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The New Jersey Fair Housing Act, N.J.S.A. 52:27D-321.1, stipulates, in part, that:

The affordable portion of any mixed-income or mixed-use development that is part of a fair share housing plan that has obtained compliance certification, including a court-approved judgment of repose or compliance, including, but not limited to, a development that has received a density bonus, shall be permitted to receive allocations of low-income tax credits, provided that the applicant can conclusively demonstrate that the market-rate residential or commercial units are unable to internally subsidize the affordable units, and the affordable units are developed contemporaneously with the commercial or market-rate residential units.

In implementing this requirement, as stated in the Qualified Allocation Plan (QAP), N.J.A.C. 5:80-33.9(b), the Agency presumes that municipally approved inclusionary zoning, in and of itself, creates a realistic opportunity for the affordable units to be built and that such inclusionary zoning is sufficient to support the internal subsidization of the affordable units. To overcome this presumption, a LIHTC applicant must demonstrate, to the satisfaction of the Agency, that:

• LIHTC equity is needed to subsidize any affordable units to be built in excess of the municipal obligation; or
• Economic conditions have changed so much that the zoning, taking into account any density bonus received, no longer creates enough internal subsidy to build the required number of affordable units; or
• The municipally approved zoning erroneously determined that the internal subsidy would be enough to build the affordable units.

As stated in , economic changes notwithstanding, there should never be a scenario where the internal subsidy provided by market-rate units is completely disregarded. Any inclusionary analysis submitted to the Agency must account for the internal subsidy provided by the market-rate units and consider the possibility of a partial LIHTC award, along with alternate funding sources (such as additional deferred developer fees).

The following two types of projects must undergo an inclusionary review in order to receive LIHTC:

• Projects involving the development of new affordable units, including:
  • 100% affordable developments
  • Mixed-income developments; and
  • Mixed-use developments.
• Projects involving the gutting and rehabilitation of one or more buildings, or involving the movement of interior walls with the addition of new units

Projects that do not involve the development of new affordable units (i.e., rehabilitation-only) are exempt from the inclusionary review requirement.

There are two steps to the inclusionary review. All projects subject to the inclusionary review requirement must complete Step #1. Projects determined to be inclusionary must also complete Step #2.

Projects with any number of market-rate units are definitionally considered to be inclusionary and must complete both Step #1 and Step #2.

Whether a 100% affordable project with a commercial component must complete Step #2 will be determined on a case-by-case basis.

There are no fees for the inclusionary review process; however, applicants are responsible for all costs that they incur in completing the process, including any expenses for additional reviews.

Timing

Applicants must submit a complete inclusionary review package to the Agency:

• Prior to or simultaneous with the tax credit application, for projects seeking 9% LIHTC; and
• Prior to advancing to the Agency Board for approval of a Declaration of Intent.

Applicants must complete the inclusionary review process prior to:

• Receiving an award of 9% LIHTC; and
• Advancing to the Agency Board for approval of a mortgage commitment.

The Agency reserves the right, on a case-by-case basis, to require that a project complete the entire inclusionary review process prior to advancing to the Agency board for a Declaration of Intent.

In deciding how early to submit the inclusionary review package, applicants are advised to take into consideration that the determination of eligibility for LIHTC is based on the information provided by the applicant. If an applicant fails to supply all relevant information to the Agency, or if substantive changes to the project occur after submission of the inclusionary review package (unit count, financing plans, project costs, PILOT status, etc.), the Agency reserves the right to require a new inclusionary review, borne at the applicant’s expense, which may result in a new determination of eligibility for LIHTC.

The Agency estimates that, for complete submissions, Step #1 will take approximately six to eight weeks and Step #2 will take approximately eight to twelve weeks. However, complex projects may take longer. No review will begin until all required documents have been submitted to the Agency in satisfactory form. Applicants should note that any delay may impact the project’s targeted Board meeting date or jeopardize an award of 9% LIHTC.

Step #1: Inclusionary Determination

Step #1 determines if a project is inclusionary, specifically:

• Whether the project contains or is part of a project that contains both affordable residential units and market-rate residential units or non-residential uses (“inclusionary status”). This includes, but is not necessarily limited to, new construction, the conversion of a non-residential structure to residential or mixed-use, and the creation of new residential units through the reconstruction of a vacant residential structure; and
• Whether a zoning or other land use change was implemented to create a realistic opportunity for the construction of affordable housing by enhancing permitted uses, increasing permitted density and/or increasing intensity of use (“density bonus”).

If a project is determined to be not inclusionary, the inclusionary review is complete. The applicant has no further obligation with regards to the inclusionary review, provided that no substantive change(s) to the project occur.

If a project is determined to be inclusionary, including all mixed-income projects, it proceeds to Step #2.

Step #2: Need Determination

Step #2 determines if an inclusionary project has conclusively demonstrated a need for tax credits. As part of Step #2, the applicant must commission and submit a feasibility analysis by an independent third party (details below). The Agency (or a third-party vendor contracted by the Agency) will review the feasibility analysis in order to make a final determination as to whether there is a need for tax credits, in whole or in part. The Agency will issue its determination to the applicant. However, the final tax credit award/allocation is based on a number of factors and cannot be concluded until the full review of the entire LIHTC application has occurred, including the needs analysis required by Section 42(m)(2)(a) of the Internal Revenue Code.

If an inclusionary project is determined to have conclusively demonstrated a need for tax credits, the inclusionary review is complete. The applicant has no further obligation with regards to the inclusionary review, provided that no substantive change(s) to the project occur.

If an inclusionary project is determined NOT to have conclusively demonstrated a need for tax credits, the project may not receive any award or allocation of LIHTC.

Applicants may appeal the Agency’s determination in Step #2 by submitting a written request for reconsideration to the Executive Director no later than 10 business days from the date of notification of inclusionary determination. The request must include a comprehensive discussion of the basis for reconsideration. Such requests will be considered promptly by way of internal Agency review and discussion. The Agency reserves the right to request additional information, as needed, in order to make its final determination, which may include updates to the applicant-commissioned feasibility analysis. A final decision letter will be issued to the developer upon conclusion of the Agency’s review.

Requirements for Step #1: Inclusionary Determination

All inclusionary review submissions must include a completed NJHMFA Inclusionary Review Checklist. Click here to download the blank NJHMFA Inclusionary Review Checklist

Applicants must submit the following information to the Tax Credit Division (as applicable) via the LIHTC mailbox — NJHMFAtaxcredits@njhmfa.gov — or via the Agency’s Multifamily and Supportive Housing Lending Portal. Applicants who submit their Step 1 documentation through the Portal should notify the Tax Credit Division by email to NJHMFAtaxcredits@njhmfa.gov after submission. No hard copies of the materials are required. Please note that this is not an exhaustive list and the Agency reserves the right to request additional information:

• Completed NJHMFA Inclusionary Review Checklist;
• One of:
  • Part I of the UNIAP; or
  • If Step #1 is being completed in advance of submitting an application for Agency financing and/or LIHTC, pages 2–3 of Part I of the UNIAP, as well as the type of LIHTC sought (9% or 4%) and the anticipated timeframe for submitting an application for Agency financing and/or LIHTC;
• Project narrative;
• A listing of all existing and future/proposed projects located in the same municipality by the same developer;
• Organizational chart for the project;
• Complete site control documentation in accordance with QAP requirements;
• Approved site plan(s) for affordable and market-rate components;
• Timetable for affordable and market-rate components, including timing of any phases and availability of units for rent/sale;
• Information on any associated market-rate components linked to the affordable component;
• Description and documentation of any business arrangement(s) relevant to additional components of any associated market-rate development;
• Description and documentation of financial ties or subsidies between affordable and market-rate components (e.g., sale or transfer of land, shared infrastructure improvements, financing, etc.); 
• A listing of all locally assigned names for the site (e.g., Smith Tract, Horse Farm Site);
• Block and lot numbers for all parcels associated with the development, including affordable, market-rate, and non-residential components;
• A written description and map showing any subdivision, re-subdivision, lot merger, or lot consolidation of any parcels listed above;
• A copy of the municipal fair share plan and/or judgment of repose or compliance;
• Copies of all municipal planning board, zoning board of adjustment, and/or land use approvals for the affordable units and any associated market-rate or commercial units;
• The current municipal Master Plan Housing Element, most recent Master Plan Reexamination Report, any applicable Area in Need of Redevelopment designations, any applicable Redevelopment Plans, and any applicable Redevelopment Agreements;
• Current zoning applicable to all property associated with the development;
• If current zoning on the property was adopted specifically to create a realistic opportunity for the construction of affordable housing, a copy of the zoning ordinance that was in effect prior to the adoption of current zoning; and
• If the project contains any market-rate units, a feasibility analysis as required by Step #2 of the inclusionary review process.

Requirements for Step #2: Need Determination

For Step #2, projects determined to be inclusionary, including all mixed-income projects, must submit a feasibility analysis. The feasibility analysis must:

• Be performed by an independent third party skilled in market and financial analysis;
• Be certified to the Agency;
• Provide all calculations electronically in Excel format with live formulas (i.e., do not “paste values”); and
• Include, at a minimum, the following information:
  • Pro forma(s) for the market-rate and/or mixed-use component(s) of the development, including, but not limited to:
    • Development costs;
    • Development financing (equity, borrowing amounts, and anticipated rates);
    • Operating/sales costs; and
    • Revenue (from rentals/sales, including ancillary sources and/or unit upgrades);
  • Pro forma for the affordable component of the development, with the same information as for the market-rate and/or mixed-use component(s);
  • Calculated Internal Rate of Return (IRR) for the market-rate and/or mixed-use component, as well as for the combined project, with and without the requested LIHTC;
  • Narrative explanation, signed by the applicant, of the reasons for the insufficiency of the combined project returns absent the requested LIHTC, which explains the basis for the insufficiency, ties the explanation to the financial analysis, and is consistent with the assumptions in the pro formas referenced above;
  • Other financial analyses used to support the narrative explanation; and
  • Inclusionary formula calculation, illustrating the internal subsidization as determined at the project’s planning stage.

The Agency reserves the right to request additional information from the applicant as needed to complete the need determination.

• NJHMFA Inclusionary Review Checklist
• QAP (see pages 24–27)