On certification to the Superior Court, Appellate Division.
For affirmance as modified -- Chief Justice Hughes and Justices Mountain, Clifford and Schreiber. For reversal -- Justices Sullivan, Pashman and Handler. The opinion of the court was delivered by Schreiber, J. Handler, J., dissenting. For these reasons, I dissent. Justice Sullivan and Justice Pashman join in this dissent.
This case presents a difficult problem in real property tax valuation involving the assessment under N.J.S.A. 54:30A-52 of land beneath a reservoir created and owned by the Hackensack Water Company, a private water public utility. The municipal taxing authority is the Borough of Old Tappan.
The background of this controversy is as follows. In the late 1950's, the taxpayer, Hackensack Water Company, purchased 940.805 acres of natural basin property along the Hackensack River in the Borough of Old Tappan. The Company excavated the land and built a dam across the river, creating a reservoir which it called Lake Tappan. The river bed is now located generally in the middle of the reservoir. Part of the reservoir (about 20%) extends into the Township of River Vale, which is adjacent to Old Tappan. The bed of the Hackensack River marks the boundary between the Borough and the Township.
Of the 940.805 acres located in Old Tappan, 424.151 are dry upland, and the remaining 516.654 are submerged under as much as twenty feet of water. The bulk of the land now under water was swamp land before it was excavated and flooded. The 424 upland acres are undeveloped and, according to the taxpayer's testimony, are necessary to maintain the integrity of the reservoir. The dam, built at a cost of several million dollars, is the only structure on the Old Tappan tract.
This litigation began in 1970, when the Company appealed the Borough's 1970 property tax assessment of the Old Tappan tract to the Bergen County Board of Taxation. The County Board reduced the assessment of $7,118,900 to
$3,869,175. The lowered assessment was based on a valuation of the upland acreage at $6500 per acre and of the underwater property at $2500 per acre. The Borough acquiesced in the reduction and assessed the property at the lower amount for the 1971, 1972 and 1973 tax years. The Company, however, appealed the 1970, 1971, 1972 and 1973 County Board determinations to the Division of Tax Appeals. The four appeals were tried together before the Division.
The Company's appeal was limited to the objection that its underwater property had been overvalued. The Division reduced the County Board's assessment from $3,869,175 to $2,835,875. The reduction was based solely on the finding that the 516 underwater acres had a nominal value of $500 per acre. Upon the Borough's appeal, the Appellate Division in an unreported decision adopted the reasoning of the Division of Tax Appeals and affirmed. We granted certification. 73 N.J. 61 (1977).
The Hackensack Water Company is a privately owned public utility which furnishes water to approximately 800,000 customers in Bergen and Hudson Counties. It is subject to comprehensive regulation by the Board of Public Utility Commissioners. In re Public Service Electric and Gas Co., 35 N.J. 358, 371 (1961). The Company could not, for example, sell the Lake Tappan reservoir without Board approval. N.J.S.A. 48:3-7. As a water public utility the Company is subject to "a complete scheme and method" for taxation for public utilities, N.J.S.A. 54:30A-49 et seq., under which it pays a percentage of its gross receipts to the State, some of which are then distributed to municipalities in which the company has its facilities. Under the statutory format all real estate must "be assessed and taxed at local rates in the manner provided by law for the taxation of similar property owned by
other corporations or individuals * * *." N.J.S.A. 54:30A-52.
Real estate is defined as "land and buildings, but it does not include * * * reservoirs (except that the lands upon which dams and reservoirs are situated are real estate) * * *." N.J.S.A. 54:30A-50(b). The problem here, then, is to evaluate the land beneath the reservoir according to the criteria established generally for assessment of real property. The statutory test calls for an assessment of the land at its "full and fair value * * * at such price as * * * [the property] would sell for at a fair and bona fide sale by private contract * * *." N.J.S.A. 54:4-23. A fair sale encompasses a transaction between "a buyer willing but not obliged to buy, and a seller willing but not obliged to sell." Greenwich Tp. v. Gloucester Cty. Bd. of Taxation, 47 N.J. 95, 99 (1966). In applying that test it is appropriate to consider the highest and best use of the property. See City of Clifton v. No. Jersey Dist. Water Supply Comm'n, 104 N.J. Super. 147, 153 (App. Div. 1959).
The parties assumed the highest and best use of the land was for residential development and presented proofs designed to demonstrate value on that basis. However, it was shown that conversion of this reservoir bottom into a tract amenable to suburban living would require a number of costly engineering maneuvers: a dam would have to be dismantled and the water captured by it drained away without flooding the surrounding countryside; millions of cubic yards of landfill would then have to be dumped into the resulting basin to create land suitable for building and high enough to withstand flooding; and the Hackensack River, now stopped up by the dam, would have to be rechanneled, a feat that would cost, according to one expert's estimate, around $5,000,000. The evidence showed that the conversion expense would far exceed the fair market value of residential property in the area. Since property owners cannot be charged with the cost of restructuring their property (property should be valued in the actual condition in which the
owner holds it, Trustees of Stevens Inst. of Technology v. State Board, 105 N.J.L. 99, 101 (Sup. Ct. 1928), aff'd 105 N.J.L. 655 (E. & A. 1929)), the Division's finding that financially it was not feasible to develop the property for residential use was fully supportable in the record.
However, the Division ignored basic precepts when it assumed that residential use was the sole guidepost for valuation and that the taxpayer would have been compelled to give its property away for residential purposes. Underlying the settled rule that remote uses are irrelevant, Div. of Tax Appeals v. Ewing Tp., 72 N.J. Super. 238, 243 (App. Div. 1962); City of Clifton v. No. Jersey Dist. Water Supply Comm'n, supra, is the more basic principle that property valuation should have some relationship to reality, and the reality of the matter is that the land is useful as a reservoir. Therefore, it would have been ...