Revocation of Real Estate Tax Exemption for the Tax Exempt

August 16, 2016 | Articles & Press Releases

Recently, the revocation of exemption from real property tax for certain non-profit organizations has become a topic of much debate in courtrooms and legislatures alike.

New York is moving towards a more restrictive application of the real property tax exemption statutes. New York has two statutes that govern the exemption of real property from taxation—New York Real Property Tax Law § 420-a (mandatory exemption) and New York Real Property Tax Law § 420-b (permissive exemption).  In 2015, the Court of Appeals comprehensively examined section 420-a in Greater Jamaica Dev. Corp. v. New York City Tax Comm’n.  The Court upheld the revocation of a tax exemption for parking garages that were owned by a non-profit organization, but were not used for an exempt purpose.  It stated:  “Inasmuch as the parking facilities themselves are not incidental to a charitable purpose, they are not entitled to a section 420–a (1)(a) tax exemption.” Greater Jamaica Dev. Corp. v. New York City Tax Comm’n, 25 N.Y.3d 614, 631, 36 N.E.3d 645, 655 (2015).  The matter was remitted to the Appellate Division, Second Department for consideration of issues that were raised in the appeal, but not addressed.  In April 2016, upon remittitur, the Appellate Division, Second Department affirmed the order and judgment that was originally appealed from. Greater Jamaica Dev. Corp. v. New York City Tax Comm’n, 138 A.D.3d 840, 28 N.Y.S.3d 339, 340 (2d Dep’t 2016).

In June 2015, the Tax Court of New Jersey issued a detailed decision that significantly reduced the real property tax exemption for a hospital. The issue in AHS Hospital Corp., d/b/a Morristown Memorial Hospital v. Town of Morristown revolved around the requirement that the operation and use of the property must not be conducted for profit to qualify for an exemption under N.J.S.A 54:4-3.6.   The court examined the history of the applicable exemption statute and reviewed the inner workings and finances of the hospital. AHS Hosp. Corp. v. Town of Morristown, 28 N.J. Tax 456, 463 (2015), as revised (June 26, 2015), as revised (June 29, 2015), as revised (July 15, 2015).  The court ultimately concluded that many parts of the hospital and its related entities were conducted for profit, and therefore, the vast majority of the property could not be exempt from property tax.  It was not enough that the hospital itself, the owner of the property, was a non-profit organization because inter alia the hospital had a relationship with private, for-profit physicians that operated throughout the facility, and it was affiliated and intertwined with other for-profit entities.  The court denied the exemption for all but the auditorium, fitness center, and visitor’s garage and found that the property had been used “substantially for profit.”

The Greater Jamaica Dev. Corp. and Morristown Memorial Hospital cases are examples of the shift in attitude away from exempting certain property from taxation.  Many states are looking for creative ways to generate revenue, and taxing historically exempt property appears to be discussed more frequently.  For example, in 2015, Gov. Paul LePage of Maine proposed taxing large nonprofits as part of the 2016/17 state budget.  The proposal would allow municipalities to collect property taxes from nonprofits with property valued at $500,000 with the exception of churches and government-owned entities.  The proposal was ultimately rejected by the Legislature.

Similarly, in Connecticut, a bill was approved in early 2016 by the Legislature’s tax-writing committee to allow a municipality to tax property owned by a college. Previously, real property owned by certain colleges and universities in the state was exempt from property tax under subdivision (8) of section 12-81 of the Connecticut General Statutes. The new legislation amends that exemption to exclude any such real estate owned by the listed colleges and universities that generates an annual income of more than six thousand ($6,000), and real estate owned by an institution that owns more than two billion ($2,000,000,000) of land, buildings and equipment and the activities on such real estate generate an annual income of more than six thousand ($6,000).  The bill was drafted to specifically target Yale University, which is the owner of other commercial properties around the school.  The bill has since died and was not addressed by the Legislature before finishing its 2016 session.

There has not yet been a legislative push to change or limit the exemptions in New York, but it is clear the statutes will continue to be interpreted narrowly and tax exemption will only become more limited in the future.