For-Profit Operations at a State Owned University Found to Qualify for Tax Exemption

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In what may prove to be a watershed moment for real property tax exemption jurisprudence in New Jersey, the Appellate Division has held that property located on the campus of Kean University (a State owned institution of higher education), but being utilized and occupied, in part, by a for-profit restaurant, is nonetheless still entitled to a tax exemption because it is being used for an exempt “public use” pursuant to N.J.S.A. 54:4-3.3.  In reversing the decision of the New Jersey Tax Court, the court in Gourmet Dining, LLC v. Union Township, (App. Div. 2019) (Docket No. A-4799-17T3), held that the Tax Court employed too narrow a view of “public purpose” in rejecting the property owner and business operator’s claim for exemption.

The Gourmet Dining court recognized that “generally speaking, [public use] connotes an activity which serves as a benefit to the community as a whole, and which, at the same time is directly related to the functions of government…. In each instance where the test is to be applied the decision must be reached with reference to the object sought to be accomplished and the degree and manner in which the object affects the public welfare.”  (citing to City of Newark v. Essex Cty. Bd. Of Taxation, 54 N.J. 171, 187 (1969) (quoting Roe v. Kervick, 42 N.J. 191, 207 (1964).  The Court thus concluded that the concept of what constitutes a “public purpose” is to be expanded “when necessary to encompass changing public needs of a modern dynamic society.”  Id.

In so doing, the Appellate Division focused on the following factors, which it concluded collectively tipped the scales in favor of its “public use” determination and resulted in applicability of the statutory tax exemption in the case of Gourmet Dining LLC’s operations:

  1. at least 10% of the subject restaurant revenues were required to be allocated to Kean University student scholarships;
  2. the Tax Court had improperly substituted its judgment for that of the University’s Board of Trustees, which believed and concluded, in its approving resolution, that the introduction of an upscale restaurant at its on-campus building would enhance the public perception of the University and the institution’s “forward-looking” status;
  3. the restaurant served as an important recruiting tool for the University;
  4. 85% of the restaurant’s employees were students of the University;
  5. the restaurant used produce grown on University property in its operations;
  6.  the restaurant provided its compost waste to the University as part of a science program which involved research projects conducted by the University’s students and faculty; and
  7.  the University’s management arrangement with the for-profit restaurant was not a lease, but rather a license agreement and therefore did not trigger the exception to tax exemption prescribed by N.J.S.A. 54:4-3.6 for improvements leased to for-profit entities.

This decision thus squarely places the focus of the exemption analysis on the contractual methods employed by the public entity with its for-profit counterpart (the use of management agreements/licenses, as opposed to leases) and the presence of conditions compelling a result that furthers an undeniable public purposes (such as the specific earmarking of revenues derived from these arrangements for student scholarships).  When fashioned correctly, the groundwork can be laid for application of the statutory tax exemption, even in the case of for-profit operations on the tax exempt premises.  Careful planning and consultation, with the involvement of experienced real property tax practitioners, is therefore essential in order to properly structure these transactions with for-profit entities in a manner that best enhances the prospect that the “public purpose” exemption will both apply and be upheld by the courts.

As the law continues to evolve on these matters, please note that this article is current as of date and time of publication and may not reflect subsequent developments. The content and interpretation of the issues addressed herein is subject to change. Cole Schotz P.C. disclaims any and all liability with respect to actions taken or not taken based on any or all of the contents of this publication to the fullest extent permitted by law. This is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Do not act or refrain from acting upon the information contained in this publication without obtaining legal, financial and tax advice. For further information, please do not hesitate to reach out to your firm contact or to any of the attorneys listed in this publication.

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