NJ Supreme Court Denies Tax Exemption to High-End Restaurant Located on University Campus

In Gourmet Dining, LLC v. Union Township, (A-8-19/083146) (Decided June 30, 2020), the Supreme Court of New Jersey held that a high-end restaurant operated by a for-profit entity, but housed in a building on the Kean University campus, does not qualify for exemption from local property taxation.

New Jersey’s Property Tax Exemption Statutes

Under the New Jersey Constitution, all real property within New Jersey is subject to taxation unless it qualifies for a statutory exemption. N.J.S.A. 54:4-3.3 exempts from taxation property belonging to the State, counties, or municipalities, or their agencies and authorities, that is used for a public purpose. Meanwhile, N.J.S.A. 54:4-3.6 exempts certain property of various non-profit organizations, including: “all buildings actually used for colleges, schools, academies or seminaries, provided that if any portion of such buildings are leased to profit-making organizations or otherwise used for purposes which are not themselves exempt from taxation, said portion shall be subject to taxation.”

The Legislature has also established several limitations on the otherwise exempt status of property. For instance, N.J.S.A. 54:4-2.3 provides that real property entitled to tax exemption loses its exemption when leased to a person or entity whose property is not exempt. Additionally, under N.J.S.A. 54:4-1.10, an arrangement that does not technically qualify as a lease, but still operates like one, is subject to taxation.

Facts of Gourmet Dining, LLC v. Union Township

Gourmet Dining, LLC owned and operated a fine dining restaurant named Ursino in a Kean University building. In October 2011, the Kean University Foundation, Inc. and Gourmet Dining entered into a Management Subcontract Agreement (MSA), which conferred on Gourmet Dining the exclusive right to operate, manage, and control Ursino. Gourmet Dining agreed to pay the Foundation an annual “management fee” and a percentage of Ursino’s gross revenue.

The restaurant began operation in late October 2011. In August 2012, Union Township issued a letter notifying Gourmet Dining that it would receive a tax bill for the last two months of the 2011 tax year and the entirety of the 2012 tax year. Gourmet Dining did not challenge those initial assessments but did challenge the 2013 and 2014 tax assessments. It ultimately appealed to the Tax Court.

The Tax Court granted summary judgment in favor of Union Township. The court first held that N.J.S.A. 54:4-3.3 applied because the University is a State governmental entity and the building constitutes governmental property. Concluding that Gourmet Dining had not established that the subject property is used for a public purpose pursuant to N.J.S.A. 54:4-3.3, or that its actual use of the property was for “colleges, schools, academies or seminaries” as required by N.J.S.A 54:4-3.6, the court held that Gourmet Dining was not entitled to tax exemption under either provision. And reasoning that the “rights, powers, and obligations conferred” through the MSA demonstrate that that agreement — even if not denominated a lease by the parties — is “a lease for legal purposes,” the Tax Court found the property taxable under N.J.S.A. 54:4-2.3 and N.J.S.A. 54:4-1.10.

The Appellate Division reversed. In support, the appeal court cited the following facts: the restaurant is located on-campus; University students and their parents regularly dine there; the restaurant provides students and members of the University community “an alternative dining experience”; Gourmet Dining’s annual management fees are used for scholarships; the University’s Board determined “that having a critically acclaimed, upscale restaurant on campus enhances the public’s perception of the University as a forward-looking institution, and thereby serves as an important recruiting tool”; many of the restaurant’s employees are students; and the restaurant uses produce grown on the University grounds and provides the University with compostable waste. The Appellate Division also rejected the Tax Court’s conclusion that Gourmet Dining is “the ‘functional’ equivalent” of a lessee.

NJ Supreme Court’s Decision in Gourmet Dining, LLC v. Union Township

The New Jersey Supreme Court reversed. The court held that the arrangement by which Gourmet Dining operates Ursino is taxable as a lease or lease-like interest.

“We further hold 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,” Justice Jaynee LaVecchia wrote. “The Tax Court properly held that Gourmet Dining, as the exclusive operator and manager of this restaurant establishment, must bear its fair share of the local real property tax burden.”

In reaching its decision, the New Jersey Supreme Court found that the Appellate Division’s holistic approach to the public purpose inquiry was “mistaken.” As explained by the court, the public purpose must be the “paramount factor” in an arrangement with a private entity’s use of public property. “For a tax exemption to apply, any private advantage must be incidental or subordinate,” Justice LaVecchia wrote. “Here that is not so.” She added: “The commercial success of this competitive high-end restaurant located on the University’s campus is the paramount factor in this arrangement. Providing food services for students, or even faculty or administrators, was not its key purpose.”

The New Jersey Supreme Court rejected Gourmet Dining’s claim that it is merely a manager and operator of the restaurant facility, not a tenant or lessee. According to the court, Ursino is taxable under N.J.S.A. 54:4-1.10, as the legislative intent seems clear. “By enacting the loophole-closing provision of N.J.S.A. 54:4- 1.10, the Legislature indicated that it did not wish for the public at large to underwrite the local tax obligation of the private operator of a for-profit commercial establishment on public property,” Justice LaVacchia wrote. The court also rejected the argument that Gourmet Dining is exempt from taxation under N.J.S.A. 54:4-3.6. As explained by the court, Gourmet Dining is a for-profit entity, and the restaurant, as contemplated by the MSA, is intended to make a profit. “Gourmet Dining receives the gross revenue and, from that, it pays operating expenses — which notably expressly reference payment of local taxes — and fees to the Foundation,” Justice LaVecchia wrote. “As the Tax Court reasoned, the profit, after all expenses are paid, goes to Gourmet Dining. Thus, Gourmet Dining’s use of the subject property does not constitute a use for the ‘college’ but rather for itself.”

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