Court Opinion

ID: 9754969
Source: CourtListenerOpinion
Date Created: 2023-08-28 20:19:52.463301+00
Date Added: 2024-06-11T09:56:00.683090
License: Public Domain

The opinion of the court was delivered by
Schreiber, J.
This case presents a difficult problem in real property tax valuation involving the assessment under N. J. S. A. 54:30A-52 of land beneath a reservoir created and owned by the Hackensack Water Company, a private water public utility. The municipal taxing authority is the Borough of Old Tappan.
I
The background of this controversy is as follows. In the late 1950’s, the taxpayer, Hackensack Water Company, purchased 940.805 acres of natural basin property along the Hackensack River in the Borough of Old Tappan. The Company excavated the land and built a dam across the river, creating a reservoir which it called Lake Tappan. The river bed is now located generally in the middle of the reservoir. Part of the reservoir (about 20%) extends into the Township of River Vale, which is adjacent to Old Tappan. The bed of the Hackensack River marks the boundary between the Borough and the Township.
Of the 940.805 acres located in Old Tappan, 424.151 are dry upland, and the remaining 516.654 are submerged under as much as twenty feet of water. The bulk of the land now under water was swamp land before it was excavated and flooded. The 424 upland acres are undeveloped and, according to the taxpayer’s testimony, are necessary to maintain the integrity of the reservoir. The dam, built at a cost of several million dollars, is the only structure on the Old Tap-pan tract.
This litigation began in 1970, when the Company appealed the Borough’s 1970 property tax assessment of the Old Tap-pan tract to the Bergen County Board of Taxation. The .County Board reduced the assessment of $7,118,900 to *212$3,869,175. The lowered assessment was based on a valuation of the upland acreage at $6500 per acre and of the underwater property at $2500 per acre. The Borough acquiesced in the reduction and assessed the property at the lower amount for the 1971, 1972 and 1973 tax years. The Company, however, appealed the 1970, 1971, 1972 and 1973 County Board determinations to the Division of Tax Appeals. The four appeals were tried together before the Division.
The Company’s appeal was limited to the objection that its underwater property had been overvalued. The Division reduced the County Board’s assessment from $3,869,175 to $2,835,875. The reduction was based solely on the finding that the 516 underwater acres had a nominal value of $500 per acre. Upon the Borough’s appeal, the Appellate Division in an unreported decision adopted the reasoning of the Division of Tax Appeals and affirmed. We granted certification. 73 N. J. 61 (1977).
II
The Hackensack Water Company is a privately owned public utility which furnishes water to approximately 800,000 customers in Bergen and Hudson Counties. It is subject to comprehensive regulation by the Board of Public Utility Commissioners. In re Public Service Electric and Gas Co., 35 N. J. 358, 371 (1961). The Company could not, for example, sell the Lake Tappan reservoir without Board approval. N. J. SA. 48:3-7. As a water public utility the Company is subject to “a complete scheme and method” for taxation for public utilities, N. J. S. A. 54:30A-49 et seq., under which it pays a percentage of its gross receipts to the State, some of which are then distributed to municipalities in which the company has its facilities. Under the statutory format all real estate must “be assessed and taxed at local rates in the manner provided by law for the taxation of similar property owned by *213other corporations or individuals * * N. J. S. A. 54: BOA-52.
 Real estate is defined as “land and buildings, but it does not include * * * reservoirs (except that the lands upon which dams and reservoirs are situated are real estate) * * N. J. S. A. 54:30A-50(b). The problem here, then, is to evaluate the land beneath the reservoir according to the criteria established generally for assessment of real property. The statutory test calls for an assessment of the land at its “full and fair value * * * at such price as * * * [the property] would sell for at a fair and bona fide sale by private contract * * N. J. 8. A. 54:4-23. A fair sale encompasses a transaction between “a buyer willing but not obliged to buy, and a seller willing but not obliged to sell.” Greenwich Tp. v. Gloucester Cty. Bd. of Taxation, 47 N. J. 95, 99 (1966). In applying that test it is appropriate to consider the highest and best use of the property. See City of Clifton v. No. Jersey Dist. Water Supply Comm’n, 104 N. J. Super. 147, 153 (App. Div. 1959).
 The parties assumed the highest and best use of the land was for residential development and presented proofs designed to demonstrate value on that basis. However, it was shown that conversion of this reservoir bottom into a tract amenable to suburban living would require a number of costly engineering maneuvers: a dam would have to be dismantled and the water captured by it drained away without flooding the surrounding countryside; millions of cubic yards of landfill would then have to be dumped into the resulting basin to create land suitable for building and high enough to withstand flooding; and the Hackensack River, now stopped up by the dam, would have to be rechanneled, a feat that would cost, according to one expert’s estimate, around $5,000,000. The evidence showed that the conversion expense would far exceed the fair market value of residential property in the area. Since property owners cannot be charged with the cost of restructuring their property (property should be valued in the actual condition in which the *214owner holds it, Trustees of Stevens Inst, of Technology v. State Board, 105 N. J. L. 99, 101 (Sup. Ct. 1928), aff’d 105 N. J. L. 655 (E. & A. 1929)), the Division’s finding that financially it was not feasible to develop the property for residential use was fully supportable in the record.
 However, the Division ignored basic precepts when it assumed that residential use was the sole guidepost for valuation and that the taxpayer would have been compelled to give its property away for residential purposes. Underlying the settled rule that remote uses are irrelevant, Div. of Tax Appeals v. Ewing Tp., 72 N. J. Super. 238, 243 (App. Div. 1962); City of Clifton v. No. Jersey Dist. Water Supply Comm’n, supra, is the more basic principle that property valuation should have some relationship to reality, and the reality of the matter is that the land is useful as a reservoir. Therefore, it would have been proper to consider the actual highest and best use of the land, namely as a reservoir in conjunction with the operation of a ’utility water system.1 *215The ultimate inquiry remains — what is the fair market value of the land?
Various methods have been used to ascertain the price which parties would freely fix in the market place. One standard technique is to examine comparable sales. Another is to capitalize income derived from the property. See Aetna Life Ins. Co. v. City of Newark, 10 N. J. 99, 105-109 (1952); New Brunswick v. State Division of Tax Appeals, 39 N. J. 537, 544 (1963). These approaches are not compatible with the unique problem posed here.
In the case of public utilities, in situations in which it is not feasible to evaluate land by utilizing the standard criteria, other factors must be considered. We indicated as much in Aetna Life, Ins. Co. v. City of Newark, 10 N. J. at 109, wherein we cited with approval Assessors of Quincy v. Boston Consol. Gas Co., 309 Mass. 60, 34 N. E. 2d 623 (Sup. Jud. Ct. 1941). In attempting to ascertain the fair market value of part of a gas company’s property located in one municipality, the court acknowledged that profits from a business located upon the land are not a fair measure of the value of the land because financial returns from a commercial undertaking are dependent upon so many factors unrelated to the land itself. 309 Mass. at 63, 34 N. E. 2d at 626. The court, after stating that it was appropriate to relax the general principle in those instances where, in the absence of such evidence, there would be no proof of the fair market value of the land, made the following pertinent comments :
The subject of the tax is a network of underground pipes used by the company in delivering gas to its customers. There is nothing in the record to indicate that this distributing system could be used for any other purpose and there is nothing to show that, if operation of the system were discontinued, these pipes would have any removal value, although the meters located upon the premises of the customers might have some value if they were disconnected and repossessed by the company. The property was adapted to a single use and its value depended entirely upon a continuance of that use. It would therefore be difficult properly to appraise its value without *216considering its use, which was the only element that gave it whatever value it had. The absence of sales of similar property deprived the assessors of resorting to current market prices. Here the company did not have the right of sale that ordinarily attaches to ownership. It could not sell this distributing system and deprive itself of its power to perform its public duties without legislative sanction. [309 Mass, at 64, 34 N. E. 2d at 627]
The court concluded that financial returns from the use of the property and its cost were two of the controlling factors in fixing a fair price.2
The thoughts expressed by the Massachusetts Supreme Judicial Court are peculiarly applicable here. Nothing in the record indicates that the land under the reservoir could be used for any purpose other than a reservoir, the highest and best use of the property. The land was adapted to a single use and its value depends upon continuance of that use. That is the only element shown to have created value in this land.3
 Consideration of the contribution of this land to the Company’s earnings, therefore, becomes relevant. As a public utility, its rates have been fixed by the Board of Public Utility Commissioners. In making that determination the Board has consistently included in rate base the “original cost”4 of the reservoir land. In re Hackensack Water Co., 1 N. J. P. U. C. 2d 76, 92 (1958), rev’d on other grounds 57 N. J. Super. 180 (App. Div. 1959), aff’d as modified 35 N. J. 239 (1961). In other proceedings the *217Board has also approved the use of original cost for rate making purposes: P. U. C. Dkt. Nos. 663-125 and 666-458, Examiner’s Report dated January 30, 1967, adopted by Board, April 7, 1967; P. U. C. Dkt. No. 74A-315, Examiner’s Report dated January 23, 1975, adopted by Board, February 27, 1975; P. U. C. Dkt. No. 7512-1330, Examiner’s Report dated July 8, 1976, orginial cost rate base adopted .by Board, August 12, 1976. It is true that rate base is but one factor in determining revenues and much may be lost in the translation of the value of that base .by comparison with the market value of the owner’s equity. See Samuels, “On the Effect of Regulation on Yalue,” 25 National Tax Journal 311, 315 (1972). However, it is probable that a prospective purchaser, public or private, of the system would in computing value include an amount at least equal to the original cost of the land beneath the reservoir.5 The original cost at least bears some relationship to the value of the reservoir land and it is appropriate to rely upon it in the absence of any other evidence.6 Cf. Troy Hills Village v. Parsippany Troy Hills Tp. Council, 68. N. J. 604, 622-623 (1975) (rent control case indicating that public utility precedents are of limited usefulness in determining market value and that meaning of the term “value” must be derived from the purpose for which valuation is being made). We hasten to add that it would have been proper to consider, even under the unusual circumstances of this case, other factors such as the trending of *218costs incurred in acquiring the land and in preparing for its use as a reservoir. Here the only relevant evidence was that of an expert, a member of a public utility consulting firm, who testified that the original cost of the reservoir land per the Company’s books was approximately $670 per acre. Accordingly, the assessed value should be $670 per acre.
As so modified the judgments are affirmed.

We note that N. J. 8. A. 54:4^3.3, governing the taxation of municipality owned water supply lands located in other municipalities, requires that such lands be taxed “without regard to any * '* * improvements thereon, in the same manner and to the same extent as the lands of private persons * *" Cases construing that provision, e. g., Newark v. West Milford Tp., 9 N. J. 295, 302 (1952) ; City of East Orange v. Tp. of Livingston, 102 N. J. Super. 512, 520-530, aff’d 54 N. J. 96 (1968), do not control us here. However, our conclusion that it is appropriate to consider the reservoir use of the lands is consistent with Judge Kilkenny’s thoughtful discussion of N. J. 8. A. 54:4-3.3 in In re Appeal of East Orange, 80 N. J. Super. 219 (App. Div. 1963), which involved Livingston’s assessment of a large tract of watershed land owned by Bast Orange in connection with its water supply business. The evidence demonstrated that the highest and best use of the land was for residential purposes. Judge Kilkenny suggested, however, that if value of the land for water supply purposes had compared favorably with the value for other purposes, such as residential development, evaluation of the land from the standpoint of its availability as a water supply would have been appropriate. Id. at 232-234. See Wanaque v. No. Jersey Dist. Water Supply Comm’n, 20 N. J. Misc. 232, 26 A. 2d 569 (State Tax Bd. 1942).

The court also indicated other elements were age, condition and reproduction cost of the equipment. None of these factors is relevant here.

We do not intend here to disturb the principle that valuation of land for economically feasible uses other than its actual use is appropriate.

Original cost is the cost of the property to the first person who devoted the property to utility service. For a general criticism of the use of net original cost, see D. Eiteman, “Approaches to Utility Valuation for Ad Valorem Taxation,” 71 Pub. Util. Fort. 19 (May 23, 1963).

“Original cost” should probably include the associated costs incurred in placing the land in position for its use as a reservoir.

An analogy may be found in eminent domain proceedings when property because of its unusual character has no market value in the traditional sense and there must be resort to other methods. 4 Nichols, Eminent Domain, § 12.32 (3d. ed. 1971). See Pa. Gas & Water Co. v. Pa. Tpk. Comm’n, 428 Pa. 74, 236 A. 2d 112 (Sup. Ct. 1967) (land held for reservoir purposes compensated for in condemnation case on basis of cost to replace rather than fair market value because there existed no market for such utility property).