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2nd Roc-Jersey Associates v. Town of Morristown

158 N.J. 581, 731 A.2d 1 (1999)

TAXATION; SPECIAL IMPROVEMENT DISTRICTS—Assessments for Special Improvement Districts are not real estate taxes and therefore do not need to be imposed uniformly within the district.

The issue before the New Jersey Supreme Court was whether assessments, imposed on real property in municipal Special Improvement Districts (SIDs) are unconstitutional because residential properties are excluded from the assessments. The municipality had enacted an ordinance creating a SID and then designating a management corporation. The district was created to combat declining economic conditions in the municipality. The ordinance specifically exempted residential and mixed-use property from the district’s special assessment. In an unreported decision in a different case, the Appellate Division upheld the constitutionality of the statute that authorized establishment of SIDs, but invalidated the provision of a municipal ordinance that exempted residential properties because the enabling Legislation defines a SID as “an area within a municipality designated by municipal ordinance as an area in which a special assessment on all property within the district shall be imposed.” In response to that unpublished decision, this municipality amended its ordinance by removing residential properties from the boundaries of the SID. Subsequently, a special assessment was imposed on all property within the district based on a percentage of the property’s assessed value for local real property tax purposes. A challenge to the ordinance was raised and the lower court ruled that the ordinance designating the SID and ordinance authorizing the special assessment were valid and that residential properties located within the geographic boundaries of the district were permissibly excluded from contributing to the costs of the district. Subsequent to the lower court’s decision, the Legislature enacted a statute amending the statute that authorized SIDs. The amendment expressly permitted municipalities to exempt residential properties, residential portions of mixed-use properties, and parcels with any number of residential units or vacant properties within the SID from a special assessment. That amendment was the basis of the current case.

Two commercial property owners within the SID asserted that the exclusion of residential property was unconstitutional because the assessment is a tax, rather than a special assessment, and therefore it violated the Uniformity Clause of the New Jersey Constitution which requires real property taxes to be applied uniformly to all classes of real property. In the part of the New Jersey Constitution that applies to the taxation of real property, it is required that all property be assessed for taxation “under general laws and by uniform rules” according to the “same standard of value.” Although the Legislature may exempt certain property from the Uniformity Clause, exemption may be granted only by general laws. Consequently, if the assessments authorized by the Special Improvement District statute and imposed by the implementing ordinance are deemed to be real property taxes, then the exclusion of residential properties could constitute preferential tax treatment in violation of the Uniformity and Exemption Clauses of the Constitution. Therefore, the important issue before the Court was whether, as a matter of constitutional interpretation, the impositions constituted real property taxes or special assessments. This was because it is well recognized that the Uniformity Clause of the Constitution is inapplicable to special assessments. Assessments “are not such taxes as are referred to in the various clauses of the constitution and they are neither embraced, nor intended to be embraced in them.” Essentially, the differences between an assessment and a tax include: an assessment supports local improvements, while a tax finances general operations; an assessment is a one-time charge, while a tax is annual; and an assessment requires that the benefit be direct, while a tax requires no such benefit. The improvement must benefit the assessed property, and that benefit must be special and local, that is, the benefit to the specific property must be substantially greater than to the public in general whether measured by increased market value or by the overall economic effect of the improvement. Lastly, the benefit must be certain rather than speculative, but may arise in the future.

The Court recognized that the SID assessment was not a prototypical special assessment. Unlike the state statute which authorizes special assessments for local improvements essentially identified with specific properties, the SID statute permits special assessments that bestow general benefits, consisting of services and improvements to a class of properties within the district. The underlying improvements funded by the SID assessments “are not necessarily physical, concrete, or permanent, nor are they directly adherent to the specific commercial properties that are assessed.” In fact, the kind of services within a SID supplement traditional services, but are specifically intended and designed to improve commercial properties and to promote economic growth in the business community. Following that analysis, the Court concluded that the core of what makes the imposition a special assessment rather than a general tax is that the special assessment is used to provide a combination of services and improvements that is intended and designed to benefit particular properties and demonstrably enhance their value, use or function. In conclusion, the Court felt it clear that the Legislature intended that SID assessments be considered special assessments and do not take on the characteristics of general taxes.

The objectors also argued that even if the assessments were upheld as special assessments that conferred benefits to commercial properties, the method of assessment was overly broad and not sufficiently tailored to the benefit received by individual properties. In general, a valid special assessment must be “as nearly as may be in proportion” to the benefit received, not in “substantial excess” of those special benefits. However, special assessments need not be measured with mathematical precision. The Court found that none of the benefits provided by the district were aimed directly at the residences and none of the district’s budget was spent directly on residential properties. The municipality chose a simple method for allocating the assessment. The Court found that it was not unreasonable for the municipality to select such a simple method, especially during the initial phases of the SID. The tax system offered several advantages and would be updated periodically, giving property owners a basis to challenge erroneous tax assessments and the derivative SID assessments. To the Court, although a more complex method might have yielded a fairer apportionment, it would be substantially more expensive and difficult to employ, especially in the early stages of the district. Lastly, the Court gave retroactive application to the enabling statute’s amendment, primarily because it felt that the amending legislation was ameliorative or curative and that the expectations of the parties warranted retroactive application.


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