The opinion of the court was delivered by: Rimm
Plaintiff, Claremont Health Systems, Inc. (hereinafter, "Claremont Health Systems"), claims an exemption from local property taxes for the 1994, 1995, and 1996 tax years on a building located at 1515 Hulse Road in the Borough of Point Pleasant. The property is designated as Block 256, Lot 15 on the municipal tax map. The building at issue is a one-story, 34,000 square foot structure with a partial basement situated on 2.3 acres of land. The building was constructed in 1972 and an addition was built in 1985.
On November 1, 1993, plaintiff filed a statement with the Office of the Tax Assessor for the Borough of Point Pleasant, seeking an exemption from local property taxes for the building on Block 256, Lot 15 on the municipal tax map under N.J.S.A. 54:4-3.6. On December 22, 1993, the assessor denied the exemption request and assessed the building at $3,066,400. Subsequently, plaintiff filed a petition of appeal with the Ocean County Board of Taxation. The county board affirmed the assessment without prejudice, at the request of both parties. The process was repeated for the 1995 and 1996 tax years. Following the affirmance of the assessment in each year by the county board of taxation, plaintiff filed a timely complaint in the Tax Court. In all of the cases, issues were raised concerning qualification for exemption from local property taxation as to whether: (1) plaintiff is the owner of the building; (2) ownership of only the building and not the land can qualify the building for exemption; (3) plaintiff is organized exclusively for hospital purposes; and (4) the "hospital purposes" exemption under N.J.S.A. 54:4-3.6 is constitutional. The question of the constitutionality of the "hospital purposes" exemption arises as a result of the amendment to the statute effective July 1, 1993. L. 1993, c. 166, § 1.
On January 2, 1996, following defendant's notice that it intended to challenge the constitutionality of the "hospital purposes" exemption of N.J.S.A. 54:4-3.6, the Attorney General of the State of New Jersey, as an intervenor in the matters, filed a motion to dismiss, or, in the alternative, for partial summary judgment on the constitutional issue. On May 31, 1996, plaintiff and defendant each filed a motion for summary judgment pursuant to R. 4:46, each party contending that there is no material issue of fact in the case and that it is entitled to judgment as a matter of law. The motion of the Attorney General of the State of New Jersey was held pending resolution of the non-constitutional issues.
Prior to September 1992, the building at issue was operated as a for-profit nursing home with 112 skilled and intermediate care nursing beds. The facility was known as the Claremont Care Center (hereinafter, "the center"). The first floor of the building included executive offices, nurses' stations, a dining and recreation room, a kitchen, waiting rooms, utility rooms, television rooms, a laundry area, an employee lounge, tub and shower rooms, therapy rooms, and guest rooms. Additionally, there were storage areas, a mechanical room, an electrical room, and a classroom located in the basement of the building.
Genesis Health Ventures of Point Pleasant, Inc. (hereinafter, "Genesis Point Pleasant"), a for-profit New Jersey corporation, originally owned and operated the center. Genesis Point Pleasant was a wholly-owned subsidiary of Genesis Health Ventures, Inc. (hereinafter, "Genesis Health"), a for-profit Pennsylvania corporation. As of September 1, 1992, Genesis Point Pleasant employed a total of 124 people to operate the nursing home. For the fiscal year ending September 1991, the center's statement of operations showed total net revenue of $3,897,532 and total expenses of $3,904,416, resulting in a loss of $6,844.
At some time before September 1992, Hoosier Care, Inc. (hereinafter, "Hoosier Care"), a non-profit Indiana corporation, entered into negotiations with Genesis Health regarding the center. Hoosier Care's certificate of incorporation and by-laws filed with the State of Indiana provide that the corporation is organized to establish, operate, and manage nursing homes, hospitals, related health care facilities, and "retirement housing for elderly persons."
Hoosier Care has purchased several health care facilities through subordinate companies in transactions involving state economic development authorities. As part of these transactions, the development authorities issued tax exempt bonds to finance the acquisition of each facility. The bonds were purchased by underwriters and then sold to investors. Hoosier Care purchases health care facilities through subordinate companies in an attempt to increase its ability to obtain bond financing and gain favorable management contracts for the care centers. By creating a separate entity to acquire each facility, lenders and management companies Judge each care center separately, without considering the centers that Hoosier Care has acquired in the past or may acquire in the future.
In February 1992, during negotiations with Genesis Health *fn1 relating to the center, Hoosier Care formed a wholly-owned subsidiary, Claremont Health Systems, a non-profit New Jersey corporation. Claremont Health Systems is plaintiff in the present case. Its certificate of incorporation provides in part as follows:
The Corporation shall be organized and thereafter operated exclusively for public charitable uses and purposes within the meaning of Section 501(c) (3) of the Internal Revenue Code. Such charitable purposes of the corporation include establishing, owning, maintaining and operating hospitals, nursing homes and related health care facilities, including retirement housing for elderly persons and performing such other acts necessary or incidental to the above stated purposes.
Claremont Health Systems' corporate by-laws indicate that, like its parent company, Hoosier Care, the corporation has full power and authority "to establish, acquire, own, maintain, operate, and manage nursing homes, hospitals, and related health care facilities, and retirement housing for elderly persons . . ."
In September 1992, Claremont Health Systems and Genesis Point Pleasant, engaged in a complex series of transactions concerning the center and the land on which it is built. These transactions were all financed by the issuance and sale of $6,400,000 in Health Care Facility Revenue Bonds by the New Jersey Economic Development Authority to an underwriter, A.H. Williams and Company.
The Health Care Facility Revenue Bonds were issued pursuant to a trust indenture dated September 15, 1992, between the New Jersey Economic Development Authority and the trustee for the financing, Fidelity Bank, National Association. The bonds were made payable from funds held by the trustee and payments to be made by Claremont Health Systems from its planned operation of the center, pursuant to a loan agreement between Claremont Health Systems and the New Jersey Economic Development Authority. The obligations of Claremont Health Systems under the loan agreement were secured by a mortgage and security agreement, dated September 15, 1992, between Claremont Health Systems and the trustee, Fidelity Bank, National Association, as assignee from the New Jersey Economic Development Authority.
Contemporaneously with the issuance of the bonds, Claremont Health Systems and Genesis Point Pleasant executed several documents relating to the center, all dated September 15, 1992. One document was labelled a "Ground Lease." Another document was labelled a "Deed." A third document was labelled an "Asset Purchase Agreement." A fourth document was labelled a "Management Agreement," and was executed by Claremont Health Systems and Total Care Systems, Inc., a for-profit subsidiary of Genesis Health.
For ease in understanding the various parties involved in this matter, the following summary of the parties is set forth:
1. Genesis Health Ventures of Point Pleasant, Inc. (Genesis Point Pleasant), a for-profit New Jersey corporation. Former operator of the Claremont Care Center at the subject property. A wholly-owned subsidiary of Genesis Health.
2. Genesis Health Ventures, Inc., (Genesis Health) a for-profit Pennsylvania corporation. The parent company of Genesis Point Pleasant which is a wholly-owned subsidiary. The parent company of Total Care which is a wholly-owned subsidiary.
3. Total Care Systems, Inc. (Total Care), a for-profit Pennsylvania corporation. A wholly-owned subsidiary of Genesis Health Ventures, Inc.
4. Claremont Health Systems, Inc. (Claremont Health Systems), a non-profit New Jersey corporation. Plaintiff in this matter. A wholly-owned subsidiary of Hoosier Care, Inc.
5. Hoosier Care, Inc., a non-profit Indiana corporation. The parent company of Claremont Health Systems, which is a wholly-owned subsidiary.
According to Dr. Bruce Parker Hutson, the president of both Hoosier Care and Claremont Health Systems, after being told during negotiations for the acquisition of the center that "Genesis did not want to part with the land . . . [because the Chairman of Genesis] felt that someday down the road . . . the land would be very valuable . . .," Claremont Health Systems entered into a "Ground Lease" with Genesis Point Pleasant for the land on which the center is built.
In Section 1.01 of the document labelled "Ground Lease" and dated September 15, 1996, the "demised premises" are listed as including all the land under the building and all adjoining land, all easements and other rights appurtenant to the land, and all improvements, other than the building. That section also indicates, however, that "the demised premises and the building are sometimes . . . collectively called the 'Property'" in the "Ground Lease" document.
Section 5.02 of the lease document provides that, unless Claremont Health Systems obtains the prior written consent of Genesis Point Pleasant, Claremont Health Systems "shall not use or occupy the Property or permit the Property to be used or occupied except for a skilled care nursing home." (emphasis supplied). Section 6.01 of the lease says that Claremont Health Systems must "keep the entire Property. . . in good and clean order and condition . . . and . . . promptly make all necessary or appropriate repairs, replacements and renewals thereof, whether interior or exterior, structural or non-structural . . . ." (emphasis supplied). Section 7.01 of the lease states that Claremont Health Systems, at its own expense, may make any reasonable alterations of and additions to "the Property or any part thereof," provided that such alterations or additions "shall not change the general character of the Property, or reduce the fair market value thereof below its value immediately before such alteration or addition . . .". (emphasis supplied).
Section 8.01 of the lease document provides that, "if any of the Building is damaged, destroyed, or rendered untenantable by fire, the elements or any other cause, such damage or destruction or conditions rendering said Property untenantable shall not operate to terminate [the] lease . . ." (emphasis supplied). Instead, the lease is to continue in full effect for as long as any loan from the bond sale by the New Jersey Economic Development Authority remains outstanding. Section 13.01 of the lease requires Claremont Health Systems, at its own expense, to insure "the Building" against loss, damage, or destruction, in an amount equal to its full insurable replacement value. The amount and type of insurance, as well as the designation of insured parties, however, are to be controlled by the loan documents from the bond financing agreement with the New Jersey Economic Development Authority for as long as any loan from the sale of the bonds remains outstanding.
The term of the lease is thirty-five years. The rent called for under the lease is $50,000 per year with the provision that such "basic rent" shall be increased annually beginning after the first year of the lease at a rate of 3.5% of the basic rent payable for the immediately preceding lease year. However, Section 4.03 of the lease document states that, as long as Genesis Point Pleasant or any of its affiliates serves as the manager of the nursing home of the property, or is terminated as manager for cause, pursuant to the management agreement executed simultaneously with the ground lease, then Claremont Health Systems can pay the rent under the lease after it pays any debt service, management fees, and operating expenses owed for the center. If Genesis Point Pleasant or any of its affiliates is terminated as the manager of the nursing home for any reason other than a termination for cause under the management agreement executed simultaneously with the ground lease, basic rent is to be paid as part of operating expenses for the care center.
Article XXI of the lease document provides that, "if Tenant shall fail in the performance and observance of any of the material agreements, conditions and terms herein contained on Tenant's part to be performed or observed, . . ." the lease can be terminated by the landlord. Genesis-Point Pleasant can also terminate the lease if a receiver is appointed for Claremont Health Systems, Claremont Health Systems is adjudicated bankrupt or makes an assignment for the benefit of its creditors, or if Claremont Health Systems does not pay the rent and Genesis-Point Pleasant deposits funds with the trustee, ...