Changes to Economic Opportunity Act Seek To Stimulate Development in South Jersey

December 10, 2014Articles New Jersey Law Journal

"Reprinted with permission from the December 10 issue of the New Jersey Law Journal. (c) 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved."

Everyone knows that Atlantic City, N.J., is in dire straits, and this year has been particularly tough for the city. Four casinos closed in 2014 and a fifth may soon follow. These closures have put more than 8,000 casino employees out of work and the effects of these closures can be felt throughout South Jersey.

Although there is no one-size-fits-all solution, one thing is clear: Atlantic City and much of South Jersey have for too long relied on an economy primarily based on gaming, hospitality and tourism. To reverse the region's downward trend, we must diversify the region's economy and encourage private-sector job growth. To that end, New Jersey's leaders have taken a giant step toward increasing economic development in Atlantic City and South Jersey by reclassifying Atlantic City as a "Garden State Growth Zone" and by easing the criteria for projects to be considered "Mega Projects" in the eight South Jersey counties.

To understand the significance of these new changes, and their anticipated effect on Atlantic City, a brief overview of the Economic Opportunity Act of 2013 and its incentive programs is required. The act was first signed into law by New Jersey Gov. Chris Christie on Sept. 18, 2013. The act was created to maximize economic development and private-sector job growth. The act, which is administered by the New Jersey Economic Development Authority (EDA), consolidated five existing economic incentive programs into two: the Grow New Jersey Assistance Program (Grow NJ) and the Economic Redevelopment Growth Program (ERG).

In an effort to build on the act, and to correct a legislative oversight, the Economic Opportunity Act of 2014, Part 3 (Part 3) (A-3213) passed in both the Assembly and Senate in June. Since Part 3 reached the governor's desk, however, the magnitude of problems facing Atlantic City has become even clearer with the announcement of several casino closures. Gov. Christie, therefore, conditionally vetoed Part 3 on Sept. 11. Pursuant to his constitutional authority, the governor returned Part 3 to the legislature with additional changes in an effort to encourage nongaming economic development and job growth in Atlantic City. Shortly thereafter, Part 3 passed by large margins in both the Assembly and the Senate, and was signed into law by Gov. Christie on Oct. 24.

Part 3 provides very appealing incentives for businesses to move their operations to Atlantic City and the eight South Jersey counties. Although the Economic Opportunity Act originally contained additional incentives and lower jobs and capital investment requirements for South Jersey projects, the new changes in Part 3 have greatly increased the incentives for nongaming activities in Atlantic City and South Jersey. The changes in Part 3 related to the Grow NJ program are the focus of this article.

Grow NJ awards tax credits to businesses (other than point-of-sale retail businesses) that create or retain jobs in New Jersey and make a qualified capital investment at an appropriate business facility. Once the threshold requirements are met, a business may be eligible for tax credits that are applicable to the business' New Jersey state corporate income tax liability, insurance company tax and franchise tax. These tax credits can be used for up to 10 years from the date that the business certifies compliance with the Grow NJ requirements. Grow NJ also permits the business to monetize the tax credits by applying for a benefit transfer certificate. The transfer certificates can be sold to another entity that has specific corporate tax liabilities to New Jersey. The EDA takes a relatively "hands-off" approach and simply requires that the tax credits be transferred for consideration not less than 75 percent of the transferred tax credit value. Although the values of tax credits fluctuate like any other traded commodity, the current market rate for tax credits is around 90 percent. Even if a business decides to sell its tax credits, the transferor must remain in compliance with the Grow NJ requirements.

Grow NJ has four eligibility requirements:

  • The project is located in a "qualified incentive area";
  • The project meets or exceeds the applicable employment and capital investment requirements;
  • The tax credits are a "material factor" in the applicant's decision; and
  • The capital investment and resultant creation of full-time jobs will yield a net positive benefit of at least 110 percent to the state.

In addition to the eligibility requirements, Grow NJ also has performance-based requirements that include:

  • Maintaining the project employment for 1.5 times the period in which the business received the tax credit (generally, 10 years);
  • Maintaining a minimum of 80 percent of the full-time workforce from the last tax period prior to the grant approval, which is evidenced through annual reporting requirements; and,
  • Submitting a certification from an independent certified public accountant regarding the actual capital investment and job creation/retention at the completion of the project.

The "base" tax credit amounts range from $500 to $5,000 per job per year depending on the location and type of project. For example, eligible projects located in a Garden State Growth Zone (GSGZ) or projects that qualify as a "Mega Project," receive the statutory maximum amount of $5,000 per year for each new full-time job. These credits are also supplemented by "bonus" credits that are based on other characteristics. Let's say that a business wants to open up a factory to manufacture widgets in Trenton. The project is expected to create 100 new full-time jobs. Assuming that the project meets the minimum capital investment requirements ($20 per square foot of gross leasable area for industrial projects), because Trenton is in a GSGZ, the project would receive $5,000 for each of the 100 jobs for 10 years, which equates to a total award of $5,000,000. Based on the amount of capital investment, the average salaries of the employees, the project's industry or a host of other factors, the project could also qualify for bonus credits of more than $5,000 per job per year for 10 years. In other words, this business could receive more than $10 million in tax credits, which it could apply toward its tax liability or monetize into nondilutive capital.

The recently passed modifications in Part 3 make two material changes to the Grow NJ program that were targeted at stimulating economic development in Atlantic City and the eight South Jersey counties. The first change expanded the definition of a GSGZ. Under the old legislation, the four cities with the lowest median family income based on the 2009 American Community Survey from the U.S. Census: Camden, Trenton, Paterson and Passaic. Projects in these municipalities have significantly lower eligibility thresholds and higher incentive levels. Part 3 has expanded the GSGZ definition to include Atlantic City. This means that qualifying projects in Atlantic City will now have less stringent eligibility requirements and receive the maximum amount of base and bonus tax credits for each new or retained full-time job. Atlantic City's new designation as a GSGZ will make it easier for businesses to obtain larger awards if they pursue a project in Atlantic City.

The second change expanded the definition of a "Mega Project." Under the old legislation, a Mega Project was defined as: (1) a qualified business facility in the logistics, manufacturing, energy, defense or maritime industries in a port district, or businesses in the aviation industry in an aviation district with either a $20 million or more capital investment and 250 new or retained jobs, or 1,000 jobs created; or (2) a qualified business facility located in an urban transit hub with a capital investment of $50 million and 250 jobs created or retained. Part 3 has expanded the Mega Project definition by significantly relaxing the eligibility requirements for projects in South Jersey. Under the new changes in Part 3, Mega Projects now include projects that are located in an existing area designated in need of redevelopment with the eight South Jersey counties—Atlantic, Burlington, Camden, Cape May, Cumberland, Gloucester, Ocean or Salem—and having a capital investment in excess of $20 million and at which more than 150 full-time jobs are created or retained. These new eligibility requirements will make it significantly easier for businesses interested in South Jersey to obtain large awards under the Grow NJ program.

An example will demonstrate the significance of this change. Assume that a manufacturing business wishes to acquire a 10,000 square-foot rundown industrial building in one of the eight South Jersey counties. The project is anticipated to create 200 full-time jobs and the business will make a $25 million capital investment in the property. Under the old legislation, this project would not qualify as a Mega Project. Assuming that the qualified incentive area is a "Priority Area," the project would receive a base credit award of $500 per job per year over 10 years, plus an additional $1,000 per job per year in bonus credits. This project would therefore be eligible for a total award of $3 million ($1,500 per job x 200 jobs x 10 years).

Under the new changes to Part 3, however, this project would qualify as a Mega Project, as it exceeds the 150 jobs and $20 million capital investment requirements. This means that the project would receive $5,000 in base credits and be eligible for an increased bonus award that could be in excess of $5,000. Assuming that the project receives $5,000 per job per year in bonus credits as a Mega Project, the total award for the project would be $20 million ($10,000 per job x 200 jobs x 10 years). As a direct result of the new changes to Part 3, this project would therefore receive an additional $17 million in tax credits that the business could use against its own tax liability or sell them to raise nondilutive capital.

These new changes to the Grow NJ program make Atlantic City and its surrounding counties a much more appealing place to do business. Prospective applicants must act quickly to take advantage of the new changes to the Grow NJ program.

"Reprinted with permission from the December 10 issue of the New Jersey Law Journal. (c) 2014 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved."