in redevelopment matters

S-2780/S-2815 (Allen) – calculate “just compensation”of SF residence to reflect replacement cost

SCR-140 (Connors) – proposes Constitutional Amendment to restrict condemnation against non-blighted property

The Fallout: Other state and federal legislation Court decisions post-Kelo Present court challenges

Long Branch Linden

Gubernatorial platforms

Conclusions Hot issue Be thorough Be careful Be fair to ensure just compensation Be sensitive to “heightened scrutiny”

to be applied by courts AND to juror perceptions