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Volume 6 - Opinions of Counsel SBEA No. 91

Opinions of Counsel index

Special franchise assessment (occupancy of navigable waters) (riparian rights) - Real Property Tax Law, § 102(17):

Real property which is located in navigable waters and used in the production and distribution of electric power, is not tangible property of a special franchise where occupation of those waters is derived from the owner’s riparian rights, rather than from a grant by the municipal corporation in which located.

We have been asked whether mounted gas turbine power plants and auxiliary fuel supply barges located in Gowanus Bay in Brooklyn should be categorized as “special franchise” property, as that term is defined in subdivision 17 of section 102 of the Real Property Tax Law. The Court of Appeals has concluded that the equipment is “real property” within the meaning of paragraph (b) of subdivision 12 of section 102, i.e., as structures “affixed” to the land (see, Consolidated Edison Co. of New York, Inc. v. City of New York, 44 N.Y.2d 536, 378 N.E.2d 91, 406 N.Y.S.2d 72, aff’g, 57 A.D.2d 926, 395 N.Y.S.2d 42, aff’g, 80 Misc.2d 1065, 365 N.Y.S.2d 377).

Special franchises are “real property” (Real Property Tax Law, § 102(12) (h)), which are composed of two elements: (1) the right to operate in the public way (often referred to as the intangible element); and (2) the tangible property used in connection with that right and located in the public way (id. § 102(17)). If either element is absent, no special franchise exists (People ex rel. Barren v. Knapp, 208 App. Div. 127, 203 N.Y.S. 76 at 78, aff’d, 239 N.Y. 581, 147 N.E. 204).

Excepted from this definition is (1) property of a municipal corporation or special district and (2) a crossing of less than 250-feet of a public place outside a city or village, unless the crossing is a continuation of an occupancy of another public place. Neither exception applies in this instance. The property is not owned by a municipal corporation or a special district, and it is located within the boundaries of the City of New York.

The courts have declared that the intangible element of a special franchise (i.e., the right to occupy) is a “right to do something in the public street or highway, which, except for the grant under which it is exercised, would be a trespass” (People ex rel. New York Central & Hudson River R.R. Co. v. Gowley, 198 N.Y. 486 at 492,92 N.E. 398 (emphasis added); see also, People ex rel. Metropolitan St. Ry. Co. v. State Board of Tax Comm’rs, 174 N.Y. 417 at 435-436,67 N.E. 69). Thus, the first issues for our consideration are (A) is this property located in the public way and, if so (B) would the occupancy be a trespass in the absence of permission granted by the City?

(A)  Waters, if navigable, are considered public thoroughfares, such that an occupancy could constitute a trespass (see, People ex rel. Grand Trunk Ry. Co. of Canada v. Gilchrist, 248 N.Y. 97 at 101, 161 N.E. 432). It has been declared that if waters “are public navigable waters there exists an easement or right in the public to use them as a highway. Being a public highway, a franchise to cross is necessary, [citations omitted)” (People ex rel. N. Y. Central R. Co. v. State Tax Comm., 258 N.Y. 356, 16 N.Y.S.2d 812 at 815-816, aff’d, 284 N.Y. 616, 29 N.E.2d 932).

Property is not liable for special franchise assessments if the water which it crosses or occupies is non-navigable (People ex rel. Rutland R. Co. v. State Tax Comm., 243 N.Y. 543, 154 N.E. 597). However, the fact that the stream or river is not navigable at the point of the crossing does not change the water’s character as navigable (see, People ex rel. Grand Trunk Ry. Co. of Canada v. Gilchrist, 221 App.Div. 19, 221 N.Y.S. 613 at 617, rev’d on other grounds, 248 N.Y. 97, 161 N.E. 432). Rather, the question is one of navigability in fact (People ex rel. N. Y. Cent. R. Co. v. State Tax Comm., supra, 16 N.Y.2d at 815).

“Navigable in fact” is defined as “navigable in its natural or unimproved condition, affording a channel for useful commerce of a substantial and permanent character conducted in the customary mode of trade and travel on the water” (Navigation Law, § 2(5)).

The common law rule defined navigability in terms of tidality, i.e., whether there was “ebbing and flowing of the tide” (People ex rel. Howell v. Jessup, 160 N.Y. 249 at 260, 54 N.E. 682, cited in Trustees of Freeholders and Commonalty of Town of Southampton, 84 Misc.2d 318, 375 N.Y.S.2d 761 at 767).

While there is no statute or reported case law explicitly declaring the Gowanus Bay to be navigable, there is language in the Court of Appeals decision in Consolidated Edison Co. of N. Y. v. City of New York implying that these waters are tidal and therefore “navigable” in law. The Court, in describing the property in question, noted that “[e]ach barge is connected to the pier by a ‘spud and clamp’ design system which allows for vertical movement with tidal variation . . .” (44 N.Y.2d at 539 (emphasis added)). Thus, applying the common law rule, we conclude that the Gowanus Bay is a navigable - and therefore public - waterway.

(B)  The second-and related-issue for our consideration is whether Con Ed’s occupancy of the public waterway constitutes a trespass in the absence of a grant from the City of New York.

The bare fact that a utility company has tangible property in the public way does not mean that a special franchise exists. For example, the courts have consistently held that “prior occupancy” of a public way bars an assessment of the property as special franchise (People ex rel. N. Y. Cent & H. R.R. Co. v. Woodbury, 203 N.Y. 167 at 179-180, 96 N.E. 421; People ex rel. N. Y. Cent. R. Co. v. State Tax Comm., 292 N.Y. 130 at 134, 54 N.E.2d 332). That is, if an occupancy was established prior to the opening or declaration of a place as a public highway there is no special franchise. As expressed by the Court of Appeals in the Woodbury case, supra:

The object of the Special Franchise Tax is to tax . . . for privileges granted . . . in the streets . . . and if, after they [railroads in this case) have their rights of way secured over private land, a public highway is laid across the tracks, while there is a crossing . . . [s]uch a crossing . . . is not a special franchise . . . because the railroad was built on its own right of way before the street came into existence and no additional right was granted to the railroad company by the extension of a highway across its tracks. 203 N.Y. at 179-180.

Similarly, it has been held that no special franchise exists if the right to occupy the public place arises from a purchase of title thereto or some property interest therein rather than as a matter of “public favor” (see, People ex rel. Long Island R. Co. v. State Board of Tax Comm’rs., 148 App.Div. 751, 133 N.Y.S. 348 at 352, aff’d, 207 N.Y. 683, 101 N.E. 1117). In the case just cited, the Appellate Division, Second Department, declared that the definition of a special franchise “should be limited to a case where the privilege to occupy the street or highway results solely from permission by the proper authorities, and where the railroad company has no estate or interest in the land itself over which it is operating the road” (133 351).

Consolidated Edison owns the land, including the wharf, which abuts the area in Gowanus Bay in which the subject equipment is located. It also owns the pier to which the equipment is connected. As the owner of the “upland,” Con Ed “has the well-settled riparian right of access . . . to navigable water in front of its upland, subject to the rights of the public [citations omitted]” (Del Balso Holding Corp. v. McKenzie, 271 N.Y. 313 at 316, 3 N.E.2d 438). That is, it has certain rights or privileges to use and occupy the water adjoining its land- notwithstanding that the water is a public waterway. The Court of Appeals has stated that “[the) right to the use of the water . . . arises by mere operation of law as incident to the ownership of the bank and is a part of the estate of its owner [citations omitted]” (United Paper Board Co. v. Iroquois Pulp and Paper Co., 226 N.Y. 38 at 46, 123 N.E. 200).

This does not mean that an upland owner has unbridled freedom to occupy navigable waters which his land abuts. “Riparian rights” have been defined to include:

access to the navigable part of the river from the front of his lot, the right to make a landing, wharf or pier for his own use or for the use of the public, subject to such general rules and regulations as the legislature may see proper to impose for the protection of the rights of the public, whatever these may be. (Rumsey v. N.Y. & N.E. R.R. Co., 133 N.Y. 79 at 88)

Whether or not a use or occupancy is a matter of riparian rights will depend upon the meaning of the word “access.” It has been held that this does not connote “purposes extrinsic to commerce and navigation” (see, Town of Hempstead v. Oceanside Yacht Harbor, Inc., 38 A.D.2d 263, 328 N.Y.S.2d 894 at 897, aff’d, 32 N.Y.2d 859, 299 N.E.2d 895, 346 N.Y.S.2d 529). Specific examples of unrelated uses have included the operation of a restaurant (In re Neptune Avenue, City of New York, 280 N.Y. 604, 20 N.E.2d 557), amusement parks (People v. Steeplechase Park Co., 218 N.Y. 459, 113 N.E. 521) and a plant for processing meat (City of New York v. Wilson & Co., 278 N.Y. 86, 15 N.E.2d 408).

In the case of Town of Hempstead v. Oceanside Yacht Harbor, Inc., supra, the question before the court was “whether the extent of the defendant’s use of its riparian rights and the rental of the mooring slips . . . to . . . the public owning boats constitute an unreasonable exercise of dominion over the plaintiffs’ underwater land” (328 N.Y.S2d at 897). The trial court stated that “accessibility to navigable waters . . . is at the essence of riparian rights” and concluded that a commercial marina did not fall within that term, noting that “the damning point persists of an unequivocal business activity created quite independently of the need to derive access to the upland property” (64 Misc.2d 4, 311 N.Y.S.2d 668 at 673-674).

On appeal, the Appellate Division (affirmed by the Court of Appeals reversed. It rejected the Town’s contention that a commercial operation per se was an unreasonable exercise of riparian rights, and stated:

We cannot say on this record that the defendant overstepped the bounds of reasonableness by renting the mooring slips to individual owners of boats, even though the number of boats is considerable. The policy of the State, since an early time in the history of our State, has been directed toward encouraging the private development of waterfronts, subject only to the condition that the use be reasonable and not obstructive of navigation [citation omitted]. (328 N.Y.S.2d at 898)

Thus, we must determine whether Con Ed’s occupancy of Gowanus Bay is a reasonable exercise of its riparian rights within the meaning of these cases; that is, whether or not the occupancy is for a purpose related to commerce and navigation. The Court of Appeals stated the purpose of the property in question to be “to generate electric power for distribution to Con Ed users supplementary to and augmenting the power produced by its land-based facilities” (44 N.Y.2d at 542).

“Commerce” is a generic word having broad and varied meanings (see, 51 C.J.S. Commerce § 1, p.383 (1967)). It has been defined by one court in this State to mean the “transportation of persons or property by land, water, or air, and extends to all instrumentalities and every device that may be so employed” (People v. Katz, 140 Misc. 46, 249 N.Y.S. 719 at 721). It is a broader term than, and includes, the concept on navigation (Delaware & Hudson Canal Co. v. Lawrence, 2 Hun 163 at 168-169, aff’d, 56 N.Y. 612; see also, 15 C.J.S. Commerce § 30, p. 497 (1967)).

It has been held that the transportation or transmission of electric current and gas is a form of commerce, at least within the meaning of the Commerce Clause of the United States Constitution (Pennsylvania Gas Co. v. Public Service Comm., 225 N.Y. 397, 122 N.E. 260, aff’d, 252 U.S. 23, 40 S.Ct. 279, 64 L. Ed. 434; see generally, 15 Am.Jur.2d, Commerce § 58, pp. 398-399 (1976)). However, the courts have distinguished commerce from production. For example, it has been stated that:

[C]ommerce succeeds production and is not a part of it. Production or manufacture is a transformation of raw material into a change of form for use, while the functions of commerce consist in the purchasing, selling, and exchanging of commodities and the transportation incidental thereto (Utah Power & Light Co. v. Pfost, 52 F.2d 226 at 234, aff’d, 286 U.S. 165, 52 S.Ct. 548, 76 L.Ed. 1038).

In this regard, we note that while the Court of Appeals stated the purpose of the property in question to be to “generate-power for distribution” (44 N.Y.2d at 541), it also concluded that “[t]aken together with the facilities located on the land, they constitute an interrelated whole electric power production and distribution system” (id. at 543 (emphasis added)). Thus, the function of the barges, transformers and accessory apparatus cannot be said to be strictly limited to the production or manufacture of electricity - as opposed to its transmission - when perceived as part of a process which is a continuous, inseparable transfer of energy . . . through the generators along the lines to the consumer’s point of use” (Utah Power & Light Co. v. Pfost, supra, 52 F.2d at 235).

Whether the barges, generators and accessory apparatus of Con Ed are used for “commerce” and, therefore, within a reasonable definition of the Company’s riparian rights is a close question. However, it is our opinion that because of the interconnection between that property and the onshore switching station, the courts would conclude that the property is used in “commerce” and that its location in the public waterway is not a trespass but rather an occupancy within the scope of the Company’s rights as riparian land owner.

Therefore, we believe that this real property is not special franchise property since its location in the public way is not by virtue of permission granted by the municipality, but is rather an incidence of its ownership of the adjoining land.

October 31, 1979