The opinion of the court was delivered by: Kuskin
Block 400, Lot 1 contains 1116.14 acres of which 710.2 acres are submerged under approximately 7,300,000,000 gallons of water. The balance of the lot consists of a buffer area surrounding the body of water, wetlands, wetlands transition areas and developable upland. 1077.14 acres are located in the R-3 Zone in which the principal permitted use is single family residences on lots having a minimum size of 15,000 square feet with townhouse development, at a density of 2.5 units per acre, as a conditional use. 26.3 acres are located in the R-1 Zone in which the principal permitted use is single family residences on lots having a minimum size of 40,000 square feet, and 12.7 acres are located in the SED-3 Zone in which the principal permitted uses are offices and scientific research laboratories on lots having a minimum area of three acres. The Lot also contains a dam and three storage buildings.
Lot 1 in Block 450 contains 5.2 acres and Lot 2 in such Block contains 3.79 acres, all located in the SED-3 Zone. Both Lots are vacant and unimproved. Block 494, Lot 8 contains 49.53 acres located in the R-1 Zone, and is improved with a water filtration plant.
Construction of the reservoir and necessary piping (extending some twenty-two miles to the City of Jersey City) was completed, and the water was "turned on," on May 23, 1904. Mayor and Aldermen of Jersey City v. Flynn, 74 N.J. Eq. 104, 109 (Ch. 1908), modified sub nom. Mayor and Aldermen of Jersey City v. Jersey City. Water Supply Co., 76 N.J, Eq. 607 (E.&A. 1910). The following description of such construction appeared in an article entitled "Work Progressing on Jersey City's Water Works" in the September 5, 1902 issue of The Boonton Times :
A number of handsome farmhouses that now dot the roadside between here and Parsippany have been sold to the water company and will have to be tom down, and hundreds of acres of as fine farm land as there is in the State will be submerged. The village of Parsippany will practically be wiped out. Old Boonton, about a mile from Boonton, whose history dates back to Revolutionary times, will be completely buried under water, and several old landmarks will be razed to the ground.
It was here that the first iron mills in the United States were set in motion, and when cannon balls were made for the Revolutionary Army the ore used in the mills was brought from the mountains in saddle bags to be smelted and forged into nails, cannon balls, etc. The old stone mill, which in late years was used as a paper mill, marks the spot where the old iron mill stood. On the other side of the road stands an old Revolutionary house, which was built 140 years ago and which has sheltered Washington and other officers of Revolutionary fame.
During the excavations for the dam a large number of fossil fishes, imbedded in the stone, were found thirty feet under the surface, and there now can be seen the footprints in the stones where the ichthyosauris walked on the shores of some prehistoric lake, older than Lake Passaic or the Bergen Hills. The excavations have been a mine of information to geologists.
In fact the new reservoir will occupy the site of a lake that, according to Professor Gratacap, of the American Museum of Natural History of New York, existed some 15,000,000 years ago, more or less. The lake, when completed, will add to the beauty of picturesque Boonton, for from its hills it will be plainly seen in the valley below.
Because of the characteristics of the subject property, determining the value of the property for tax assessment purposes requires resolution of the following issues:
1) the valuation methodology to be applied to the underwater portion and surrounding buffer area of Block 400, Lot 1;
2) the quantity of developable acreage in each Zone on each Lot. Subsumed in this issue are the issues of whether the buffer area surrounding the body of water on Block 400, Lot 1 should be deemed to be 250 feet or 300 feet in width and to what extent steep slopes inhibit development of portions of the property; and
3) whether and to what extent the value of developable land should be reduced by reason of the moratorium on conveyances imposed by the Watershed Protection Act, L. 1988, c. 163 as amended by L. 1990, c. 19, as such Act is interpreted in Newark v. Hardyston Tp., 285 N.J. Super 385 (App. Div. 1995), certif. denied, 143 N.J. 518 (1996).
The first issue is, by far, the most significant because it affects approximately 90% of the dollar amount of assessments under appeal and involves a fundamental conflict between the valuation approaches used by the parties. This conflict arises from the parties' differing interpretations of N.J.S.A. 54:4-3.3 pursuant to which the subject property was assessed. This statute provides in relevant part as follows:
The lands of counties, municipalities, and other municipal and public agencies of this State used for the purpose and for the protection of a public water supply shall be subject to taxation by the respective taxing districts where situated, at the taxable value thereof, without regard to any buildings or other improvements thereon, in the same manner and to the same extent as the lands of private persons, but all other property so used shall be exempt from taxation.
The statute was enacted in 1910. Its purpose was to eliminate the exemption from taxation previously enjoyed by lands "used for the purpose and protection of a public water supply." Other municipal lands used for public purposes remained exempt, and, therefore, the statute accorded "special tax treatment" to publicly-owned water supply lands. East Orange v. Livingston Tp., 102 N.J. Super 512, 529 (Law Div. 1968), aff'd 54 N.J. 96 (1969).
Both parties assert that, as of each of the relevant valuation dates (October 1 preceding each year under appeal), then current and reasonably foreseeable environmental laws and regulations prohibited, and would prohibit, draining the water from Block 400, Lot 1 and reclaiming the land for development. Both parties agree, therefore, that, for purposes of these appeals, such body of water should be considered permanent. Based upon their respective interpretations of the phrases "without regard to any buildings or other improvements thereon" and "in the same manner and to the same extent as the lands of private persons" appearing in N.J.S.A. 54:4-3.3, the parties reach dramatically different valuation Conclusions from their shared premise of a permanent body of water.
Plaintiff asserts that: (a) under the statutory language requiring that the subject property be assessed "in the same manner and to the same extent as the lands of private persons," Block 400, Lot 1 must be assessed as if it were a privately-owned lake not utilized for water supply purposes, and (b) the phrase "without regard to any buildings or other improvements" refers to the dam and storage buildings (as well as the filtration plant on Block 494, Lot 8) and does not refer to the water included in the reservoir. Plaintiff's appraiser, accordingly, excluded from consideration a highest and best use as a water supply facility, determined that the highest and best use for the land under water and surrounding buffer land, "as the lands of private persons," was for conservation and open space use, and so valued such lands.
Defendant asserts that: (x) the statutory reference to "private persons" does not preclude valuation of the body of water and buffer area as a reservoir (presumably owned by a private water company); and (y) under the statutory requirement that the land be valued "without regard to any buildings or improvements thereon," the water is an "improvement" and must, therefore, be disregarded in valuing the underlying land. Defendant's appraiser, accordingly, determined that the highest and best use for Plaintiff's entire property, including the land under water and surrounding buffer area, was as a reservoir, but that the purchase price to acquire the land for this use would be based on the value of the land for development as zoned (i.e., for residential development or for office or research laboratory development). The appraiser valued the land as so zoned, ignoring the presence of the water.
These widely divergent interpretations and applications of N.J.S.A. 54:4-3.3 led, inevitably, to widely divergent value Conclusions. Plaintiff valued Block 400, Lot 1 at $4,500,000 for each year under appeal. Defendant valued such Lot at $30,835,000 for 1990 and $31,760,000 for 1991 and each succeeding year under appeal.
Because of the fundamental conflict between the two valuation approaches, I must, in valuing the underwater portion and surrounding buffer area of Block 400, Lot 1, select the approach advanced by one of the parties and rely on that approach to the exclusion of the other. Decisional law involving appeals of property tax assessments on both municipally-owned water facilities and privately-owned water supply facilities provides the basis for making such selection. Of primary importance are decisions of the New Jersey Supreme Court which interpret the statutory provisions governing assessments of such facilities and establish substantive differences between the valuation methodology permissible for publicly-owned water supply facilities and the methodology permissible for privately-owned facilities. As set forth above, publicly-owned water supply facilities are taxed pursuant to N.J.S.A. 54:4-3.3. Privately-owned facilities are taxed pursuant to N.J.S.A. 54:30A-52 and not pursuant to N.J.S.A. 54:4-3.3. N.J.S.A. 54:30A-52 provides in relevant part as follows:
"All the real estate as herein defined... owned or held by any taxpayer shall 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 ... ."
"Real estate" is defined in N.J.S.A. 54:30A-50(b) as "lands and buildings, but it does not include ... pipes, conduits, bridges, viaducts, dams and reservoirs (except that the lands upon which dams and reservoirs are situated are real estate) ... ."
The differences between valuation methodologies applicable to publicly-owned and privately-owned water supply facilities result primarily from the highest and best use analysis for each type of facility. For property tax assessment purposes, property must be valued at its highest and best use. Ford Motor Co. v. Edison Tp., 127 N.J. 290, 300-01 (1992); Inmar Assocs. v. Edison Tp., 2 N.J. Tax 59, 64 (Tax 1980). Highest and best use is defined as:
the reasonably probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, and that results in the highest value.
[Appraisal Institute, The Appraisal of Real Estate 297 (11th ed. 1996).]
This definition has been accepted and adopted by the New Jersey Courts in property tax appeals involving a wide variety of property types, including water supply facilities. The Supreme Court has however, imposed restrictions on the highest and best use analysis of publicly-owned water supply facilities under N.J.S.A. 54:4-3.3 which restrictions are not applicable to the analysis of privately-owned facilities under N.J.S.A. 54:30A-52.
The seminal decision as to publicly-owned water supply facilities is Newark v. West Milford Tp., 9 N.J. 295 (1952), in which the City of Newark challenged the tax assessment on 18,548 acres of watershed property, including a reservoir, located in the Township of West Milford. The Court's opinion does not indicate the number of acres under water and does not distinguish between "watershed" and "underwater" land. The record on appeal reveals that the property under appeal included 1,197 underwater acres. "Excerpts Taken From the Testimony of [George W.] Rude," Appendix to Brief for Defendant-Appellant, Township of West Milford, Newark v. West Milford Tp. in 161 Supreme Court of New Jersey (1951-52) at 52a. The Court defined the "purpose and intent" of N.J.S.A. 54:4-3.3 as:
to distribute the tax burden of the taxing district equably between the municipality owning watershed lands and the lands of the other taxpayers of the district. [The statute] subjects such lands to taxation at their true value on the same terms and conditions as the lands of the other taxpayers in the district are subjected to. The scheme is essentially different from the method of taxing property of private companies.
The statute impliedly prohibits an assessment of such lands as part of an integrated utility with the resultant increment to the value of such lands because of their integrated use. An assessment on such a basis necessarily would result in a higher valuation and would burden the municipality owning the watershed property with a disproportionate share of the tax burden of the taxing district.
[Id. at 301-02 (citations omitted).]
Further explanation of the valuation principles set forth in Newark v. West Milford Tp. appeared in In re Appeal of East Orange, 80 N.J. Super 219 (App. Div.), certif. denied, 41 N.J. 200 (1963), which involved the valuation of vacant lands owned by the City of East Orange and located in the Township of Livingston. The lands contained an underground aquifer that served as a water supply source for residents of East Orange.
The central concept in Newark v. West Milford Tp. is that N.J.S.A. 54:4-3.3 precludes a valuation approach based upon any special factor of value inhering in the property as devoted to integrated water utility purposes because other lands in the municipality are not being used for such purposes and the municipally-owned water supply lands must be assessed in the same manner as comparable land of the generality of real estate taxpayers in the taxing district. Therefore since, as indicated above, the influence upon the assessable valuation of the lands of taxpayers generally of the fact that they contained subterranean water-bearing strata would in ordinary course exert very little influence on the true or market value of the property, the same Conclusion must be arrived at for purposes of determining the true or assessable value of the property of East Orange in this case.
The Appellate Division also held that such water supply property, just as all other types of property, must be valued "in the actual condition in which the owner holds it," id. at 230 (citations omitted), taking into account the property's "fitness and availability ... for particular uses ... rather than the fact of actual use as such." Id. at 231 (citations omitted).
In Hackensack Water Co. v. Old Tappan Bor., 77 N.J. 208 (1978), the Supreme Court set forth the permissible valuation methodology in valuing water supply lands owned by a private utility company. Of the 940.80 acres under appeal, 516.654 acres were under water. The balance of the property was dry upland. Both parties assumed that the highest and best use of the entire 940.8 acres was for residential development and valued the land on that basis. The proofs demonstrated, however, that, in order to make the underwater land usable for residential development, a dam would have to be dismantled, the water drained, and then millions of cubic yards of fill dumped into the resulting basin. The cost of performing this work would far exceed the fair market value of the reclaimed residential land. The Court rejected valuation based on a residential highest and best use.
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), the Division's finding that financially it was not feasible to develop the property for residential use was fully supportable in the record.
[Id. at 213-14 (citations omitted).]
After noting that "property valuation should have some relationship to reality," the Court determined that: "The reality of the matter is that the land is useful as a reservoir. Therefore, it would have been proper to consider the actual highest and best use of the land, namely as a reservoir in conjunction with the operation of a utility water system." Id. at 214. In a footnote to this determination, the Court stated that Newark v. West Milford Tp., supra, and other cases construing N.J.S.A. 54:4-3.3 "do not control us here." Hackensack Water Co. v. Old Tappan Bor., supra, 77 N.J. at 214 n.1. *fn1 In such footnote, the Court also commented that valuing the Hackensack Water Co. property based on use as a reservoir was consistent with the suggestion in In re Appeal of East Orange, supra, 80 N.J. Super. 219, that, if the evidence therein had demonstrated that the value for water supply purposes of municipally-owned land with an underground aquifer "compared favorably with the value for other purposes, such as residential development, evaluation of the land from the standpoint of its availability as a water supply would have been appropriate." Hackensack Water Co. v. Old Tappan Bor., supra, 77 N.J. at 214 n.1.
The Supreme Court concluded that the comparable sales approach and income approach "are not compatible with the unique problem posed here," id. at 215, because the operations of the water supply utility, including sale of the property and income generated, were "subject to comprehensive regulation by the Board of Public Utility Commissioners." Id. at 212 (citation omitted). The Court then determined that the original cost of the land was included in the rate base for purposes of setting the rates chargeable by Hackensack Water Co. and held: "The original cost at least bears some relationship to the value of the reservoir land and it is appropriate to rely upon it in the absence of any other evidence." Id. at 217 (footnote and citation omitted). The Court indicated that consideration of a trending of the original cost would be appropriate, but the record contained no evidence to permit such trending analysis.
Tax Court decisions valuing municipally-owned water supply facilities have reached conflicting Conclusions as to the applicability and meaning of Old Tappan and Newark v. West Milford Tp, supra, 9 N.J. 295. In Newark v. Cedar Grove Tp., 7 N.J. Tax 66 (Tax 1984) the Tax Court, after noting that, under Old Tappan, municipally-owned lands cannot be valued as part of an integrated water supply facility, nevertheless determined, based on Old Tappan, that the highest and best use of underwater land included in such a facility was as a reservoir. The Tax Court then proceeded to value that land for residential development as zoned because "in a comparable situation involving the valuation of a golf course, it was recognized that where the highest and best use of land was as a golf course, and where the zoning also permitted residential construction, the cost approach to value required the land to be first valued as unimproved land by comparing it with raw land similarly zoned." Newark v. Cedar Grove Tp., supra, 7 N.J. Tax at 75 (citations omitted).
In Newark v. West Milford Tp., 7 N.J. Tax 35 (Tax 1984), the defendant Township of West Milford contended that the same 18,548 acres of watershed lands at issue in Newark v. West Milford, supra, 9 N.J. 295, should be valued at a highest and best use of "'a continuation of its use for water supply purposes'." Id. at 43.
West Milford's position in this litigation was that Newark had no intention of selling any of the property, that "it is highly speculative that any use could be advanced to overcome the essential water supply purpose of the vast bulk of acreage under consideration," and that "property valuation should have some relationship to reality,"....
The Tax Court rejected West Milford's approach and held (i) that Hackensack Water Co. v. Old Tappan Bor., did not "stand for the proposition that the highest and best use of a municipally-owned property can be as a watershed," Newark v. West Milford Tp., supra, 7 N.J. Tax at 46, and (ii) that Old Tappan was inapplicable because its focus was on land under water whereas the lands before the Tax Court were almost entirely uplands, *fn2 and because "Newark is obviously not a privately-owned water company and is not as tightly regulated as the Hackensack Water Company with regard to buying and selling its lands in the marketplace." Id. at 47.
The inconsistency between the Tax Court's decision in Newark v. West Milford Tp. and the Tax Court's decision in Newark v. Cedar Grove Tp. cannot be explained on the basis that the former decision involved watershed lands and the latter involved underwater lands. The inconsistency is the result of fundamentally different interpretations and applications of Newark v. West Milford, supra, 9 N.J. 295, and Hackensack Water Co. v. Old Tappan Bor., supra, 77 N.J. 208. I find that, in valuing the subject underwater land and surrounding buffer area, the distinctions recognized by our Supreme Court between valuation of municipally-owned water supply facilities and valuation of privately-owned water supply facilities should be understood and applied generally in accordance with the Tax Court's analysis in Newark v. West Milford Tp., supra, 7 N.J. Tax 35.
For both municipally-owned and privately-owned water supply land the first step in the valuation analysis is the selection of a highest and best use. A reservoir has been defined as: "[a] natural or artificial place, e.g., a lake, a pond, a tank, where water is collected and stored to supply a community, an irrigation system or a power plant ... ." The Dictionary of Real Estate Appraisal 305 (3rd ed. 1993). A reservoir use, therefore, has meaning and can constitute a highest and best use only in the context of an integrated water supply system. In Hackensack Water Co. v. Old Tappan Bor., supra, 77 N.J. 208, 214, the Supreme Court found the highest and best use for privately-owned underwater land to be "as a reservoir in conjunction with the operation of a utility water system." Accordingly, if municipally-owned lands could be valued on the basis of a highest and best use for reservoir purposes, any distinction between the highest and best use analysis for privately-owned water supply facilities and such analysis for publicly-owned water supply facilities would be eliminated. The Supreme Court has, however, established such distinction by holding in Old Tappan that only privately-owned water supply land may be valued based on a highest and best use as part of an integrated water supply facility, and by holding in Newark v. West Milford Tp., supra, 9 N.J. 295, that publicly-owned water supply land may not be valued based on such a highest and best use. I conclude, therefore, that, in valuing the subject publicly-owned underwater land and surrounding buffer area, a privately-owned water utility company may not be included within the definition of the "private persons" to which N.J.S.A. 54:4-3.3 refers, highest and best use as a reservoir may not be considered, and value may not be based on such use.
Although the appraiser for the Defendant determined that the highest and best use of Plaintiffs entire property was as a reservoir, he did not value any portion of the property, including the underwater and buffer areas in Block 400, Lot 1 as a reservoir. He utilized a cost approach to value, with valuation of the land as vacant, based on comparable sales, being the first step in such approach. The appraiser did not value the land using original cost or trended original cost. He determined that the highest and best use for the land as vacant and unimproved was development as zoned, for residential or office/laboratory development. In so doing, he ignored the presence of over seven billion gallons of water covering 710.2 acres of the land on the theory that the water was an "improvement" to be disregarded both because he was valuing the land "as vacant" and because N.J.S.A. 54:4-3.3 requires valuation "without regard to ... improvements."
The appraiser's valuation theory mimics that accepted by the Tax Court in Newark v. Cedar Grove Tp., supra, 7 N.J. Tax 66. Neither such decision nor the record in this matter satisfactorily explains the leap from a highest and best use for reservoir purposes to valuation for development as zoned. The explanation offered by Defendant's appraiser was that, in order to buy the subject lands in Block 400, Lot 1 for reservoir use, Plaintiff would pay a purchase price based on the value of such lands as zoned. This analysis mimics the golf course valuation to which the Tax Court refers in Newark v. Cedar Grove Tp., id. at 75, citing Alpine Bor. v. Alpine Hills, Inc., 1 N.J. Tax 136 (Tax 1980), aff'd, 179 N.J. Super. 65 (App. Div. 1981). In Alpine Hills, the Tax Court held that, in valuing a golf course, there was "no problem in utilizing comparable sales of ...