Hotel Dorset Co. v. Trust for Cultural Resources of City of New York

• Decision Date: 13 July 1978
• Citation: 407 N.Y.S.2d 480,63 A.D.2d 157
• Parties: HOTEL DORSET COMPANY, a New York partnership, Plaintiff-Appellant, v. TRUST FOR CULTURAL RESOURCES OF the CITY OF NEW YORK and Abraham D. Beame, Mayor of the City of New York, Defendants-Respondents.
• Court: New York Supreme Court — Appellate Division

Page 480

407 N.Y.S.2d 480

63 A.D.2d 157

HOTEL DORSET COMPANY, a New York partnership, Plaintiff-Appellant, v. TRUST FOR CULTURAL RESOURCES OF the CITY OF NEW YORK and Abraham D. Beame, Mayor of the City of New York Defendants-Respondents.

Supreme Court, Appellate Division, First Department.

July 13, 1978.

Arthur Richenthal, New York City, of counsel (Richenthal, Abrams & Moss, New York City), for plaintiff-appellant.

Alfred Weinstein, New York City, of counsel (L. Kevin Sheridan, New York City, with him on the brief; Allen G. Schwartz, Corp. Counsel, New York City), for defendant-respondent Mayor.

Manly Fleischmann, New York City, of counsel (Webster & Sheffield, New York City), for defendant-respondent Trust for Cultural Resources.

Shirley Adelson Siegel, New York City, of counsel (Samuel A. Hirshowitz, New York City, with her on the brief; Louis J. Lefkowitz, Atty. Gen. of the State of New York), in support of the constitutionality of the New York State Cultural Resources Act.

Before LUPIANO, J. P., and LANE, SANDLER and SULLIVAN, JJ.

SULLIVAN, Justice.

At issue is the constitutionality of two separate but related statutes enacted together by the State Legislature: General Municipal Law, Art. 13-E, §§ 301-323, known as the New York State Cultural Resources Act (SCRA), Laws of 1976, ch. 902, and General Municipal Law, Art. 13-F, §§ 325-331, known as the New York City Cultural Resources Act (CCRA), Laws of 1976, ch. 903, as amended by ch. 904.

Plaintiff contends that the challenged statutes are special interest laws which unconstitutionally grant tax exemptions and condemnation powers for the benefit of a private corporation, the Museum of Modern Art (MOMA), through the artifice of the Trust for Cultural Resources of the City of New York (Trust). We agree.

For some insight into the background of this legislation, we quote from MOMA's biennial report covering the years 1974-1976, signed by its Director:

"In the fall of 1975, after long study and analysis, the Museum announced a highly innovative proposal to deal with the seemingly intractable problems of its financial situation and need for additional space. In essence, the plan proposed the creation through State legislation of a Trust for Cultural Resources which would be empowered to arrange for the development of the Museum's valuable air rights by constructing a condominium apartment tower. The tower would be built over a new Museum wing to the west of the existing building; this wing would approximately double the Museum's present gallery space and provide other new facilities. The Trust would be empowered to receive the equivalent of real estate taxes on the condominium and convey these payments to the Museum, providing substantial new revenues for the Museum's support.

There are many hurdles to be overcome before this exciting project can be realized. However, one vital stage was accomplished in the final month of the period of this report, when the legislation establishing the Trust for Cultural Resources was passed by the State legislature."

The concept was to obtain revenues for MOMA's benefit from rental income, profits realized on the sale of the apartments, and "tax-equivalency payments" to be paid to the Trust in lieu of real estate taxes which would have been paid to the City on the luxury apartment tower (to be 44 stories).

To achieve this diversion of tax revenues from the City to MOMA, special legislation was required because the residential or commercial portion of MOMA's property would not be exempt from real estate taxes even if the revenue produced by such properties were used to support the museum. The enactment of legislation designating MOMA as the sole beneficiary would on its face run afoul of the constitutional prohibition against granting tax exemptions except by "general law." (New York Const., Art. 16, § 1.) ¹ Article 9, § 3(d) (1) of the State Constitution defines a general law as one ". . . which in terms and in effect applies alike to all counties . . . all cities, all towns or all villages."

MOMA currently owns the brownstones adjoining the museum on the east. This property is being used for cultural purposes. Since the proposed apartment tower is to be built over a museum wing to be constructed on the west side of the existing building, the acquisition of the adjoining properties to the west of its existing facilities was required. These properties are located at 29, 31 and 33-35 West 53rd Street. Plaintiff, the owner of a hotel at 30 West 54th Street, which abuts MOMA's proposed development, owns an easement on 29 West 53rd Street. Hence, condemnation powers were needed to assure acquisition of these adjoining properties and extinction of plaintiff's air rights, both for the expansion of museum facilities and the construction of the luxury tower.

The first of the challenged statutes, SCRA, applicable on its face to cities throughout the State, authorizes creation for each city by "special law" of "trusts for cultural resources" which are denominated public benefit corporations.

The second, CCRA, is a special law creating a "trust for cultural resources for the City of New York." This is the trust referred to earlier. This special law is limited to museums and on its face, at least, applies generally to museums in the City. CCRA is the only special law that has been enacted by the Legislature pursuant to SCRA.

SCRA and CCRA together authorize the Trust and a "participating cultural institution" to develop "combined-use facilities", consisting of the institutional portion, such as a museum, and a non-institutional portion, such as income-producing luxury apartments. Through the medium of the Trust, the entire facility becomes exempt from the payment of real estate taxes. The owners of the residential or commercial portions of combined-use facilities would make tax-equivalency payments to the Trust in amounts equivalent to the real estate taxes they otherwise would pay to the local government. These tax-equivalency payments would be used to support the museum.

The infirmity in this statutory scheme is its eligibility requirements which are so restrictive that within the entire State of New York only MOMA qualifies as a "participating cultural institution" with which the Trust may enter into an agreement for the development of "combined-use facilities." Nor is there any reasonable possibility that another cultural institution would ever become eligible.

SCRA-CCRA defines a "participating cultural institution" as a non-profit institution which:

(a) operates a museum in the City (General Municipal Law § 325(3)(i));

(b) owns fee title to contiguous tax-exempt real property of more than 50,000 square feet for at least five years (General Municipal Law §§ 307(1), 325(3) (ii)); and

(c) has average annual admissions of at least 500,000 persons for at least five years (General Municipal Law § 325(3)(iii)). ²

The requirement of ownership for at least five years in fee simple of more than 50,000 square feet "contiguous tax-exempt real property" is no insignificant hurdle. While other non-profit institutions such as the Metropolitan Museum of Art and the American Museum of Natural History can meet the requirement of 500,000 average annual admissions for a five-year period, these institutions cannot qualify because they do not own in fee simple the requisite real property.

The purpose of SCRA-CCRA was to create an exemption from City real estate taxes on the luxury residential tower. This tax exemption is critical because the tax-equivalency payments will be paid to the Trust to underwrite MOMA's expansion and operating budget.

SCRA provides that the real property and improvements of a combined-use facility, including the institutional (museum) and the noninstitutional (residential or commercial building) portions, "shall be exempt from real property taxation from and after the date on which such real property has first been conveyed to the trust" (General Municipal Law § 317, subd. 2). ³

As long as the real property of the non-institutional portion of the facility is exempt from real property taxation, the owners of such residential or commercial building are to make the tax-equivalency payments to the Trust. The payments are to be in an amount at least equal to the real estate taxes which would be paid on the building were it not for the real estate tax exemption. The method of calculation and use of the tax-equivalency payments are to be determined by the special law creating the trust (General Municipal Law § 307, subd. 3).

CCRA in turn provides that there shall be a full exemption from any tax-equivalency payments during construction, and a sliding scale exemption during the ten-year period after completion of construction (General Municipal Law § 330, subd. 2).

For a fuller appreciation of the true dimension of SCRA's tax exemption provisions, some analysis of one aspect of the scheme is warranted. This is not a statute which provides a tax exemption on property owned by a public-benefit corporation. The exemption attaches when the Trust momentarily acquires title to or interest in the real property on which any part of the combined-use facility is to be constructed. (General Municipal Law § 317, subd. 2.) This exemption will survive the conveyance of the Trust's interest to the private owners of the luxury apartment tower. Since there is no termination date this tax exemption may continue in perpetuity. Although the luxury apartment tower owners will, after ten years, be paying the equivalent of the real estate taxes they would otherwise be subject to, these payments will be made to the Trust for MOMA, rather than to the City treasury. ⁴ Thus, not only will the City be losing tax revenues from this valuable 44-story luxury apartment tower but the burden of providing the municipal services which its occupancy will entail will be on the backs of the taxpayers. Moreover, under the exemption plan,...