As pandemic restrictions ease and life resumes a sense of normalcy, owners of commercial real estate shouldn’t be lulled into a false sense of comfort. As a result of lingering work-from-home policies, exploding interest rates and a change in overall demand for space, vacancy rates for office buildings in New Jersey are on the rise. For many owners, now is the time to re-evaluate the highest and best use for your commercial office building and take action. Here is your plan of attack:
Evaluate your options: First, identify what potential the property may have based upon its location or attributes. For example, an office building near a train station or bus terminal may be a great location for apartments. A property near a major highway or interstate could have great potential for warehouse or manufacturing use. Consider converting it to a mixed-use property, which would allow an owner to add residential units to existing commercial or retail space.
Identify your allies: In any plan for redevelopment, the municipality in which the property is located and elected officials can be your most powerful allies. Increased vacancy rates often cause lower property values, thereby leading to an increase in tax appeals and lower tax ratables as a result. Further, increased vacancies can deter new residents and businesses from moving into and investing in the municipality. Discuss your initial thoughts for redevelopment with the municipality.
The municipal advantage: If you were able to secure the interest of the municipality, the property may qualify for one or more programs that incentivize redevelopment. Two common incentives to explore are whether this property could meet the criteria for designation as an “Area in Need of Redevelopment” or whether a change in the current zoning is appropriate.
Consider whether the property meets the criteria for a designation as an Area in Need of Redevelopment in accordance with the Local Redevelopment and Housing Law of New Jersey. This designation allows the municipality to provide incentives for (re)development, such as a Payment in Lieu of Taxes (or PILOT) agreement, which can make a redevelopment project financially feasible. A PILOT also incentivizes a municipality to encourage redevelopment, as 95% of the annual payments made by the property owner are applied to the municipal budget.
A municipality also may change the zoning for the property by rezoning or providing an overlay zone for certain areas of the municipality. While a rezoning or implementation of an overlay zone will not generally provide the benefits of a PILOT, the change will allow an owner to repurpose an asset to a use that will better fit the demand and be more likely to get leased. New Jersey law does not provide a uniform method for seeking a zone change, so it is important to meet with the local officials of your municipality to ensure the proper steps are taken.
Creative alternatives: If the municipality is not cooperating, there are other options. A renovation and introduction of new amenities to an older office building could be the quickest and least expensive way to bring the building current with the competition. Also, consider reviewing the underlying zoning ordinance to identify permitted uses that were not otherwise known. For example, in addition to general office, permitted uses in some zones could include gyms, medical uses, theaters or catering facilities. The existing zoning already may permit a use that would revitalize the property.
If none of the above solutions will work, an owner always can apply to the zoning board of adjustment for a use variance. This will require a team of professionals to demonstrate to the board why the use should be permitted in a zoning district that does not expressly permit it. In many instances, the use is appropriate and beneficial, but the municipal ordinances are outdated.
Change breeds either complacency or opportunity. While there may be complex legal and political hurdles to overcome, owners of commercial real estate should explore all options. The current changes in the commercial real estate market may just be the catalyst that creates a perfect opportunity for an owner with the ability to seize it.
Michael Lipari is counsel in the Real Estate Practice at Mandelbaum Barrett P.C., based in Roseland. He focuses his practice on land use, zoning and redevelopment. Joshua Gorsky is a partner in the firm’s Real Estate Practice and focuses his practice on the leasing, financing, purchase and sale of commercial real estate.
