and has a place of business in West Milford, New Jersey. See Second Amended Complaint, P 4. Kemp is currently owner of the land and premises designated as lots 12 ("Lot 12") and 13 ("Lot 13") in Block 3901 on the tax map of the Township of Hanover, Morris County, New Jersey (collectively, the "Hanover Site"). Id.
2. Apollo is a limited partnership organized and existing under the laws of the state of New Jersey and has a place of business in Morristown, New Jersey. See id., P 6. Apollo is the owner of lands adjacent to the Hanover Site. Id., P 8. Apollo is also prospective purchaser of the Hanover Site. Id., P 6.
3. USR was a corporation existing under the laws of Delaware, engaged in, among other things, the production of phosphors. See Stipulation, PP 16-17. In or about 1980, USR underwent corporate restructuring. As a result of the reorganization, USR formed Safety Light, USR Industries, USR Chemicals, USR Lighting, USR Metals and USNR. See Second Amended Complaint, P 8A. Before 21 December 1950, USR owned Lot 13.
4. Prudential is a mutual insurance company organized and existing under the laws of New Jersey. See Stipulation, P 1. Prudential held title to Lot 13 from 21 December 1950 until 24 July 1964. See Stipulation, P 27; Exs. J-16, J-17.
5. During World War II, Prudential invested its assets primarily in war bonds. See Stipulation, P 2. Following the War, in or about 1946, Prudential began to transfer assets from war bonds into other investments. Id., P 3.
6. At this time, income tax rates were high and there was a great deal of uncertainty as to the future of the United States economy. Id., P 3; Tr. at 76. Interest rates and inflation were minimal. See Tr. at 76. This economic climate led to a conservative attitude toward investments. Id. at 77.
The Property Purchase Program
7. In this economic climate, Prudential embarked on a plan to redistribute its assets so as to guarantee a fixed but steady return on its investments. See Stipulation, P 8. Accordingly, in or about 1946, Prudential adopted "a modest program for the purchase of carefully selected income properties and also the purchase of some unimproved property for development . . . ." Id., P 9. This program was referred to as the "Industrial Loan and Property Purchase Program" (the "Program"). Tr. at 74.
8. Pursuant to the Program, Prudential's Mortgage Loan Department was expanded to provide financing for one-story industrial properties. Id. The financing method utilized by the Program was the 'sale-leaseback.' Id. at 79.
9. The sale-leaseback emerged as a financing method in the late 1940s. Id. at 122. It is neither a loan nor a sale, but rather a "hybrid financing device" whereby the debtor 'sells' property to the creditor in exchange for the amount the debtor requires to acquire the property, and the creditor simultaneously leases the property to the debtor for the debtor's continued use. Id. at 122, 126. "Under this arrangement, the seller receives cash from the transaction and the buyer is assured a tenant and a fixed return on the investment." The Dictionary of Real Estate Appraisal 318 (3d ed. 1993).
10. In a sale-leaseback, the buyer/creditor takes title to the subject property,
but the seller/debtor retains the primary benefits of ownership, such as "long-term occupancy and control over the property." Tr. at 122. The benefits of such an arrangement to the debtor are that there is little or no capital investment required and the debtor may obtain financing closer to the value of the collateral -- the leased property -- than in a conventional loan. Id. For example, whereas a lender may not feel comfortable loaning a mortgagor more than 75% of the value of the mortgaged property, the buyer in a sale-leaseback generally provides financing in an amount up to 100% of the value of the subject property. See Tr. at 129; Ellwood Tables for Real Estate Appraising and Financing (the "Ellwood Tables") 115 (2d ed. 1967) ("Despite its all cash nature, the philosophy and economics of purchase-leaseback are little different than those of the level periodic installment, full-amortization mortgage investment. Imagine if you will this type of mortgage investment at 100% of purchase price and you have the most important, initial characteristic of the typical purchase-leaseback transaction."). Prudential's industrial mortgage loans typically provided the mortgagor with only two-thirds of the value of the mortgaged property. Tr. at 74.
11. Because of the increased risk posed by the sale-leaseback configuration, Prudential expected to obtain a return of 1/2% to 3/4% more from such transactions than it could obtain in a conventional mortgage loan. Tr. at 82. In 1950, the average yield on mortgage loans made by Prudential's Mortgage Loan Department in New Jersey was 4.07%. See 1950 Review at 9.
12. "Typical buyers [in sale-leasebacks] are life insurance companies and pension trusts [which] are interested primarily in long-term income at a fixed rate of return commensurate with that obtainable from well secured mortgage investments." Ellwood Tables 116; Tr. at 130. "Institutional buyers normally are not in [a] position to, or at least do not wish to provide real estate management. Consequently, the leases are usually written on an absolutely net basis with the tenant providing all the management and paying all the bills." Ellwood Tables 116.
13. In instituting the Program, Prudential was interested not in owning or operating industrial properties, but in obtaining a fixed rate of return on its investments. See Tr. at 86-87. Accordingly, Prudential, after obtaining the deeds to properties acquired in the Program, "had very little involvement with these properties, other than to do periodic ride-by inspections to determine if the properties were being maintained satisfactorily."
Id. at 86. Prudential did not supervise the management of any of these properties. Id. at 86-87.
14. In evaluating a proposed sale-leaseback, the primary consideration to the financing institution is generally the creditworthiness of the 'seller'
Although type, quality and condition of the real estate are afforded due consideration, the financial responsibility of the tenant and his prospects for continued success for a long period of future years are of great importance. He will be subjected to the same investigation and be expected to meet the same qualifications as if he were applying for long-term debenture financing.
Ellwood Tables 116.
15. Prudential evaluated prospective participants in the Program in similar fashion. There were two key criteria in evaluating applicants: the creditworthiness of the applicant and the value of the property as security.
Tr. at 75-76. An industrial company that approached Prudential seeking financing through the Program was required to provide Prudential with operating statements and other credit history over the previous ten years. Id. at 78-79. Prudential would then appraise the subject property "to establish the security [it was] getting for the financing [it was] extending." Id. at 79-80. "Only companies on which Prudential could qualify their credit" were accepted into the Program. Id. at 74.
16. As title owner of the properties in the Program, Prudential was entitled to, and typically did, take a depreciation on the properties for tax purposes, in accordance with Internal Revenue Service ("IRS") regulations. Id. at 74; see Deposition of Russell Apgar (the "Apgar Dep."), submitted into evidence as Ex. P-42, at 48.
17. In 1950, Prudential typically did not grant repurchase options to participants in the Program. Tr. at 109. Prudential "made the assumption that [the subject properties] wouldn't be worth anything [upon the expiration of the lease] because [it] had very little experience with these properties and the primary purpose was to get [its] money back." Id. at 90.
18. This policy, moreover, was intended to preserve certain tax benefits to sellers. Id. Specifically, in 1950, rental payments made by the seller/tenant in a sale-leaseback would be fully deductible under Federal tax laws. Id. at 143-44. The inclusion of a repurchase option in a sale-leaseback would have caused the IRS to view the transaction as a conditional sale and refuse these tax benefits to sellers. Id.
The USR Leaseback
19. In the late 1940s, USR decided to construct a facility on Lot 13 to accommodate anticipated expansion of its phosphor production operations. See Stipulation, PP 18-19. USR's vice president located Lot 13 and recommended it to USR as an appropriate site for expansion. Id., P 20. USR required financing for the project and approached Prudential to secure such financing. USR also proposed to construct, according to its own specifications, a building on Lot 13 (the "USR Building"). See Deposition of John Davenport (the "Davenport Dep."), submitted into evidence as Ex. D-20, at 8-9.
20. Prudential evaluated USR's proposal as it did any other proposal from an applicant to the Program. Tr. at 85. In an internal memorandum to Prudential's Finance Committee, dated 2 May 1950 (the 2 May 1950 Memo"), the Mortgage Loan Department recommended acceptance of USR's proposal. See 2 May 1950 Memo, submitted into evidence as Ex. J-3, at 1. The 2 May 1950 Memo recommended that Prudential purchase Lot 13 from USR for a price not to exceed $ 179,000, an amount representing 95.5% of the appraised value of Lot 13 and the proposed USR Building.
Id. (stating appraised value of Lot 13 and USR Building was $ 197,000); see Tr. at 135.
21. The 2 May 1950 Memo recommended an initial lease term of twenty-five years, with four ten-year renewal options. See 2 May 1950 Memo at 1. The Mortgage Loan Department recommended a net annual rent of $ 15,322.40, representing 8.56% of the purchase price, for the first fifteen years of the initial term and $ 4,528.70, representing 2.53% of the purchase price, for the remaining ten years of the initial term. Id. The recommended annual rent for the first two renewal terms was $ 4,475.00, representing 2.5% of the purchase price. The recommended annual rent for the final two renewal terms was $ 3,580.00, representing 2.0% of the purchase price. Id.
22. Based on these rents, the 2 May 1950 Memo stated the USR Building "will be amortized in approximately 14 2/3 years and the land and building in approximately 15 years at 3 1/2% interest." Id. The 2 May 1950 Memo further predicted the "yield with complete recovery of investment over 25 years will be 5%." Id.
23. The terms "amortize" and "interest" are most commonly used in connection with security transactions and not in connection with purchases of property for the purpose of ownership. See Tr. at 184.
24. The 2 May 1950 Memo recommended that USR be obligated "to pay all taxes, assessments, water charges, insurance and utilities" and that USR be further required to submit audited financial statements "annually within 90 days after the end of each fiscal year." 2 May 1950 Memo at 2. The 2 May 1950 Memo concluded:
[USR] agrees if the total cost of the proposed project exceeds the sum of $ 197,000 by not more than 10%, it shall pay such excess out of its corporate funds. However, if said costs shall be exceeded by more than 10%, [Prudential] may at its option cancel any commitment issued by it unless such funds over said 10% are provided for by new capital or from net earnings of [USR] transferred to surplus, subsequent to January 1, 1950.
25. The 2 May 1950 Memo demonstrates that Prudential viewed the proposed transaction with USR primarily as a financing and not as a purchase of property. Tr. at 183. Prudential viewed its interest in Lot 13 as a guarantee of USR's obligations and returns on the proposed transaction as interest on its initial commitment. Id. at 184-85. This finding is further supported by Prudential's interest in the creditworthiness of USR and the cost to USR of the proposed USR Building. Id. at 184.
26. On 10 July 1950, USR and Prudential entered into an agreement (the "Leaseback Contract") whereby Prudential would acquire title to Lot 13 from USR for a price of $ 179,000.00 and simultaneously lease the property back to USR. Stipulation, PP 24-26; see Leaseback Contract, submitted into evidence as Ex. J-5.
27. After execution of the Leaseback Contract, USR hired Wm. Blanchard Co. (the "Contractor") to construct a production facility, the USR Building, on Lot 13. Davenport Dep. at 8. Construction was completed in December 1950, at a total cost of $ 187,670.19. See Sworn Statement of Cost, dated 21 December 1950 (the "Cost Statement"), submitted into evidence as Ex. J-11. Of this total cost, $ 3,500.00 represented the cost to USR of acquiring Lot 13 itself. Id.
28. On 21 December 1950, USR conveyed title to Lot 13 and the USR Building to Prudential through transfer a deed, dated 21 December 1950 (the "1950 Deed"). See Stipulation, PP 27, 29; 1950 Deed, submitted into evidence as Ex. J-6, at 1. The 1950 Deed is marked with $ 196.90 in revenue stamps. Id. Simultaneous with delivery of the 1950 Deed, Prudential and USR entered into the lease contemplated by the Leaseback Contract (the "Lease") Stipulation, P 28.
29. Pursuant to the Lease, USR, along with its "successors and assigns" were conveyed the right "to have and to hold" Lot 13 for an initial term of twenty-five years at a net annual rental of $ 15,322.40 until 1 December 1965 and $ 4,528.70 thereafter. Lease, submitted into evidence as Exhibit J-7, at 2.
30. The rental payments under the Lease were structured so as to amortize the amount committed by Prudential in the Leaseback Contract over the useful life of the property. Id. at 88-89, 140. Such a structuring of rental payments is consistent with the treatment of mortgage loans. Id.
31. Also pursuant to the Lease, USR agreed to pay
all real estate taxes, assessments, water rates and charges, and other governmental charges, general and special, ordinary and extraordinary, unforeseen as well as foreseen, of any kind and nature whatsoever, including but not limited to assessments for public improvements or benefits which shall during the term hereby demised be laid, assessed, levied, or imposed upon or become due and payable and a lien upon the demised premises or upon any part thereof . . . .