Articles Posted in Real Estate

Airbnb houseThe “sharing economy” has become a feature of daily life for millions of people around the country and in New Jersey. It primarily consists of technology companies that use mobile apps to allow people, at least in principle, to make certain exchanges. Two well-known types of sharing economy services are ride-sharing and home-sharing. These particular business models frequently conflict with established local businesses and local regulations. Ride-sharing companies like Uber and home-sharing companies like Airbnb have often resisted efforts by local governments to regulate them as taxi and hotel companies, respectively. A pair of bills pending in the New Jersey Legislature would impose regulations on home-sharing services. While not expressly classifying them as hotels, the bills would subject them to similar rules and taxes.

Home-sharing services allow homeowners to make their homes available for short-term rental. The home-sharing service acts as a sort of broker between users and homeowners. This type of service has managed to avoid many of the legal pitfalls that some ride-sharing companies have encountered, such as questions of whether drivers are independent contractors or employees. Where home-sharing companies have found trouble, however, is on the question of whether they should be regulated and taxed as hotels.

Hotels, motels, “bed & breakfast” operations, and other businesses providing overnight accommodations are subject to a variety of state and local regulations. New Jersey law imposes a seven percent State Occupancy Fee on rental rates charged by hotels and motels across the state. Most municipalities in New Jersey are also authorized to collect a Municipal Occupancy Tax of up to one percent of rental rates.

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By US Army Corps of Engineers from USA (Patrol Boat Hocking in Newark Bay) [CC BY 2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia CommonsThe Third Circuit Court of Appeals recently ruled against a private marine terminal operator at the Port Authority of New York and New Jersey (PANYNJ), which had challenged its lease at the port facility in Elizabeth, New Jersey. Maher Terminals v. Port Authority of N.Y. and N.J., et al., No. 14-3626, slip op. (3rd Cir., Oct. 1, 2015). The plaintiff claimed that the rent provisions of the lease violate the Tonnage Clause of the U.S. Constitution, U.S. Const. art. I, § 10, cl. 3, as well as several federal statutes related to maritime law. The court disagreed, although it noted that the claim “is not a typical landlord-tenant dispute.” Maher, slip op. at 3. It held that, as a land-based business, the plaintiff is not “within the class of plaintiffs that the Tonnage Clause or its related federal statutes were intended to protect.” Id. Most New York and New Jersey businesses will not have to deal with lease terms like this, but the case certainly illustrates the importance of understanding potential objections to a lease contract.

The plaintiff operates a business at the PANYNJ’s primary port facility under a lease agreement that took effect in 2000. Its business activities, according to the court, primarily consist of stevedoring, or loading and unloading cargo from ships. The lease charges two types of rent:  “Basic Rental” charges consisting of a fixed fee per acre, and “Container Throughput Rental” (CTR) charges based on the volume of cargo handled by the plaintiff. Id. at 4. The plaintiff could unload up to 356,000 containers during a calendar year without incurring CTR charges. The per-container charge for containers 356,001 through 980,000 is is $19.00, and it is $14.25 after that.

The lease also establishes minimum amounts of cargo the plaintiff must unload annually in order to keep the lease in effect. When the plaintiff first filed its complaint, the minimum number was 420,000 containers. This would effectively guarantee annual payment of CTR charges for 64,000 containers, but the lease sets an even higher minimum amount of guaranteed CTR payments, according to the court, which is equivalent to a total annual volume of 775,000 containers.

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file531278556409.jpgA New York court recently addressed the fiduciary duties owed among managers of businesses involved in a venture together. A group of real estate investors sought to hold an individual liable for multiple business torts, all of which were allegedly committed by his son. Halpern, et al v. Kuskin, 2013 NY Slip Op. 32005(U) (N.Y. Sup. Ct., Aug. 26, 2013). The father took over the operation of several business entities from his son, and the plaintiffs argued that the father was liable either for the allegedly tortious acts themselves, for aiding and abetting said acts, or for attempting to shield his son from liability. The court held that the plaintiffs failed to plead any facts directly alleging the father’s liability. It also addressed the question of the father’s fiduciary duty to his son, as part of a family business, versus any fiduciary duty he might have owed to the plaintiffs.

Two plaintiffs signed an operating agreement with Brad Kuskin, according to the court, in March 2008 for a limited liability company (LLC) intended to purchase investment property in Crested Butte, Colorado. The two plaintiffs, along with a third plaintiff, signed another operating agreement with Kuskin for an LLC whose purpose was to purchase property in Crystal Springs, New Jersey. The plaintiffs invested substantial funds, including about $1.1 million by the lead plaintiff, in the two LLCs. The plaintiffs alleged that Kuskin used the invested funds to purchase the Colorado property in another company’s name, and otherwise mismanaged the funds.

Gary Kuskin, Brad Kuskin’s father, took over operations of various businesses from his son, including the company or companies involved in the deals with the plaintiffs. In their lawsuit, the plaintiffs alleged that Brad Kuskin fraudulently induced them to invest money with him. They further claimed that Gary Kuskin “attempted to make Brad Kuskin judgment proof.” Id. at 3. The suit, which only named Gary Kuskin as a defendant, included causes of action for tortious interference with a contract, aiding and abetting fraud, and breach of fiduciary duties. It essentially sought to hold Gary Kuskin liable for intentional torts committed by his son through their business.
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file4741281776353.jpgFinding a good location is critical to the success of a small business, but even the best location in town is of no use if the business cannot negotiate acceptable lease terms. As a general rule, commercial lease terms will favor the landlord. Unlike residential leases, however, which are frequently boilerplate and inflexible, a business may be able to negotiate improvements to the lease terms. Unambiguous provisions for rent and expenses are critical to businesses leasing office, retail, warehouse, or other commercial space in New York City and northern New Jersey. Here are four key factors to consider when negotiating a commercial real property lease:

1. Term of the Lease

Most commercial leases have a specified length, or “term,” usually expressed in months or years. A short-term lease is often preferable for small and startup businesses, as it allows the business more flexibility to respond to changing needs. A business that grows quickly, for example, may need to move to larger accommodations before the end of a multi-year lease. Landlords may prefer long-term leases for the assurance of a steady income stream from the property.

A lease agreement should also specify what happens at the end of the lease term. The parties may be able to negotiate new lease terms, continue the same lease agreement for an additional term, or continue the lease month-to-month.
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file0001008419026.jpgLocation is one of the three most important features of any small business in New York or New Jersey. The other two critical features, as the saying goes, are location and location. Any business that must maintain a permanent physical location must decide whether to purchase or lease real estate. Each offers advantages, depending on the nature of the business and the means of the company. Renting is very common for new and small businesses, and for many businesses in dense areas like New York City. Commercial leases differ significantly from residential leases. It is therefore important for business owners to understand the general types of commercial leases and a few of the features of each.

Leasing Versus Owning

Leasing a property to locate one’s business is almost always a prudent move when starting a business. As a tenant, or “lessee,” the business is typically only responsible for rent and, in some cases, pro rata shares of maintenance costs and property taxes. The lessee may vacate the property when the lease expires, or earlier with an early termination penalty. On the other hand, a landlord may choose not to renew a lease when the lessee would prefer to stay.

Owning a piece of property may offer greater flexibility and security, with no landlord or threat of lease termination, but it also offers many drawbacks. The owner of commercial property is responsible for all taxes and shoulders all liabilities related to the property. Certain state and federal laws, such as environmental regulations, may impose costs and liabilities on a property owner for pollution or other dangerous conditions, even if those conditions were created by a previous owner. Finally, selling a property can be far more costly and risky than terminating a lease.

Gross Lease

Under a gross lease, the landlord pays most or all of the costs of maintaining and operating the property. The lessee pays rent, and may also pay a share of the landlord’s costs through what is commonly called “load factor.” This type of lease is common for properties that rent office or warehouse space to multiple businesses.
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1099609_17171190_01222012.jpgNew Jersey Governor Chris Christie signed a bill into law on January 5, 2012 that creates the Grow New Jersey Assistance Program (GrowNJ), which is intended to promote business and economic development in urban and suburban areas around the state. The program will allocate $200 million from the Urban Transit Hub Tax Credit program and apply it towards relatively small-scale development projects. The program will also expand the reach of the Urban Transit Hub program itself. Sponsors of the bill in the state Assembly describe it as a step forward in efforts to build New Jersey’s reputation as a “business-friendly” state.

New Jersey’s Economic Development Authority (EDA) will administer the GrowNJ program. The program will offer qualifying businesses tax credits worth between $5 million and $8 million over a ten-year period. In order to be eligible, businesses must commit to investing $20 million or more in a “qualified redevelopment zone.” They must also provide at least 100 full-time jobs in the area. Larger projects may allow a business up to $40 million in tax credits under certain circumstances, according to the governor’s office.

The EDA, as part of the new law, will also convey a 12-acre tract of land in downtown Newark to the New Jersey Performing Arts Center. The Center is reportedly considering selling part of the site to the insurance company Prudential for a new office tower. The EDA has stated that it has offered the company a $250 million tax credit if it proceeds with the project.

The Urban Transit Hub program, also administered by the EDA, supports and encourages private capital investment in nine New Jersey cities, known as “urban transit hubs.” Seven of these “hubs” are in the northern part of the state: East Orange, Elizabeth, Hoboken, Jersey City, Newark, New Brunswick, and Paterson. The two other hubs are located in the southwest part of the state in Trenton and Camden. Under the main Urban Transit Hub Program, real estate developers or owners investing at least $50 million and providing 250 or more jobs may qualify for tax credits based on the amount of their qualifying capital investment. The tax credit could total as much as 80 to 100 percent of their investment. The program took effect on June 13, 2008, and businesses may apply for its benefits for a period of five years from that date.
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Newark, New JerseyThe New Jersey Institute of Technology (NJIT) announced in late December that it is moving forward with an $80 million plan to develop a “Greek Village” for its undergraduate students on its Newark campus. Newark’s planning board approved construction of six buildings as part of the project, including five three-story duplexes and a six-story “Honors College building,” according to NJ.com. The new buildings will house dormitories, mixed-use commercial space, a dining area, and a fitness facility. NJIT’s campus near downtown Newark is currently home to about 1,600 students, and the new development will create room for 600 more. The new buildings will replace a 2-acre parking lot.

A private corporation created by the school to manage the development is working out financing and hopes to complete construction by March 2013. By creating a private entity, NJIT has the opportunity to apply for tax benefits under the state’s Urban Transit Hub Tax Credit program. This program provides tax credits up to 100% for certain capital investments made by individuals or businesses in designated urban areas, in an effort to promote private equity investment in development projects. Since the school is a public entity, it may also be able to raise funds through a bond election.

The corporation’s president describes the development plan as a “community development initiative” not limited to the benefit of NJIT. The Greek Village project is the first phase of a billion-dollar “Campus Gateway Redevelopment Plan” that will eventually redevelop about 23 acres around the NJIT campus.

The Greek Village is intended to replace the aging buildings on Martin Luther King Jr. Boulevard used by the school’s Greek organizations. The school hopes that the existing buildings will be replaced by mixed-use developments, combining retail or office spaces at street level with residence above. The development therefore offers opportunities to create new businesses in both an as-yet-unused part of the campus and an older, established but slightly run-down part of Newark.

As of late December, eight of NJIT’s eighteen Greek organizations had agreed to move to the new location. Many students had mixed feelings, citing the existing Greek area’s history despite the often-poor condition of many of the buildings. Non-student residents of that area seem more receptive to the idea, as it brings in new development to the neighborhood and moves the frat parties to the NJIT campus.
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