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Township of Holmdel v. New Jersey Highway Authority

April 4, 2007

TOWNSHIP OF HOLMDEL, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY HIGHWAY AUTHORITY, DEFENDANT-APPELLANT.
NEW JERSEY HIGHWAY AUTHORITY, PLAINTIFF-APPELLANT,
v.
TOWNSHIP OF HOLMDEL, DEFENDANT-RESPONDENT.
TOWNSHIP OF HOLMDEL, PLAINTIFF-RESPONDENT,
v.
NEW JERSEY TURNPIKE AUTHORITY, DEFENDANT-APPELLANT.
NEW JERSEY TURNPIKE AUTHORITY, PLAINTIFF-APPELLANT,
v.
TOWNSHIP OF HOLMDEL, DEFENDANT-RESPONDENT.



On appeal from the Superior Court, Appellate Division, whose opinion is reported at SYLLABUS BY THE COURT

(This syllabus is not part of the opinion of the Court. It has been prepared by the Office of the Clerk for the convenience of the reader. It has been neither reviewed nor approved by the Supreme Court. Please note that, in the interests of brevity, portions of any opinion may not have been summarized).

ZAZZALI, C.J., writing for a majority of the Court.

In this appeal, the Supreme Court must determine whether the amphitheater and reception center facilities of the PNC Bank Arts Center (formerly known as the Garden State Arts Center), which is owned by the New Jersey Turnpike Authority, are exempt from local property taxation.

In 1954, the Authority acquired 400 acres of land in Holmdel Township for the purpose of constructing the Arts Center. At that time, the Highway Act authorized the Authority to acquire, construct, maintain, and operate "highway projects," which were exempt from taxation. A "highway project" was defined as any highway together with "such adjoining park or recreational facilities" that the Authority finds "necessary and desirable to promote the public health and welfare." The Highway Act empowered the Authority to enter into lease agreements with private parties if those agreements were "necessary or incidental" to the performance of the Authority's duties.

After delaying construction, the Authority approved construction of a 5,000-seat amphitheater at the Arts Center site in 1965. The Authority maintained that the Arts Center was statutorily authorized as a "highway project" because its purpose was to provide public access to the performing arts, while generating more traffic on the Parkway during off-peak hours and thereby increasing toll revenue for the Authority. Construction of the Arts Center was completed in 1968. At that time, it consisted of only the amphitheater, parking and restroom facilities, two miles of nature trails, and the Celebrity House, where community botany classes were held. There were no reception facilities. The Authority contracted with a private company for booking, ticket sales, and general amphitheater management.

In 1968, a study commission created by the Assembly concluded the Arts Center was only tenuously connected to the Authority's statutory mandate. Accordingly, the Legislature amended the definition of "highway authority" to include only facilities "directly related" to use of the highways to prevent repetition of such unauthorized projects. The amendment provided it did not affect the continued operation of "existing facilities," thus grandfathering the Arts Center.

Notwithstanding the limitation to existing facilities, the Authority, in 1972, converted the Celebrity House to a full-service reception facility with a maximum capacity of seventy, including service people. In 1984, the Authority announced construction of a larger reception center, now known as the Robert B. Meyner Reception Center, which would accommodate 350 people for sit-down receptions and 500 for stand-up receptions. The final cost of the larger reception center was $6.4 million. In response, the Senate convened a special investigation committee, which concluded that the new construction violated the 1968 legislation. No corrective legislation ensued, however.

In 1989, the reception center was completed and the Authority leased it to 116 Park Caterers. The Park agreement provided that the reception center would be operated as a "first-class" catering and conference facility. After two renewals, the Park lease was replaced in 1996 by a similar agreement with Bott, Inc., which currently operates the reception center. Under both the Park and Bott agreements, the lessee was responsible for day-to-day operations and was required to use best efforts to manage the reception center as a profitable catering facility available to the general public. Both lessees were required to make minimum annual payments to the Authority, which were credited towards a percentage of gross receipts.

Prior to 1997, the Authority operated the amphitheater in conjunction with several private companies. In 1997, the Authority leased the amphitheater, which currently accommodates over 17,000 people, to GSAC Partners pursuant to a lease agreement that expires in 2017. Minimum annual rental payments are required. GSAC has the exclusive right to operate the amphitheater for entertainment events, seminars, corporate meetings, and political fundraisers. Events may be hosted any day of the week. GSAC is authorized to sell merchandise, food and beverages at performances. GSAC has a limited right to sell alcohol. The lease requires GSAC to use recognized business practices to provide efficient, high quality services to the public and to use reasonable efforts to present balanced programming, however, GSAC makes the ultimate decision as to programming. GSAC also must pay all taxes imposed on the amphitheater. GSAC has the right to sublease the amphitheater without Authority approval. Finally, the lease requires GSAC to undertake various renovations, including expansion of the amphitheater's covered and lawn seating, parking lots, restroom facilities, and access walkways and plazas. The Authority retains the right to use the amphitheater annually for ethnic-heritage festivals, admission-free performances, and a winter holiday celebration. The Authority's right to use the facility is subordinate to GSAC's rights.

In 1998, Holmdel's tax assessor determined that the Arts Center's amphitheater and reception center were no longer eligible for property tax exemption under the Highway Act's immunity provision, as the Authority had leased those facilities to private, for-profit entities. No tax was assessed against facilities or property not subject to the GSAC and Bott agreements, such as the picnic and nature areas and the New Jersey Vietnam Veteran's Memorial, which Holmdel concedes are tax exempt. For 1996 and 1997, the assessor imposed an "omitted added assessment" of over $14 million for each year for the combined amphitheater and reception center complex, and a "regular assessment" of $200 for 1998. Both Holmdel and the Authority appealed those assessments. Appeals are also pending for other subsequent tax years.

In 1999, the Tax Court held that the Authority was entitled to tax immunity. The Appellate Division reversed and remanded for a determination whether the amphitheater's use under the GSAC lease coincided with the use the Legislature envisioned in 1968; whether the reception center, completed in 1989, was contemplated by the Legislature in 1968; and, if so, whether the use of the reception center under the Bott agreement is too far removed from the Legislature's initially-contemplated use to warrant tax immunity. On remand, the Tax Court concluded that the amphitheater and reception center were significantly different, physically and in their operation, than the Legislature contemplated in 1968. The Appellate Division summarily affirmed. The Supreme Court granted both parties' motions for leave to appeal. The opinion of the court was delivered by: Chief Justice Zazzali

Argued January 30, 2007

In this appeal, we must determine whether portions of the PNC Bank Arts Center (Arts Center), which is owned by the New Jersey Turnpike Authority (Authority), are exempt from local property taxation. The municipal tax assessor determined that the Arts Center's amphitheater and reception center were no longer entitled to tax immunity because the Authority had leased those facilitates to two private, for-profit entities. Both the Tax Court and the Appellate Division held that those facilities were subject to taxation.

Because the amphitheater's current operation furthers the Arts Center's original purpose, we conclude that the amphitheater remains tax exempt. However, the reception center's construction and privatization were dramatic, unanticipated departures from the Authority's statutory mandate, and, for those reasons, we hold that the reception center is subject to taxation. Thus, we reverse in part, affirm in part, and remand for a tax assessment of the reception center.

I.

A.

In 1953, the Authority acquired 400 acres of land adjacent to the Garden State Parkway (Parkway) in Holmdel Township (Holmdel).*fn1 Public Hearing Before Autonomous Authorities Study Commission 59A (Oct. 30, 1968) [hereinafter October 1968 Hearing] (Statement of Authority's Executive Director D. Louis Tonti). The Authority obtained the land, known as Telegraph Hill, for the purpose of constructing the Arts Center. Ibid. At that time, the Highway Authority Act (Highway Act or Act) authorized the Authority to "acquire, construct, maintain, improve, repair and operate highway projects." N.J.S.A. 27:12B-2 (repealed by L. 2003, c. 79) (emphasis added). The Act defined "highway project" as "any express highway, superhighway or motorway . . . together with such adjoining park or recreational areas and facilities as the Authority . . . shall find to be necessary and desirable to promote the public health and welfare." N.J.S.A. 27:12B-3(d) (amended by L. 1968, c. 348, § 5.1(2)) (repealed). Significantly, "highway projects" were exempt from taxation. N.J.S.A. 27:12B-16 (repealed). The Act also empowered the Authority to enter into lease agreements with private parties if those agreements were "necessary or incidental to the performance of its duties." N.J.S.A. 27:12B-5(o) (repealed).

Construction of the Arts Center was delayed until 1965, when the Authority finally approved construction of a 5,000-seat amphitheater. October 1968 Hearing, supra, at 63A-64A. The Authority claimed that the Arts Center's purpose was to provide public access to the performing arts while generating more traffic on the Parkway during off-peak hours, thereby increasing toll revenue for the Authority. Public Hearing Before Autonomous Authorities Study Commission 65A-66A (May 14, 1968) [hereinafter May 1968 Hearing] (Statement of Authority's Executive Director D. Louis Tonti). The Authority maintained, therefore, that the Arts Center was statutorily authorized as a "highway project" pursuant to the Highway Act because it served the Authority's broad statutory purpose. October 1968 Hearing, supra, at 12A.

Construction of the Arts Center was completed in 1968. At that time, the Arts Center consisted of only the 5,000-seat amphitheater, attendant parking and restroom facilities, two miles of nature trails, and the Celebrity House, in which community botany classes were held. May 1968 Hearing, supra, at 69A-70A; Public Meeting Before Senate Special New Jersey Highway Investigation Committee 39 (Oct. 13, 1988) [hereinafter 1988 Senate Hearing]. The amphitheater cost nearly $6.8 million to construct, October 1968 Hearing, supra, at 64A, and the Authority purposefully chose its size and design based on the dimensions necessary to ensure its "economic success," id. at 63A. Additionally, the Authority immediately contracted with a private company for the "full responsibility of booking, handling subscriptions in ticket sales, and general management of the [amphitheater]." Id. at 45A. There were no reception facilities at the Arts Center in 1968. 1988 Senate Hearing, supra, at 38-39.

However, also in 1968, the Assembly created the Autonomous Authorities Study Commission to investigate the operation of the Authority and other autonomous authorities, such as the New Jersey/New York Port Authority and the New Jersey Turnpike Authority. See Assembly Concurrent Resolution No. 9 of 1968. The Commission concluded that the Authority was operating without sufficient legislative oversight and that the Arts Center was only tenuously connected to the Authority's statutory mandate. Interim Report of the Autonomous Authorities Study Commission 3 (Jan. 1969). Consequently, the Legislature amended the definition of "highway project" to include only those "facilities directly related to the use of [highways]." L. 1968, c. 348, § 1 (amending N.J.S.A. 27:12B-3(d) (repealed)). The 1968 Amendment's unequivocal purpose was to "prevent repetitions" of unauthorized projects such as the Arts Center. May 1968 Hearing, supra, at 2; see also Monarch Entm't Bureau, Inc. v. N.J. Highway Auth., 715 F. Supp. 1290, 1297 (D.N.J.) ("The [L]egislature very clearly disapproved of the Authority's expansive interpretation of the provisions which the Authority believed authorized it to build an Arts Center."), aff'd, 893 F.2d 1331 (3d Cir. 1989). Nevertheless, because the Authority had already constructed the Arts Center and, more important, had issued State-guaranteed bonds to finance its construction, the Legislature grandfathered the Arts Center by adding the following provision to the Act: "The continued operation of existing facilities or activities by the [A]uthority shall not be affected by the provisions of this act," L. 1968, c. 441, § 1 (amending N.J.S.A. 27:12B-5.1 (repealed)). See also Veto Message of Governor Richard J. Hughes with Respect to Senate Bill 493 (Sept. 19, 1968) (vetoing original amendments that did not contain grandfather provision because of financial implications for Arts Center).

The Reception Center Lease Agreements

In 1972, notwithstanding the Legislature's directive limiting the Arts Center to "existing facilities or activities," the Authority converted the Celebrity House into a full-service banquet and reception facility. 1988 Senate Hearing, supra, at 36-39. The Celebrity House was available to the general public as well as non-profit, corporate, and private entities. Id. at 37. At that time, the Celebrity House had a maximum capacity of seventy people, including service personnel. Ibid. In 1984, the Authority announced the construction of a larger reception center that would accommodate 350 people for "sit-down" receptions and 500 people for "stand-up" receptions. Id. at 39-41, 44. The final cost of the new reception center, now known as the Robert B. Meyner Reception Center, was approximately $6.4 million. Id. at 52.

Concerned that the Authority had blatantly disregarded the intent of the 1968 Amendments and that the reception center would result in toll increases, the Senate convened the special New Jersey Highway Authority Investigation Committee. Senate Resolution No. 122 of 1987; see 1988 Senate Hearing, supra, at 1 (discussing purpose of Senate Committee). The Committee concluded that "the construction of [a] $6.4 million facility violated state law which was specially amended in 1968 to limit the Authority's ability to engage in projects which are not related to the operation of the highway." Second Interim Report of Senate Special New Jersey Highway Authority Investigation Committee 30 (Oct. 1989). The Committee also found that the Authority conducted no research regarding the reception center's economic feasibility, id. at 32, engaged in inappropriate bid solicitation, id. at 42-44, and that the reception center was an "ill-executed" project that would not be profitable, id. at 33. No corrective legislation ensued, however, and in 1989, when the reception center was completed, the Authority leased it to 116 Park Caterers (Park).

Under the terms of the Park agreement, the reception center would operate as a "first-class, high quality," catering, banquet, and conference facility. The initial agreement expired in 1993 but was subject to two-year renewal periods. It was renewed twice before it was replaced in 1996 by a similar agreement with Bott, Inc. (Bott). The terms of that agreement were identical to the Park agreement except that Bott's annual payments were greater than Park's. Bott currently operates the reception center under the terms of the 1996 agreement.

Under both the Bott and Park agreements, the lessee was responsible for the reception center's day-to-day operation. The lessees were permitted to use the reception center for "banquets, meetings, conferences, seminars, luncheons, dinners, weddings and other similar activities." The Bott and Park agreements required the lessee to "use its best efforts" to manage the reception center profitably. Accordingly, both Park and Bott operated the reception center as a for-profit catering facility available to the general public.

Both lessees were required to make minimum annual payments to the Authority. Those minimum payments were credited towards a percentage of gross receipts that the Authority was entitled to receive, which ranged from 10% to 25%. No minimum was required for 1989, but $150,000 was required for 1990, $250,000 for 1991, and $350,000 for 1992. The Bott agreement imposed a $300,000 minimum payment per year.

The Amphitheater Lease Agreement

In 1997, the Authority leased the amphitheater to GSAC Partners (GSAC). Prior to 1997, the amphitheater was operated by the Authority in conjunction with several private companies. See October Hearing, supra, at 45A; 1988 Senate Hearing, supra, at 60. The GSAC lease took effect retroactively in 1996 and expires in 2017. The leased facilities consist of the amphitheater and related land areas, mostly parking lots. The lease also grants GSAC the right to use the two electronic billboards adjacent to the Parkway for advertisement of scheduled events and sponsors. The Authority retained the right to use the signs for non-commercial purposes.

Under the lease, GSAC holds the exclusive rights to "use, operate, and enjoy the amphitheater." However, GSAC's use of the facility is restricted to entertainment events, seminars, corporate meetings, political fund-raisers, and tangential events. Additionally, the Authority retains the right to use the amphitheater annually for up to ten ethnic-heritage festivals, twenty admission-free performances, and a winter holiday celebration. The Authority's right to use the facility is subordinate and subject to GSAC's rights.

The lease also requires GSAC to "use recognized modern business practices to provide efficient and high quality services to the public." However, in respect of programming, the "ultimate decision as to what action, if any, should be taken rests solely with [GSAC]." Nevertheless, the lease requires GSAC to use its "reasonable best efforts" to present "balanced programming" at the amphitheater.

Under the lease, GSAC has the limited right to sell alcohol on the premises. The lease restricts sales to two beverages per person per sale, requires cessation of sales one hour before the end of a performance, prohibits sales to anyone exhibiting signs of intoxication, and bars patrons from bringing alcohol onto the premises. GSAC is also authorized to sell merchandise, food, and beverages at performances.

Rent for the first year, 1997, was a minimum of $1.5 million plus 100% of GSAC's profits in excess of $1 million. Rent for the second and subsequent years was set at $1.65 million. Additionally, GSAC is obligated to pay contingent rent from gross revenues, based on a graduated scale ranging from 5% to 15%. GSAC further agreed to pay all taxes imposed on the amphitheater. GSAC also has the right to sublease the amphitheater without the Authority's approval and mortgage its leasehold interest in the amphitheater.

Finally, the lease requires GSAC to undertake various renovations, including expansion of the amphitheater's covered and lawn seating, parking lots, restroom facilities, and access walkways and plazas. Currently, the amphitheater can accommodate over 17,000 people and, under the GSAC lease, may host performances on any day of the week.

Holmdel's Tax Assessment

In 1998, in view of the perceived privatization of the Arts Center, Holmdel's tax assessor determined that the facilities subject to the GSAC and Bott agreements were no longer eligible for property tax exemption under the Highway Act's immunity provision, N.J.S.A. 27:12B-16 (repealed). The tax assessor did not assess any tax against facilities or property not implicated by the Bott and GSAC agreements, such as the New Jersey Vietnam Veterans' Memorial, the Telegraph Hill Nature Area, picnic areas, Highway Authority maintenance and administration buildings, and State Police facilities. Holmdel concedes that those facilities are tax exempt.

For 1996, the assessor imposed an "omitted added assessment" of $14,261,200 for the combined amphitheater and reception center complex. See N.J.S.A. 54:4-63.3 (defining "added assessment"); N.J.S.A. 54:4-63.12 (permitting imposition of omitted "added assessment"). For 1997, Holmdel imposed an "added assessment" in the same amount, and, for 1998, Holmdel imposed a "regular assessment" of $200. In 1998, both Holmdel and the Authority appealed those tax assessments. The Authority claimed that the assessed property and facilities were statutorily exempt from property taxation, and Holmdel sought an increase in the amount of each assessment.*fn2

B.

In 1999, the Tax Court granted the Authority's motion for summary judgment, holding that the Arts Center was entitled to tax immunity. The Appellate Division reversed and remanded for a determination whether the amphitheater's use under the GSAC lease coincided with the use that the Legislature envisioned in 1968; whether the reception center, completed in 1989, was contemplated by the Legislature in 1968; and, if so, whether the use of the reception center under the Bott agreement is too far removed from the Legislature's initially-contemplated use to warrant tax immunity. Twp. of Holmdel v. N.J. Highway Auth., 329 N.J. Super. 410, 431-32 (App. Div. 2000).

On remand, the Tax Court concluded that the amphitheater and reception center were "significantly different, physically and in [their] operation," than the Legislature contemplated in 1968. Twp. of Holmdel v. N.J. Highway Auth., 22 N.J. Tax 428, 451-52 (Tax 2005). The Tax Court held that the reception center was subject to tax for all years in question and that the amphitheater was subject to tax beginning in 1997, the first year for which the GSAC lease was actually operative. Id. at 466. Thus, the court held that the reception center and amphitheater were both subject to taxation for 1997, 1998, 2000, 2001, 2002, and 2004, and that, for 1996, only the reception center was taxable. Ibid. On appeal, the Appellate Division summarily upheld the Tax Court's ruling. Twp. of Holmdel v. N.J. Highway Auth., 388 N.J. Super. 36, 40 (App. Div. 2006). Both parties sought leave to file an interlocutory appeal, which we granted. 188 N.J. 570 (2006).

II.

In arguing that the amphitheater and reception center are no longer tax exempt, Holmdel points to the 1968 Amendments to the Authority's enabling statute, L. 1968, c. 348; L. 1968, c. 441. Those amendments expressly prohibited the Authority from constructing or operating "any facility . . . not directly related to the use of a highway project," L. 1968, c. 348, § 2 (amending N.J.S.A. 27:12B-5.1 (repealed)), but permitted the Authority to continue operating all "existing facilities or activities," L. 1968, c. 441, § 1 (amending N.J.S.A. 27:12B-5.1 (repealed)). Thus, Holmdel argues ...


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