Property Tax Exemption Not On The Menu For University Restaurant
The New Jersey Supreme Court recently held in Gourmet Dining v Union Township that a for-profit high-end restaurant housed in a building on the Kean University campus was subject to local property taxation.
The defendant, Union Township, appealed from the judgment of the Appellate Division, which reversed the Tax Court’s grant of summary judgment in favor of the Township that the restaurant was not exempt. The plaintiff, Gourmet Dining, LLC, owned and operated Ursino Steakhouse & Tavern. Gourmet Dining did not have a lease, but instead it entered into a management subcontract agreement giving it the exclusive right to operate the restaurant in exchange for payment of an annual “management fee” and a portion of the Ursino’s gross revenues.
The Township issued a property tax bill for the restaurant and plaintiff appealed. The Tax Court granted summary judgment in favor of the Township. While the Tax Court concluded that the university property itself qualified for exemption, the court found that “it is undisputed that Gourmet Dining is a for-profit corporation, and its operation and management of Ursino are conducted for-profit.” The court found also that the management agreement was functionally equivalent to a lease with a for profit entity that disqualified exemption for property that was otherwise eligible.
The Tax Court also reviewed whether the use, possession, and occupancy of the property as a restaurant fulfills a statutory purpose afforded to a university. But the court rejected that such use was for a recognized “public purpose” that would qualify for exemption. It found that Ursino is a for-profit business that did not operate as a dining hall or part of a meal plan to serve the University’s ancillary function of providing food to its student body, faculty, or administrators.
Plaintiff appealed and the Appellate Division reversed reasoning that the restaurant: (1) is located on campus; (2) provides alternative dining for students who regularly dined there; and (3) employs many students. The appellate court noted also that the management fees collected from plaintiff were used to fund scholarships. In support of the alleged public purpose, plaintiff cited the determination by the University’s Board that having an acclaimed restaurant on campus would enhance public perception of the university and serve as a recruiting tool. In response, the appellate court found that “it is incumbent on courts not to substitute their judgment for that of the University Board.” The Appellate Division also rejected the Tax Court’s finding that the management agreement the functional equivalent to a lease.
The Supreme Court reversed and reinstated the summary judgment for defendant, concluding that plaintiff’s agreement with the university was a lease or lease-like interest and thus plaintiff was not entitled to a tax exemption. The court held that the public benefit tax exemption was not intended to provide an exemption for the operator of a for-profit, high-end restaurant, since the overriding purpose of the restaurant was profit.
The Court rejected plaintiff’s argument that because the property is owned by the State a demonstration of a “public purpose” is unnecessary. The Court relied on the Constitutional prohibition against the donation of state property for private use and its two part test employed when reviewing such cases: (1) whether the provision of land or financial aid is for a public purpose; and (2) whether the means to accomplish that public purpose are consonant with it. The Court noted also that the public purpose assessment is integral to a determination of whether a tax exemption is warranted under the applicable exemption statutes.
The Court rejected the Appellate Division’s “holistic” approach to the public purpose inquiry and held that the public purpose must be the paramount factor in an arrangement with a private entity’s use of public property. Any private advantage must be “incidental or subordinate” which was not the case here.
The Court also rejected the claim that Gourmet Dining was merely a manager and operator of the restaurant and not a tenant or lessee.
Simply stated, the Court held that “the public-benefit-oriented exemption provisions in issue were not intended to exempt the for-profit operator of a high-end, regionally renowned restaurant situated on a college campus, when the overriding purpose of this commercial endeavor is focused on profitmaking.”