While foreclosure is a major collections tool for community associations across New Jersey, many board members and industry professionals may be unaware that New Jersey’s foreclosure law has just undergone its most significant change in living memory. On January 12, 2024, Governor Phil Murphy signed into law Assembly Bill A5664/Senate Bill S4240, commonly known as the “Community Wealth Preservation Program” or “CWPP.” This sweeping legislation fundamentally changes how foreclosure sales are conducted in several ways, most significantly the rights it affords to so-called “Nonprofit Community Development Corporations” at sheriff’s sales of foreclosed properties.
When a property is foreclosed, it is sold at a “sheriff’s sale” – a public auction conducted by the sheriff of the county in which the property is located. The goal is for the property to be bid on by members of the public, ideally to be sold at or around its fair market value. The CWPP allows certain corporations to eliminate the bidding process by purchasing foreclosed properties outright at the foreclosing party’s “upset price” – an amount that generally reflects what the party is owed. In many cases, the “upset price” is far less than the fair market value of the property. Consider the example below:
- Party A forecloses on a mortgage. At the time of sheriff’s sale, Party A is owed a total of $100,000. Party A’s “upset price” is $100,000. The foreclosed property is valued at $500,000.
- The property is announced at sheriff’s sale. Corporation B announces that it is exercising its right to buy the property under the CWPP. Corporation B purchases the property for Party A’s “upset price” of $100,000. No public bidding takes place.
One thing should stand out in this example: Corporation B purchased the property for a steal – $400,000 cheaper than its fair market value. This is a simplistic illustration, but countless similar circumstances have unfolded across the state since the CWPP went into effect in January 2024.
The legislative goal behind this section of the CWPP is to allow qualifying “Nonprofit Community Development Corporations” to acquire foreclosed properties at a reduced price, so that they can either permit the former owners to continue living there, or lease or sell the property subject to affordable housing restrictions. To qualify, a corporation must be a tax-exempt nonprofit entity under Section 501(c)(3) of the Internal Revenue Code, and its IRS filings must indicate that the mission of the corporation includes “community revitalization through the restoration of vacant and abandoned property to create or preserve affordable housing.”
Noble as the legislature’s intentions may have been, the CWPP has caused serious concern among many in government and the private sector who are familiar with the foreclosure process. Sheriff’s sales have seen an onslaught of “Nonprofit Community Development Corporations,” many of which satisfy the minimal requirements of the CWPP, but whose actual motives are less clear. The concerns are so great that, as of this writing, two counties (Ocean and Atlantic) have stopped applying this section of the CWPP entirely.
Regardless of whether “Nonprofit Community Development Corporations” truly exist for “community revitalization,” the CWPP has at least two significant implications for community associations. The first is financial. Community associations often record liens against properties when the owners are delinquent. When a property is sold at sheriff’s sale and the sale price exceeds the upset price, the difference between the sale price and the upset price is held by the state as “surplus funds.” Associations that recorded liens on the property can then apply to obtain those “surplus funds” and be made whole.
Recall, however, that the CWPP allows “Nonprofit Community Development Corporations” to purchase properties at the upset price. This prevents any surplus funds from being generated and, as a result, eliminates what is often the association’s most feasible method of recovery. Since the CWPP went into effect, several associations, as well as lenders who have been similarly deprived of access to surplus funds, have taken to court to challenge the constitutionality of the CWPP for this reason. As of this writing, this litigation remains unresolved.
The second major implication is less immediate, but possibly even more far-reaching. The CWPP requires that, if a property is purchased by a “Nonprofit Community Development Corporation” and then sold or leased, it must be deed-restricted as affordable housing. Affordable housing deed restrictions mean that only purchasers or renters below a certain maximum income can buy or rent the property. Many community associations have a certain number of affordable units; others have none. Regardless, as properties within associations are sold under the CWPP and converted to affordable housing, the number of affordable-housing units will gradually expand. The long-term effects of this development are uncertain, but it has the potential to drastically alter the socioeconomic composition of many community associations across the state.
The phenomenon of “Nonprofit Community Development Corporations” spawned by the CWPP is only one piece of this paradigm-shifting legislation. Its full story is yet to be told, as we await decisions of the courts and possible legislative action to amend the law. For now, community associations are left to contend with a foreclosure process that is far removed from what it was little more than a year ago.