The New Jersey Unused Tax Credits Purchase Act, recently enacted by the New Jersey Legislature and signed by Governor Murphy, authorizes the New Jersey Department of the Treasury, through the Division of Taxation, to purchase unused tax credits issued under a range of state economic development programs. The legislation specifically addresses the purchase of tax credits under the following programs:

• Historic Property Reinvestment Act
• Brownfield Redevelopment Incentive Program Act
• New Jersey Innovation Evergreen Act
• Food Desert Relief Act
• New Jersey Community-Anchored Development Act
• New Jersey Aspire Program Act
• Emerge Program Act
• Grow New Jersey Assistance Program
• State Economic Redevelopment and Growth Grant Program
• Cultural Arts Incentives Program Act

The Treasury would be required to purchase unused tax credits under the Aspire and Cultural Arts Facilities (CAFE) programs. 

A critical feature of the Act is the establishment of specific purchase percentages for unused tax credits. For most programs, the Director of the Division of Taxation may purchase unused credits at up to 75% of their face value. However, for the New Jersey Aspire Program and the Cultural Arts Incentives Program, the Director is required to purchase unused credits at 85% of their face value, provided that the tax credit certificate was issued at least one year prior to the application for purchase. For Aspire credits, if the application is made after the sixth year of the eligibility period, the amount in excess of the reasonable and appropriate rate of return on investment increases to 50%.

Potential Legal and Practical Implications

For lenders and other parties interested in financing against Aspire tax credits, the Act provides a significant enhancement to the liquidity and certainty of these credits. The state’s obligation to purchase unused Aspire and CAFE credits at 85% of face value (subject to the one-year holding period) creates a reliable exit mechanism for holders, which can be leveraged as collateral in financing transactions. This statutory buyback feature reduces the risk profile for lenders, as it establishes a clear, state-backed floor for the value of the credits.

Additionally, the Act’s provisions may increase the attractiveness of Aspire credits as a financing tool, potentially leading to more favorable lending terms and broader participation by financial institutions. The requirement that the credits be held for at least one year before being eligible for state purchase may influence the structuring of loan maturities and collateral arrangements.

Notable Changes from Prior Law

Prior to this legislation, holders of unused tax credits under the Aspire Program and other covered programs had limited options for monetizing their credits, often relying on private market sales or transfers, which could be subject to discounts and market uncertainty. The new law introduces a state-backed purchase mechanism, providing a guaranteed liquidity option at a defined percentage of face value, which did not previously exist.

Relevant Deadlines and Compliance Requirements

• One-Year Holding Period: For Aspire and Cultural Arts credits, the tax credit certificate must have been issued at least one year prior to the application for state purchase.
• Application Timing: For Aspire credits, if the application is made after the sixth year of the eligibility period, the amount in excess of the reasonable and appropriate rate of return on investment increases to 50%.
• Immediate Effect: The Act takes effect immediately, making its provisions available to current and future holders of eligible tax credits.

Implications for Lenders

• Reduced Credit Risk: The statutory buyback at a defined percentage of face value significantly reduces the risk associated with lending against Aspire credits, as the state provides a clear, enforceable floor for their value.
• Improved Collateral Value: Aspire credits become a more attractive and predictable form of collateral, potentially leading to more favorable loan terms and increased lender participation.
• Structuring Considerations: Lenders should note the one-year holding period requirement before credits are eligible for state purchase, which may affect loan maturity and collateral release provisions.
• Timing for Applications: For applications made after the sixth year of the eligibility period, special rules apply regarding the return on investment, which may impact the economics of longer-term financing arrangements.

The New Jersey Unused Tax Credits Purchase Act represents a major development for lenders and other stakeholders in the state’s economic development ecosystem. By providing a state-backed purchase option for Aspire and CAFE tax credits, the law enhances the utility and security of these credits in financing transactions. Lenders are encouraged to review the new provisions carefully and adjust their practices to maximize the benefits of this legislative change.

For more information, please contact:

Brendan Pytka
Director of Tax Credits & Incentives
Phone: (862) 418-3702
Email: bpytka@murphyllp.com

Chris Murphy, Partner
Chair, Tax Credits & Incentives
Phone: (973) 705-7421
Email: cmurphy@murphyllp.com