Woe for Industrial Properties?

As published by Real Estate New Jersey, October 2002, By John Garippa

A recent New Jersey Tax Court decision  has the potential to wreak havoc on the industrial real property tax base in New Jersey.  In the case of General Motors v. Linden, the New Jersey Tax Court reinterpreted the Business Retention Act in such a way as to make taxable as real estate property, much of the automotive assembly equipment at the Linden, NJ plant.

This decision completely reverses the legislative purpose behind the enactment of the "Business Retention Act."  The purpose of the act was to preserve the industrial tax base in New Jersey and ensure that machinery, apparatus and equipment of all types wouldn't be taxable as real property.  The fallout will have enormous impact on all industrial property owners.

In the GM case, the court included as taxable real property, conveyors, paint booths, paint ovens and most of the equipment used in the manufacturing process of assembling automobiles.  Now, every pharmaceutical plant, in fact, every industrial site in New Jersey, is also at risk for significantly higher real estate taxes, because the assessment community has been given the green light to add millions of dollars of machinery and equipment to the real property tax rolls.

In its decision, the Court gave lip service to a prior decision of the New Jersey Supreme Court that affirmed the constitutionality of the Business Retention Act and declared it an appropriate exercise of legislative prerogative in removing business personal property from taxation.  However, while acknowledging this decision, it reinterpreted the law in such a way as to make the Business Retention Act null and void.

In fact, as a result of this decision, all machinery and dquipment precisely alluded to in the statute has now been rendered taxable.  As a result, the very name of the statute, "The Business Retention Act," has been eviscerated, leaving nothing but a painful reminder of the inability of the legislature to set tax policy.

The implications of this decision go far beyond the automobile industry.  Additionally, the effort to increase energy independence in New Jersey will be threatened because cogeneration will be at risk for the greater real estate taxation.  When one examines the industrial tax base in New Jersey and reflects on the hundreds of thousands of jobs devoted to that tax base, it isn't a far reach to say that this decision could have a devastating impact on both the industrial real estate market and the employment market as well.

A review of the evidence presented in the General Motors case is also interesting as it highlights the transient nature of capital investment employed in industrial properties.  In Framingham, MA, General Motors refitted an existing industrial facility with state of the art automobile assembly equipment.  Once all of the equipment was installed in the property, a business decision was made that the Framingham plant didn't fit into the overall plans of General Motors.  The plant was closed, and within 18 months, all of the automobile equipment was removed and shipped to Mexico for reinstallation in another assembly plant.

This equipment was the same type of property at issue in Linden.  Paint booths, paint ovens, and conveyors of all types were simply removed from the real property, crated and shipped to Mexico.  The industrial building was then sold to another user for other industrial purposes.

The Tax Court did note that the event had taken place and that all of the equipment at issue could be removed without any damage to the real property.  However, the overarching conclusion of the court was that when industrial owners place significant amounts of machinery and equipment in a building, they do not intend to move it after it is installed.  Therefore, the fact that it could be removed, or actually had been removed at other sites, was irrelevant.

If the Tax Court's decision is allowed to stand, tax policy in New Jersey will revert to its status prior to 1966, when the legislature of this state first determined that there was a pressing need to protect the manufacturing base of the state from business personal property taxation.  Hopefully, the appellate courts will intervene, recognizing the need to protect the manufacturing base in New Jersey, thereby restoring sanity to a potentially dangerous decision.

John Garippa is senior partner of the law firm of Garippa, Lotz & Giannuario with offices in Montclair, NJ and Philadelphia, and is also the president of American Property Tax Counsel, the national affiliation of property tax attorneys.  He can be reached at john@taxappeal.com.