Gourmet Dining, LLC v. Union Twp.

• Decision Date: 30 June 2020
• Docket Number: 083146,A-8 September Term 2019
• Citation: 233 A.3d 410,243 N.J. 1
• Parties: GOURMET DINING, LLC, Plaintiff-Respondent, v. UNION TOWNSHIP, Defendant-Appellant, and New Jersey Educational Facilities Authority, Defendant, and Kean University, Defendant-Respondent.
• Court: New Jersey Supreme Court

243 N.J. 1

233 A.3d 410

GOURMET DINING, LLC, Plaintiff-Respondent,

v. UNION TOWNSHIP, Defendant-Appellant,andNew Jersey Educational Facilities Authority, Defendant,andKean University, Defendant-Respondent.

A-8 September Term 2019

083146

Supreme Court of New Jersey.

Argued March 17, 2020

Decided June 30, 2020

Robert F. Renaud argued the cause on behalf of appellant (Renaud DeAppolonio, attorneys; Robert F. Renaud and Adam J. Colicchio, on the briefs).

David B. Wolfe, Livingston, argued the cause on behalf of respondents (Skoloff & Wolfe, attorneys; David B. Wolfe, Robert F. Giancaterino, Livingston, and Rebecca L. Hutcheon, on the brief).

Richard F. Ricci, Roseland, argued the cause on behalf of amici curiae, Rutgers, The State University of New Jersey, Montclair State University, Rowan University, Stockton University, The College of New Jersey, and New Jersey Institute of Technology (Lowenstein Sandler, attorneys; Richard F. Ricci and Zachary L. Berliner, on the brief).

JUSTICE LaVECCHIA delivered the opinion of the Court.

The issue in this appeal is whether a high-end restaurant operated by a for-profit entity but housed in a building on the Kean University campus qualifies for exemption from local property taxation.

When the restaurant became operational, the operator, Gourmet Dining, LLC (Gourmet Dining), was named as the taxpayer by Union Township, which issued a tax assessment on the belief Gourmet Dining had a taxable leasehold interest. Gourmet Dining contested the assessment, claiming exemption from taxation under N.J.S.A. 54:4-3.3 (addressing State and other public property used for public purposes), and N.J.S.A. 54:4-3.6 (exempting property of colleges and other nonprofit organizations), among other bases no longer pertinent to this appeal. Bolstered by Kean University (the University), Gourmet Dining also advanced public purpose arguments emphasizing the University's interest in having the restaurant on its campus. The Tax Court rejected those arguments, but the Appellate Division found accumulated in them a basis to permit the exemption.

In this appeal, we are asked to evaluate whether the assertions by Gourmet Dining and the University satisfy the statutory standards for exemption from local property taxation for the operator of the facility. For the reasons expressed, we reverse the Appellate Division and reinstate the judgment of the Tax Court, which found the arrangement taxable as a lease or lease-like interest. We further hold that the public-benefit-oriented exemption provisions in issue were not intended to exempt the for-profit operator of a high-end, regionally renowned restaurant situated on a college campus, when the overriding purpose of this commercial endeavor is focused on profitmaking. The Tax Court properly held that Gourmet Dining, as the exclusive operator and manager of this restaurant establishment, must bear its fair share of the local real property tax burden.

I.

Certain tax statutes provide the framework for understanding this dispute.

Under our State Constitution, all real property within New Jersey is subject to taxation unless it qualifies for a statutory exemption. N.J. Const. art. VIII, § 1, ¶¶ 1 (a) and 2 ; see also N.J.S.A. 54:4-1 ("All property real and personal within the jurisdiction of this State not expressly exempted from taxation or expressly excluded from the operation of this chapter shall be subject to taxation annually under this chapter.").

The Legislature has created numerous exemptions from local taxation, and the two that are pertinent to this appeal are found in N.J.S.A. 54:4-3.3 and -3.6.

N.J.S.A. 54:4-3.3 addresses the exemption for public property. It provides in pertinent part that

the property of the State of New Jersey; and the property of the respective counties and municipalities, and their agencies and authorities, school districts, and other taxing districts used for public purposes, which public purposes include the use for stadiums and arenas, or for the preservation or exhibit of historical data, records or property; school district property which is leased to a nonprofit organization which is exempt from taxation under N.J.S.A. 54:4-3.6, for use by that organization in its exempt functions; school district property which is leased to another board of education or governmental agency; and property acquired by any municipality through tax title foreclosure or by deed in lieu of foreclosure, if not used for private purpose, shall be exempt from taxation under this chapter ....

[ N.J.S.A. 54:4-3.3.]

N.J.S.A. 54:4-3.6, in turn, exempts certain property of various non-profit organizations, including:

all buildings actually used for colleges, schools, academies or seminaries, provided that if any portion of such buildings are leased to profit-making organizations or otherwise used for purposes which are not themselves exempt from taxation, said portion shall be subject to taxation and the remaining portion only shall be exempt.

The Legislature has also created limitations on the otherwise exempt status of property. In that respect, N.J.S.A. 54:4-2.3 and N.J.S.A. 54:4-1.10 are relevant in this appeal.

N.J.S.A. 54:4-2.3 provides that real property entitled to tax exemption loses its exemption when leased to a person or entity whose property is not exempt. Under that statute,

[w]hen real estate exempt from taxation is leased to another whose property is not exempt, and the leasing of which does not make the real estate taxable, the leasehold estate and the appurtenances shall be listed as the property of the lessee thereof, or his assignee, and assessed as real estate.

[ N.J.S.A. 54:4-2.3.]

With the subsequent enactment of a related provision, codified at N.J.S.A. 54:4-1.10, the Legislature eliminated for tax exemption purposes "the artificial distinction between leased property and property used under a non-lease arrangement." Dep't of Envtl. Prot. v. Township of Upper Freehold, 31 N.J. Tax 230, 240 (Tax 2019) (quoting N.J. Highway Auth. v. Town of Bloomfield, 8 N.J. Tax 637, 642 (Tax 1987) ). N.J.S.A. 54:4-1.10 provides:

When real property which is exempt from taxation is used by a private party in connection with an activity conducted for profit, and the use does not render the real property taxable pursuant to section 1 of L. 1949, c. 177 ( N.J.S.A. 54:4-2.3 ) or otherwise, the real property shall be assessed and taxed as real property of the private party. The private party is subject to liability for taxation to the same extent as though he owned the property or any portion thereof, unless the owner consents to the taxation thereof. For purposes of this act, "use" means the right or license, express or implied, to possess and enjoy the benefits from any real property, whether or not that right or license is actually exercised.

Thus, according to New Jersey's statutory plan addressing tax exemptions for real property, an arrangement that is not technically a lease but operates as one is subject to taxation pursuant to N.J.S.A. 54:4-1.10, just as a leasehold estate would be subject to taxation under N.J.S.A. 54:4-2.3. See State v. Eatontown Borough, 366 N.J. Super. 626, 632-33, 841 A.2d 990 (App. Div. 2004) ("[T]ax liability is imposed on the lessee ( N.J.S.A. 54:4-2.3 ) or the ‘private party’ user of the premises ( N.J.S.A. 54:4-1.10 ).").

We now turn to the circumstances that gave rise to this appeal.

II.

A.

In resolving this matter on a summary judgment basis, the Tax Court summarized the steps that led to the establishment of the restaurant at the heart of this dispute. We draw extensively from that explication of the financial and other arrangements between the parties.

Gourmet Dining is "a restaurant, food service, dining operator, and manager," that, during the tax years in issue, owned and operated a fine dining restaurant named Ursino (the subject property or the property). Gourmet Dining, LLC v. Union Township, 30 N.J. Tax 381, 391 (Tax 2018). The subject property takes up approximately 6.4% of the University's 110,000 square foot New Jersey Center for Science, Technology, and Mathematics Building (STM Building).¹ Ibid. Construction of that educational facility was financed through tax-exempt bonds issued by the New Jersey Educational Facilities Authority (NJEFA), a State "instrumentality[ ] authorized to borrow money and issue bonds" to finance construction projects for educational institutions within the state. Id. at 391-92 ; see also N.J.S.A. 18A:72A-3 (defining "Educational facility" for purposes of meeting the definition of "project" eligible for NJEFA financing). As this record reveals, the NJEFA owns the STM Building and leases it to the University pursuant to a Lease Agreement dated December 1, 2005.² Gourmet Dining, 30 N.J. Tax at 392.

On June 28, 2010, the University's Board of Trustees adopted a Resolution by which the University determined to grant to the Kean University Foundation, Inc.³ (Foundation), the right to launch a restaurant in a portion of the STM Building and to "engage a restauranteur" for the project. Ibid. That Resolution required that "a minimum of 10 percent of the restaurant's gross revenues annually be allocated for scholarship purposes within the Foundation." Ibid.

More than a year later, on October 19, 2011, the University and the Foundation entered into their contractual arrangement regarding this restaurant project, executing an agreement (the Management Agreement) granting the Foundation "the ‘exclusive right to operate, manage and control’ the subject property." Ibid. The Management Agreement also allowed the Foundation to subcontract its management rights "to a manager with extensive experience and expertise in the management and operation of various restaurant and catering businesses, with [the] University's written consent." Ibid.

On the same day in October 2011, the Foundation and Gourmet Dining entered into a Management Subcontract Agreement (MSA); notably, the MSA conferred on Gourmet Dining the...