Unnecessary delay … or due diligence? No N.J. companies have received tax awards due from 2018 … EDA’s Sullivan says state has just increased vetting

By Tom Bergeron
Trenton | Aug 12, 2019 at 4:00 am
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The CEO of the company that just moved to New Jersey — and did so, the person said, because a Grow New Jersey grant made it work financially — was angry.

The person said they understand due diligence. And they understand why, when their company applied for a Grow NJ grant, an incentive program administered by the New Jersey Economic Development Authority, it had to go through an incredible amount of paperwork and questions — and more paperwork and questions.

“Being in business for (decades), I will tell you that this was like dealing with the IRS,” the person told ROI-NJ. “It was a very, very rigorous process.

“We dotted every ‘I,’ crossed every ‘T’ and went out of our way to make sure that we 100% abided by everything. (Everything was) vetted by our law firm and by outside consultants.”

The company wasn’t the only one checking, the person said.

“The state was very diligent in making sure that everything we gave to them was correct and proper and the state came back at many junctures in the process and questioned our documentation and we gave that more answers,” the person said.

“So, at this point in time, I’m a little bit miffed and in the dark as to why they are now questioning what seems to have been a months-long process of lawyers, accountants and everyone else reviewing this documentation.”

The EDA is doing more than just questioning companies that have been approved for Grow NJ and all other incentives, including the Economic Redevelopment and Growth, or ERG, program.

It is withholding all awards until the recipients’ documentation can be fully vetted.

As of Aug. 8, not a single company has received a tax credit award it is due from 2018. And none has been giving a date as to when they may come.

Companies looking to sell their tax credits are worried the market will dry up — or, worse, they will not be able to honor deals they already have in place. Others are concerned companies that need these awards to help with operating expenses will soon be facing financial troubles.

ROI-NJ talked with more than a dozen people in jobs related to incentives about the situation. All of them — except for officials from Gov. Phil Murphy’s administration — requested anonymity, fearing their words would hurt their ability to ever get their awards.

Tim Sullivan

Tim Sullivan, the CEO of the EDA, said everyone will get their incentives. The delay, he said, is a result of the state making sure it is doing its job properly.

It is the result of what some called a scathing audit of the organization that showed — among other things — that the EDA was lax in checking documentation before awarding credits. (The period studied was before Sullivan took over in February 2018.)

This vetting, Sullivan said, is nothing more than good government.

“Nothing’s been revoked, nothing’s been denied, nothing’s been held,” he told ROI-NJ. “It’s not a micro policy decision. We’re going through these line-by-line and job-by-job, making sure we can verify everything we need to verify. 

“And if people want to hit us for being too thorough, that’s fine by me.”

Sullivan said he understands the concerns of business owners.

“In fairness, there’s a balance,” he said. “And we can’t hold all these things forever. We’ve got to do our work and we’ve got to get them done. Companies are expecting these things and good actors should expect to get what they are entitled to. And they will.”

… We’re going through these line-by-line and job-by-job, making sure we can verify everything we need to verify. And if people want to hit us for being too thorough, that’s fine by me.”
— Tim Sullivan, CEO of the EDA

The head of the company who received the Grow NJ grant is not moved by Sullivan’s sentiments.

“There are many different emotions that go through my mind here,” he said. “First of all, I’m a good player. I’m a respectful player, but I do understand there are bad participants out there. However, that being said, there’s no allegation that our firm did anything wrong.

“So, why are being lumped with other people? And I might go as far as to say this could be the greatest bait and switch ever.

“I’m between the emotions that I’m being lumped with someone and/or perhaps they’re just trying to screw everyone. I don’t know where the state is coming down on this.”

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EDA tax credits confuse a lot of people.

The state does not write checks to companies, as many believe.

Instead, it allows them to get a credit on their business taxes in return for meeting various metrics, including job creation.

But even that has a catch. The incentives have no value — except in resale — to almost every company that gets them. That’s because most businesses these days are pass-through entities such as LLCs and S-corporations that do not pay taxes at the corporate level.

Companies, in other words, need to sell the credits that the state has been slow to issue. And that is causing problems.

“There are lenders and financial institutions and a lot of people who are relying on the income stream that was provided by the legitimate beneficiaries of the incentives and the sale of the tax credits that have now come to a halt,” one longtime developer said.

News of this is traveling fast, a real estate lawyer said.

“National brokers are calling me and telling me the word is getting out that New Jersey is not paying its credit,” the person said. “These buyers have come to expect their credit at a certain time.

“If we don’t have tax credits issued by Oct. 15 this year (the last day amended tax returns can be filed), we’re essentially going to close the market. Buyers aren’t going to want to buy here anymore. They’re already talking about looking at their agreements and seeing how they can terminate them. That would be disastrous.”

The irony, one person pointed out, is that these delays are most hurting the companies Murphy repeatedly has said he wants to help: small and midsize companies.

“The big companies? They have enough money to wait it out — and enough money to hire the people needed to keep up with any new requests,” the person said. “I deal with companies where the CEO also is the HR director and accounts payable manager. They are the ones being hurt.”

To be clear, those seeking tax credits are not against the state doing their due diligence, even if it means more time, energy, paperwork and service provider fees. Many had the same request: Issue the credits, check the books — and, if we are in the wrong, audit us and claw back the award.

Holding them up, they say, does not seem fair — especially, they say, when they held up their end of the bargain.

“It feels like we are guilty until proven innocent,” said one.

If this was a private party, if this had been a lender who did this deal, for example, we’d be in court already, suing them. This is a breach of contract, a breach of good faith.”
— Developer who received an ERG award

That guilt, another said, has been spread over an entire industry.

“I think that, if they find evidence of malfeasance from some applications, then you deal with it on a one-on-one basis,” the person said. “But to penalize the entire industry is uncalled for, unwarranted and it will backfire.

“We invested (multi)millions and cleaned up a site. Do you think we would have done that without having all the pieces in place? If it weren’t for us, that place would still be streaming pollution, the city would not have its new taxes and all the jobs we created would not have happened.”

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No one blames Sullivan. 

He generally is regarded as well-meaning, thoughtful, highly competent and professional.

“He’s just the guy stuck in the middle of all this,” one person said. 

Sullivan knows the situation and urges patience. Even when he knows most companies have run out.

“We’re taking our time, and I mean that with all sincerity,” he said. “We’re doing our work. I think one of the most trenchant observations from (the EDA audit) was around the struggles we have to actually verify 100% of the jobs.

“Some of these are as mundane as you can be listed in the HR report once as Thomas and the second time as Tom and the third time as Tommy. And, if it was in different months and in different years, you might show up as a mismatch and that might not count. So, we want to go through and literally clean up the data that the companies are submitting to us.”

That’s one of the causes of the delay, Sullivan said.  

“There’s a new process,” he said. “It’s a more robust process. It’s taken a little more time. There’ll be efficiencies in building that over time. This is the first time the companies are going through the new process and the first time we’re going through the new process. So, I don’t expect this to be an annual issue. Next year should be smoother year because we’ll get up to the learning curve.”

Of course, that’s in handling incentives programs that expired June 30. The state currently does not have any incentive programs on the books, which is another issue some feel is hurting New Jersey’s business brand and reputation.

Sullivan said the state’s brand and reputation are important, but he was quick to remind of the fact this is all part of an effort to fix a brand and reputation that already was damaged.

“The branding question on all this is that we have a program that has challenges and has had some flaws, and that’s not great for branding either,” he said.

“The notion that scrutiny is bad for the business climate or bad for the recipients, I don’t agree with that. Overscrutiny and taking forever — if, six months or a year from now, we have an issue and we’re still not giving credits — then, that’s a different set of circumstances.

“We want to get this right.”

Others worry more about the brand — mainly because these delays, they say, are only reinforcing a popular belief.

“The last thing companies want to do is enter into a business arrangement and find that that’s going to be utilized for political purposes,” one longtime broker said. “Plus, you’ve also got a situation where New Jersey quite frankly has had a history of this, right?”

I might go as far as to say this could be the greatest bait and switch ever.”
— Developer who received a Grow New Jersey award

Among other things, they noted former Gov. Chris Christie, a Republican, changed the way awards in the Business Employment Incentive Program, popularly known as BEIP, were distributed.

“At some point, yes, I think it does impact the long-term credibility of the state,” the person said. “More specifically, I think it completely undermines the EDA, which, contrary to what’s been portrayed, always has been extremely detailed and rigorous in their analysis, at least in a relative sense. 

“Perfect? No, of course not. But I think that there’s been a grave disservice done to the EDA as an agency and I wonder whether they’ll have any credibility in the eyes of the citizens of the state or of the business community going forward.”

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Going forward. That’s the question.

One developer, the recipient of an ERG, does not know what the next steps should be. The company has taken all of the steps it can think of.

“We have probably a year’s worth of email records and calls and texts,” the person said. “The EDA signed off on our request months ago. It was put over at Treasury. We’ve been through two guys at Treasury. The second guy doesn’t even answer his phone any longer; we don’t know if he’s still employed or not. He told us repeatedly, ‘I’m sitting with the check in my hand, but I’m not authorized to release it.’

“If this was a private party, if this had been a lender who did this deal, for example, we’d be in court already, suing them. This is a breach of contract, a breach of good faith.”

And it’s with a company that did right by the state, the person said.

“We’ve cured all sorts of problems the city was having, brought jobs in, created brand new tax revenues and now we’re getting screwed,” they said.

“This is killing us. I don’t know how you put a good spin on it.”

(Editor’s Note: Many of the quotes in this story were given on a condition that the speaker would not be identified. It’s an agreement the Editorial Board at ROI-NJ does not make lightly. In this case, we did.

Here’s why:

We interviewed more than a dozen people involved in some way in the business of state incentives — everyone from business and economic development leaders to brokers to lawyers to those having been awarded incentives from the state’s Grow New Jersey and Economic Redevelopment and Growth programs. Everyone said they feared speaking on the record would harm their relationship with Gov. Phil Murphy’s administration. They all, however, shared similar sentiments on the situation.

In addition, the complaints and criticisms were about policies and procedure. There were no personal attacks. This, as they say, was just business.

Because of that, we decided to run a number of these unattributed quotes — and do so while attempting to explain who the person was without revealing their identity.)

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