Ry. Ave. Props. LLC v. Paterson City Paterson Charter Sch. for Sci. & Tech., Docket No. 014575-2015
| Decision Date | 04 September 2018 |
| Docket Number | Docket No. 007075-2016,Docket No. 014599-2015,Docket No. 014575-2015,Docket No. 007018-2016 |
| Parties | Re: Railway Avenue Properties LLC, v. Paterson City Paterson Charter School for Science and Technology v. Paterson City |
| Court | New Jersey Tax Court |
Re: Railway Avenue Properties LLC,
v.
Paterson City
Paterson Charter School for Science and Technology
v.
Paterson City
Docket No. 014575-2015
Docket No. 007018-2016
Docket No. 014599-2015
Docket No. 007075-2016
TAX COURT OF NEW JERSEY
September 4, 2018
Joshua D. Novin Judge
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE TAX COURT COMMITTEE ON OPINIONS
David J. Yanotchko, Esq.
Florio Kenny Raval, LLP
5 Marine View Plaza, Suite 103
Hoboken, New Jersey 07030
Scott G. Collins, Esq.
Rudy Randazzo, Esq.
Riker Danzig Scherer Hyland Perretti, LLP
Headquarters Plaza
One Speedwell Avenue
Morristown, New Jersey 07962-1981
Lamiaa E. Elfar, Esq.
Elfar & Associates, PC
15 Ramsey Road, Suite 2
Middletown, New Jersey 07748
Dear Mr. Yanotchko, Mr. Collins, Mr. Randazzo, and Ms. Elfar:
This letter shall constitute the court's opinion on defendant, City of Paterson's ("Paterson"), motions for partial summary judgment, plaintiff, Paterson Charter School for Science
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and Technology's ("PCSST"), cross-motions for summary judgment, and defendant, Railway Avenue Properties, LLC's ("Railway Avenue"), cross-motions for summary judgment.1
For reasons explained herein, the court concludes that the property, which is the subject matter of these tax appeals, is owned and used in a manner consistent with the criteria for local property tax exemption under N.J.S.A. 54:4-3.6.2 Accordingly, the court denies Paterson's motions for partial summary judgment, denies PCSST's cross-motions for summary judgment, and grants Railway Avenue's motions for summary judgment.
I. Procedural History and Findings of Fact
Pursuant to R. 1:7-4, the court makes the following findings of fact and conclusions of law based on the certifications and exhibits submitted by the parties.
Railway Avenue is a limited liability company, formed in 2011 under the New Jersey Limited Liability Company Act.3 Railway Avenue's sole member is Apple Educational Services Inc. ("Apple"), a nonprofit corporation organized under the laws of the State of New York, and authorized to transact business in New Jersey. Apple's Restated Certificate of Incorporation recites that its organizational purpose is to "improve the quality of educational institutions by
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providing access to educational services, products, and facilities that enable these institutions to offer their students the best quality education possible. . . ."
PCSST is a public school operating under the New Jersey Charter School Program Act, N.J.S.A. 18A:36A-1 to -18. PCSST received its charter from the New Jersey Department of Education in 2001 however, due to challenges in finding a suitable school building, did not open its doors until the fall of 2003.4 Initially, PCSST comprised 12 teachers and an enrollment of 147 students, in grades sixth through eighth. In 2005, PCSST relocated to property at 276 Wabash Avenue, Paterson, enabling it to serve up to 588 students, in grades sixth through tenth, with a faculty and staff of fifty-two. In 2009, PCSST was granted approval from the New Jersey Department of Education to serve grades kindergarten through fifth. By late 2011, PCSST reached its maximum enrollment capacity and required a larger school building to continue to expand its public educational programs for the children of Paterson and State of New Jersey.5
PCSST identified a potential suitable property at 196 West Railway Avenue, Paterson, New Jersey (the "subject property"). The subject property is designated as Block 6704, Lot 1 on Paterson's municipal tax map. However, PCSST did not have the financial wherewithal to acquire the subject property and make renovations necessary to use it as a school. Accordingly, PCSST partnered with Apple, an organization "founded by educators who have broad experience facilitating the development of public charter school programs," to develop a plan to acquire and finance acquisition of and renovations to the subject property. PCSST and Apple approached the
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New Jersey Economic Development Authority ("NJEDA"), to attempt to secure the requisite funding for the subject property, to serve as PCSST's high school campus. The proposed plan involved establishing a single-member/single-purpose New Jersey entity that would: (i) secure loan financing from the NJEDA; (2) use the loan proceeds to acquire title to and renovate the subject property; (iii) grant a mortgage on the subject property to NJEDA as security for the loan proceeds; (iv) lease the subject property to PCSST; and (iv) act as a conduit to repay the NJEDA-sponsored loan.6 Ultimately, the NJEDA approved the project and loan financing through the sale of approximately $11,945,000 in bonds.
On December 7, 2011, Railway Avenue's Certificate of Formation was filed with the New Jersey Department of Treasury ("Certificate of Formation"). The Certificate of Formation provides that Apple is its sole member, and that at no time shall Railway Avenue "have any other member." The Certificate of Formation further provides the following:
[Railway Avenue] shall at all times be operated exclusively to further the charitable purposes of Apple Educational Services, Inc[.] within the meaning of Section 501(c)(3) of the Internal Revenue Code . . . and may not carry on activities not permitted to be carried on by an organization described in Section 501(c)(3) of the Code.
At all times the following shall operate as conditions restricting the operations and activities of [Railway Avenue]:
A. No part of the net earnings of [Railway Avenue] shall inure to the benefit of, or be distributable to its members, trustees, officers, or other private persons, except that [Railway Avenue] shall be authorized to pay reasonable compensation for services rendered and to make payments and distributions in furtherance of the exempt purposes set forth in this Certificate of Formation . . .
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D. Upon dissolution of [Railway Avenue], Apple Educational Services, Inc. shall, after paying or making provision for the payment of all the liabilities of the Company, dispose of all of the assets of the Company exclusively for the purposes of the Company or to other organizations qualifying as exempt organizations under Section 501(c)(3) of the Code and which organizations pursue any or all of the objectives for which Apple Educational Services, Inc. is established.
E. Notwithstanding anything else herein provided, [Railway Avenue] is organized and shall be operated exclusively to further the tax-exempt purposes of its sole member, Apple Educational Services, Inc. . . . and all purposes or powers herein shall be interpreted and exercised consistent with this intention.
On September 27, 2012, Railway Avenue acquired title to the subject property. Thereafter, on September 28, 2012, Railway Avenue entered into a lease agreement with PCSST for the subject property (the "Lease"). The Lease was for an initial five-year term and provided for six renewal terms of five years each.7
The Lease requires PCSST to pay sums defined as "Basic Rent," "Additional Rent," and a "Landlord's Fee" to Railway Avenue. The Basic Rent, Additional Rent, and Landlord's Fee are limited, in the aggregate, to the sum of $1,395,200 annually, which sum is defined as the "Cap Amount." Basic Rent is defined as the total debt service due under the NJEDA bond. The term Additional Rent includes reserve amounts required to be deposited with the NJEDA, or its agent, for maintenance and operation of the subject property. The term Landlord's Fee is defined as "the Cap Amount [$1,395,200] . . . minus the Debt Service and Additional Rent . . ." The rent is due and payable in twelve equal monthly installments of $116,266.67 each.
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PCSST submits payments under the Lease directly to U.S. Bank, trustee for NJEDA. The Lease payments are used to satisfy the debt service to NJEDA and the additional amounts due under the loan agreement. To the extent that the Lease payments exceed the Basic Rent and Additional Rent, U.S. Bank will remit those funds to Railway Avenue. In turn, Railway Avenue uses those funds to cover its costs of operation and distributes excess funds, if any, to Apple for use in its nonprofit operations. Railway maintains that for the 2015 tax year, it operated at a loss of $983,659.84, and for the 2016 tax year, at a loss of $313,761.56.8
Railway Avenue's assets consist solely of the subject property and the Wabash Property. Similarly, Railway Avenue's sole revenue source to repay the NJEDA loans is derived from leasing the two properties to PCSST.
A certificate of occupancy for the subject property was issued to PCSST in or about July 2013, and PCSST has and continues to exclusively occupy the subject property as its high school, educating students in grades seven through twelve. The subject property consists of classrooms, laboratories, computer facilities, and student recreation facilities.
In 2013, Paterson's municipal tax assessor granted the subject property an exemption from local property taxes.9 The local property tax exemption continued through the 2014 and 2015 tax years. However, sometime during 2015, Paterson's newly appointed tax assessor revoked the subject property's tax exemption and levied an added assessment for the fourth quarter of the 2015 tax year. The 2015 tax year added assessment was as follows:
| Land: | $ 971,200 |
| Improvement: | $2,390,000 |
| Total Prorated Assessment: | $3,361,200 |
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Both PCSST and Railway Avenue timely filed tax appeals challenging the 2015 added assessment. For the 2016 tax year, the subject property was assessed as taxable on Paterson's tax roll bearing a total assessment of $3,361,200. Both PCSST and Railway Avenue timely appealed the subject property's 2016 tax assessment.
Paterson moved for entry of summary judgment under R. 4:46-2, arguing that the subject property was taxable during the 2015 and 2016 tax years. Paterson's motion is premised on two main arguments: (1) neither PCSST nor Railway Avenue are entitled to an exemption from...
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