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NBCP Urban Renewal Partnership v. City of Newark

September 30, 1997

NBCP URBAN RENEWAL PARTNERSHIP, PLAINTIFF,
v.
CITY OF NEWARK, DEFENDANT.



The opinion of the court was delivered by: Small

The plaintiff, NBCP Urban Renewal Partnership, seeks a declaratory judgment determining the amount of the annual service charge in-lieu-of taxes owed by the plaintiff to the defendant, City of Newark, as well as a refund of excess payments made pursuant to the Urban Renewal Corporation and Association Law of 1961 (the Fox-Lance Act). N.J.S.A. 40:55C-40 to -76. *fn1 The matter is before me on plaintiff's motion and defendant's cross-motion for summary judgment. R. 4:46.

The parties agree that the annual service charge in-lieu-of taxes should be two percent of total project cost, but disagree as to whether the total project cost should include the cost of certain turbines and other related machinery and equipment used in the generation of electricity and thermal energy (the "Turbines"). Resolution of the issue depends on the effect, if any, of the enactment of the Business Retention Act (the "BRA"), L. 1992, c. 24, amending N.J.S.A. 54:4-1, on the terms of the tax exemption granted to the plaintiff by a July 1991 resolution of the Newark City Council and an August 1991 contract (the "Financial Agreement") with the City of Newark implementing that resolution. For the reasons expressed below, I find that the total project cost should include the cost of the Turbines.

Plaintiff is organized as an urban renewal entity under N.J.S.A. 40:55C-55.1. Plaintiff is the tenant at the property identified as Block 5060, Lots 153.01 and 153.03 on the tax map of the City of Newark, commonly known as 449 Doremus Avenue and 414-434 Avenue P. Plaintiff is responsible for the payment of taxes on the leased property. On June 28, 1991, prior to commencing construction on those lots, plaintiff applied to the defendant for an exemption from real property taxes pursuant to N.J.S.A. 40:55C-58. *fn2 The proposed project involved the construction of an approximately 59,600 square foot cogeneration facility that simultaneously produces electricity and thermal energy. On July 2, 1991, the Municipal Council of the City of Newark approved, by resolution, plaintiff's exemption application.

On August 16, 1991, the parties entered into a Financial Agreement pursuant to N.J.S.A. 40:55C-59 which provided for plaintiff to construct the cogeneration facility and receive a 15-year exemption from real property taxes on the improvements from the date of the issuance of the certificate of occupancy. Construction of the facility began on August 20, 1991, and the certificate of occupancy was issued on June 10, 1993. In lieu of the real property taxes on the improvements, plaintiff agreed to pay an annual service charge to the defendant, as provided by N.J.S.A. 40:55C-65, *fn3 to be calculated as two percent of the "total project cost," as defined by N.J.S.A. 40:55C-47. *fn4

At the time the Financial Agreement was executed, the parties determined that the Turbines were to be included in the agreement as part of the calculation of the total project cost and the annual service charge. Accordingly, the parties estimated the total project cost at $50,082,500 (which would result in an annual service charge of $1,001,650) and which included $28,750,000 for the cost of the Turbines. The total project cost and annual service charge figures were incorporated into the Financial Agreement.

After the execution of the Financial Agreement, but prior to the completion of the subject facility and the issuance of the certificate of occupancy, the Legislature amended N.J.S.A. 54:4-1 through the passage of the BRA. L. 1992, c. 24. This act, applicable prospectively from June 26, 1992, and to all tax appeals pending as of that date, excluded from real property taxation certain personal property used or held for use in business. L. 1992, c. 24, § 7; General Motors Corp. v. City of Linden, 150 N.J. 522 (1997), aff'g 293 N.J. Super. 99 (App. Div. 1996), rev'g N.J. Tax (Tax 1996). The parties have stipulated, for purposes of this litigation, that the Turbines would have been taxable as real property prior to the enactment of the BRA. Badische Corp. v. Town of Kearny, 11 N.J. Tax 385 (Tax 1990), Texas E. Transmission Corp. v. Director, Div. of Taxation, 11 N.J. Tax 198 (Tax 1990), and American Hydro Power Partners v. City of Clifton, 11 N.J. Tax 12 (Tax 1990), aff'd in part and rev'd in part, 12 N.J. Tax 264 (App. Div. 1991). They also have agreed that, for purposes of this litigation, the Turbines are not taxable as real property under the BRA.

Pursuant to the Financial Agreement, plaintiff engaged Deloitte & Touche, LLP, to prepare an audit of plaintiff's total project cost upon the project's completion, which the agreement provided would supersede, upon the city's approval, the initial estimate provided in plaintiff's abatement application and the Financial Agreement. The audit report was completed on January 31, 1994, and was reviewed by the defendant's Division of Special Taxes. Eventually, following a reformatting of the report and an upward adjustment for developer's fees, a total project cost was established of $18,061,230 (which would result in an annual service charge of approximately $361,000). This figure specifically excluded the cost of the Turbines.

Since July 1, 1993, when the annual service charge payments began, the defendant municipality has billed the plaintiff for in-lieu-of tax payments based on a total project cost of $50,082,500. Plaintiff is required to make these payments to avoid default under its loan agreement, and has made all such payments.

Plaintiff argues that the passage of the BRA has altered the terms of the Financial Agreement between the parties. Plaintiff asserts that only taxable improvements may be used as the basis for calculating total project cost that is subject to the annual service charge, and that the amendment to N.J.S.A. 54:4-1 eliminated the Turbines from real property taxation, and thus from the calculation of total project cost. Plaintiff relies on one section in the Financial Agreement to support its argument. Section 14.1 of the Financial Agreement reads as follows:

The Entity hereby agrees at all times prior to the expiration or termination of this

Financial Agreement to remain bound by the relevant provisions of the Federal and State Statutes and Municipal Ordinances and Regulations including but not limited to N.J.S.A. 40:55C-40, et. seq., and the provisions of the City of Newark's R.O. 10:13-1, et. seq., as amended and supplemented. In the event that said laws are amended or revised then the Entity shall be subject to the new legislation. The Entity's failure to comply with such statutes or ordinances shall constitute a violation and breach of the Financial Agreement and the City shall, among its other remedies, have the right to terminate said tax abatement.

[(Emphasis added)]

At the time the calculation of the total project cost was to be made upon completion of the improvements, plaintiff notes, the BRA was the present law. As such, plaintiff concludes that the correct figure for the total project cost is $18,061,230, which excludes the cost of the Turbines. Defendant asserts that the taxability or non-taxability of the Turbines is irrelevant to determining whether such improvements constitute part of the total project cost for calculating the annual service charge. Defendant claims that the definition of total project cost that is the basis of the annual service charge makes no reference to N.J.S.A. 54:4-1, and thus there is no requirement that the total project cost include only otherwise taxable improvements.

Thus, two issues have been presented for my determination: (1) whether N.J.S.A. 54:4-1 and N.J.S.A. 40:55C-40 to -76 must be read together such that the definition of "improvements" is the same in each statute and in each relevant section; and (2) whether the parties contracted to change the definition of "total project cost" in the Financial Agreement upon the subsequent passage of the BRA.

The nature of the dispute between the parties is made clearer by an examination of the dollar consequences of each position. At the time the project was planned, and at the time the parties entered into the Financial Agreement, it was anticipated that the total project cost would be approximately $50,082,500. If the total project cost represented the market value of the property at Newark's then-applicable (1991) effective tax rate of $3.14 per $100 of market value, then taxes, absent an agreement, would have been approximately $1,572,600 per year. Under the financial agreement, the in-lieu-of tax payment would be $1,001,650 per year (2% of $50,082,500) for 15 years. The City of Newark takes the position that it is entitled to this greater-than $1,000,000 annual payment. After passage of the BRA, if, as the parties have stipulated for purposes of this litigation, the Turbines are removed from the tax base, the property would be valued for tax assessment purposes at approximately $18,061,230. *fn5 At Newark's 1993 effective tax rate of $3.38 per $100 of market value, annual real estate taxes would be approximately $610,500 (about $391,150 per year less than the originally-contemplated annual payments in-lieu-of taxes and approximately $1,181,450 less than what taxes would have been prior to the enactment of the BRA (and without benefit of an abatement agreement)). If the total project cost under the abatement agreement excludes the cost of the BRA property (the position of the plaintiff), in-lieu-of tax payments would then be approximately $361,225 per year (two percent of $18,061,230).

I.

Plaintiff argues that only taxable improvements may be included in the definition of "improvements" when calculating "total project cost" under N.J.S.A. 40:55C-47. That statutory definition, quoted at n. 4, (supra) , includes as one of several elements of the total project cost the "cost of the land and improvements to the urban renewal corporation...." (emphasis added). This section, however, does not grant any exemption from real property taxation on the improvements as does N.J.S.A. 40:55C-65, but merely provides ...


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