Case Law Summaries

Center for Molecular Medicine and Immunology v. Township of Belleville

• Opinion Date: January 17, 2003
• Real Property Law
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TAXATION; EXEMPTION—Where the occupant of county owned property would personally qualify for real property tax exemption, it doesn’t matter whether its occupancy is characterized as a long term ground lease (and hence equivalent to ownership) or as a short term space lease.

A former county geriatric center was leased for 115 years by the county to a federally tax exempt entity engaged in cancer research. Its long-term tenant, relying on a statute that exempts certain non-profit organizations from real property taxation, appealed unsuccessfully to the County Board of Taxation and then to the Tax Court for a real property tax exemption. The matter was further appealed to the Appellate Division, which reversed and remanded for trial on the merits for a particular tax year. Even though that dispute had not been resolved for the year in question, a separate appeal covering two later years passed through the Tax Court to the Appellate Division. In this second tax appeal, the entity was seeking exemption for the originally stated grounds as well as a second statute that exempts property of public entities used for public purposes. One aspect of the later claim reached the Appellate Division, namely, “whether a lessee under a 115 year lease should be considered an owner entitled to tax exemption if otherwise qualified under the statute.”

There was no question that the tenant was entitled to exemption from federal taxes. Its mission was cancer research “coupled with a limited amount of experimental treatment mostly for terminal cancer patients.” Treatment was provided without charge at an out-patient clinic. The initial transfer of the property “was accomplished by a set of documents, which were labeled ‘deeds,’” using a county improvement authority as an intermediary. During the first 25 years of the organization’s ownership, “the property would automatically revert to the grantor” if the cancer research facility permanently ceased to use the premises for healthcare or lost its “tax exempt status,” or “erected another structure on the site without the county’s consent.” In addition, the property would “automatically revert” to the county and the county would “be vested in indefeasible fee simple absolute in and to the property.” Each “deed” further provided that upon reversion, the cancer research facility and its successors and assigns would have “an irrevocable option to lease” the property in accordance with the terms of an attached lease. The attached lease was for 30 years followed by two 30-year extension options. If the parties could not agree on the rent, it would be “the fair market rental value… .”

With this structure in mind, the Appellate Division first needed to determine whether the property was actually owned by the county. If it was, then it might be eligible under the statutory exemption for “property of public entities used for public purposes.” If it was “owned” by the tenant, then it might be eligible under the exemption afforded to certain non-profit entities. According to the Appellate Division, the 25 year “deed” followed by a lease with a potential term of 90 years was antagonistic to the concept that the cancer research facility acquired a fee simple and absolute interest in the property. This, however, did not resolve the question as to whether the non-profit entity was to be “treated as the owner for the purposes of real estate taxation and possible exemption.” “Section 33 (of the tax exemption statute) provides exemption from local real estate taxation for property owned by counties, and certain other public entities, when the property is used for public purposes, either directly by the public entity or by a private party under a lease. ... When county property is devoted to a private purpose, [as the municipality in this case claimed], the county is the proper taxpayer against which the assessment should be made. ... Otherwise, it is the county that is entitled to the tax exemption.” Therefore, because the municipality, in this case, assessed the taxes against the cancer research facility and not against the county, the Appellate Division held Section 3.3 of the tax exemption statute to be inapplicable. “Section 3.6 [of the same tax exemption statute] provides exemption from real estate taxes for buildings, and the land on which they are erected, used by nonprofit organizations engaged in certain specific activities, including buildings and land used by nonprofit organizations engaged in the moral and mental improvement of people, ..., provided that the organization ‘owns the property in question.’” Further, “[t]he standard federal tax exemption[s] ... ‘have no relation to state law governing property tax exemption.’ ... In addition to ownership of the property, the tax exemption claimant must meet a dual test: Under the statute, exemption from taxation is tested by exclusiveness both of purpose of the organization and of use of the property for the moral and mental improvement [of people].”

The Appellate Division reviewed the “deeds followed by the leases,” and determined that the entire relationship was one of landlord and tenant. In doing so, the Court looked to “the intention the parties as revealed by the language employed in establishing their relationship… .” The Court found that because the “deeds” only provided a limited period of possession, the transaction was “more appropriately classified as a lease.” Further, a “lease containing an option to extend is regarded as a lease for the full possible extended period, terminable earlier by the tenant’s election not to continue.” Thus, according to the Court, the combination of the “deeds” and the “lease” created a 150 year tenancy.

In a 1982 Appellate Division case, involving renewable 99-year leases, that court observed that “[a]s a matter of law and fact, 99-year leases are the equivalent of a fee ownership for purposes of real property taxation, valuation and assessment.” The recording statute also provides, in pertinent part, that “[i]n the case of a leasehold interest for 99 years or more ..., the consideration shall be in the amount of the assessed value of the property at the date of the transaction for the purposes of levying local real property taxes… .” Thus, according to the Court, it was clear that the leasehold, “if not exempt, [was] subject to the local real estate tax.”

Normally, statutes granting exemption from taxation “are most strongly construed against those claiming exemption.” Further, the ownership requirement of Section 3.6 has been strictly construed. In fact, a 1963 case dealing with exemptions for senior citizens of limited income who resided in homes that they “owned,” resulted in a decision that otherwise eligible 99-year leasehold tenants did not qualify for an exemption. On the other hand, even though to “own” property means to have “legal title” to it, that concept “does not control the issue at hand if literal application would lead to a result incompatible with the legislative purposes.” According to the Court, “[t]he most obvious purpose of section 3.6’s requirement that the non-profit entity owns the property for it to be exempt is to prevent individuals or entities involved in business from avoiding real estate taxes by leasing their property for customary periods to entities which would otherwise qualify for exemption. But a 99-year lease is hardly customary, and it is extremely unlikely a that business would enter into such a lease merely to avoid taxation. Consequently, a construction of ownership to include 99-year leases would have no adverse affect on the legislative purpose.” Recognizing that the circumstances in this case could be “fairly characterized as creating a situation unanticipated by the drafter of Section 3.6,” and given that the legislature recognized that 99-year leasehold interests should be subject to local property taxation, the Court “inferred” that “Section 3.6’s ownership requirement is satisfied by allowing for exemption in such cases, at least where the owner remains a public entity.”

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