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The Tax-Exempt Entity's Property and a Lessee's Private Purpose
State and local governments grant tax-exempt status to properties that are used for certain activities, including religious and charitable purposes. Properties owned by government and educational institutions are tax-exempt as well, and these exemptions can extend to lessees of such property under certain circumstances, such as when the property continues to be used for a public purpose and such use is related to the function of the lessor entity.
Questions arise, however, when a tax-exempt property's use by a lessee involves an element of private profit. Is the tax-exempt status lost? Does that answer change if only a portion of the property is used to generate income for a privately-held entity? And if an agreement between a tax-exempt entity and a private party is not termed a “lease” by them, is the private party a lessee of property or something else altogether?
The Tax Court of New Jersey was asked to answer questions like these in Gourmet Dining, LLC v. Union Twp., 2018 N.J. Tax LEXIS 6 (Tax Court of New Jersey, 3/14/18), a recent case involving a restaurant space run by a for-profit vendor on the campus of a tax-exempt entity — a university. The scenario in Gourmet Dining is one likely to be repeated, in various guises, in other commercial contract situations involving tax-exempt entity-owned premises, so the court's reasoning may be instructive to those contemplating such business relationships.
The Contract
New Jersey Statutes Annotated (N.J.S.A.) section 54:4-1 provides that all real and personal property within the State of New Jersey is subject to annual taxation unless specifically exempted by the New Jersey legislature. If the legislature chooses to exempt a property from taxation, it may do so only by enacting general laws (N.J. Const. Art. VIII, section 1, para 2), and such exemptions from taxation may only be based on the use to which the property is put, not on the identity of the taxpayer. See, Township of Holmdel v. New Jersey Highway Auth., 190 N.J. 74 (2007).
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