Unambiguous PILOT Agreement Upheld by Appellate Division

by: Joseph Grather
12 Dec 2022

A unique characteristic of an “area in need of redevelopment” under the Local Redevelopment and Housing Law is that our State Constitution allows properties in the area to be exempted from real property taxation, and instead subject to long-term tax abatements for payments “in lieu of taxes” under agreements between the property owner and the municipal agency.  The “blighted areas clause” provides:

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 any of them, may be exempted from taxation, in whole or in part, for a limited period of time during which the profits and dividends payable by any such private corporation enjoying such tax exemption shall be limited by law.”

[N.J. Constitution Art. 8, § 3, ¶ 1 (emphasis added)]

New Jersey Long Term Tax Exemption Law

Pursuant to this provision and the statutory Long Term Tax Exemption Law, in 2014, the Town of Harrison entered into “a financial agreement with Harrison Waterfront Urban Renewal, LLC (Waterfront) in connection with its construction of a 170-room hotel on property in the Town’s waterfront redevelopment area.” See Excel Holdings v. Harrison opinion a3563-20.

The agreement granted tax exemption status to the property and allowed for the developer to make a Payment in Lieu of Tax (PILOT) to the Town in the “greater of “$170,000 or an Annual Service Charge equal to [fifteen] percent of the gross revenue of the Entity.”

In 2014, Excel Holdings acquired the property “with the consent of the Town. The master lease, however, was not assigned. Instead, Excel executed a new master lease with a new affiliated entity as the tenant-operator. The terms of the new master lease are substantially identical to the original master lease; the only change is the parties to the agreement. Following the acquisition of the hotel and assumption of rights under the financial agreement, Excel assumed payment of the annual service charge.”

Thereafter, in 2019, the Town sent Excel a revised PILOT invoice, which “indicated that Excel owed $600,947.05. That invoice explained:  [p]er Section 4.1 of the [financial agreement] dated December 15, 2000, the Annual Service Charge shall be adjusted based upon an Auditor’s Report. The audit submitted by Baker Tilly, dated May 28, 2019, reported Rental Income based upon a Master Lease dated May 23, 2018. Please be advised that the use of a Master Lease in an attempt to limit revenue is not valid under the New Jersey Local Redevelopment and Housing Law, N.J.S.A. 40A:12A-1 et seq.[,]

Excel sought – and was granted – injunctive relief in the Superior Court.  The trial court found that the financial agreement was an unambiguous contract that did not permit the Town to change the payment terms.  If you want to dive into the opinion, most of the ink is spilled on affirming the denial of the Town’s motion to disqualify counsel for Excel. In the end, the Appellate Court found:

“The terms of the contract are clear, and thus the contract must be enforced as written. Section 4.1 of the financial agreement provides, “the Entity shall make payment to the Town of Harrison [in] an amount equal to the greater of: the Minimum Annual Service Charge or an Annual Service Charge equal to [fifteen percent] of the gross revenue of the Entity.” The “Entity” . . . shall also include
any subsequent purchasers or successors in interest of the Project, provided they are formed and operate
under the Law and, when required, the transfer has been duly approved by the Town.”  Excel is the “Entity” and the Town approved the sale to Excel.  Moreover, the “2018 assignment did not create a new PILOT Agreement.  The existing contract and its method of calculating the annual service charge, as ratified by the legislature, remains in effect. That contract allowed for the assignment, and the Town consented to Waterfront assigning its rights under the financial agreement to Excel.”

I wonder whether municipalities may begin to rethink the deals they made to “redevelop” their communities.  In the long run, they may be getting the short end of the stick.   These issues are going to start grabbing lots of attention as real estate taxes continue to escalate for all of us residents of the Garden State.