Private Property Leased For Profit to School Does Not Qualify for 'Public Schoolhouse' Tax Exemption

Anderson/Maltbie Partnership v. Levin, Slip Opinion No. 2010-Ohio-4904.
Board of Tax Appeals, No. 2007-A-11. Decision reversed.
Brown, C.J., and Pfeifer, Lundberg Stratton, O'Connor, O'Donnell, Lanzinger, and Cupp, JJ., concur.
Opinion: http://www.supremecourt.ohio.gov/rod/docs/pdf/0/2010/2010-Ohio-4904.pdf


(Oct. 12, 2010) In a 7-0 decision announced today, the Supreme Court of Ohio held that the property tax exemption for a “public schoolhouse” set forth in R.C. 5709.07(A)(1) does not apply to property that is leased by its owner to a school for profit. The decision, authored by Justice Judith Ann Lanzinger, reversed a ruling by the State Board of Tax Appeals (BTA).

The case involved a for-profit company, Anderson/Maltbie Partnership (AMP), which leased property from October 1999 through October 2004 to a nonprofit corporation, which used the property to operate a community or charter school called the Cincinnati College Preparatory Academy (CCPA). Under the lease agreement, CCPA paid AMP $275,000 a year for the use of the building.

AMP filed an application with the state tax commissioner seeking a property tax exemption for the 2002 tax year and remission of taxes it had paid for 1999, 2000 and 2001. In its application, AMP asserted that because the property was used by the lessee as a public school facility, it qualified for exemption from property taxes under R.C. 5709.07(A)(1), a provision of state law that grants exemption to “public schoolhouses.” The commissioner denied the requested exemption. AMP appealed the commissioner’s determination to the BTA. On review, the BTA overruled the commissioner and ordered him to approve the requested exemption.

The commissioner exercised his right to appeal the BTA ruling to the Supreme Court.

In today’s decision, Justice Lanzinger rejected the legal reasoning underlying the BTA’s ruling as inconsistent with Supreme Court of Ohio decisions dating back to Gerke v. Purcell (1874).

She wrote: “Gerke holds that the public-schoolhouse exemption does extend to privately owned property, but only when that property is ‘appropriated to the support of education for the benefit of the public without any view to profit,’ an essential element being the ‘exclusion of all idea of private gain or profit.’ … By seeking to exempt a commercial office building that is leased to the school for profit, AMP seeks a broader exemption, an application that we reject.”

“AMP also contends that a commercial lease is irrelevant to the issue of exempt status so long as the lessee uses the property for exempt purposes. … This argument raises two questions. The first is whether ownership and use must coincide for a building to qualify as an exempt public schoolhouse. Gerke answers this question by declaring that the ‘public’ in public schoolhouse ‘is not used in the sense of ownership, but as descriptive of the uses to which the property is devoted.’ … Thus, property ‘appropriated to the support of education for the benefit of the public without any view to profit’ qualifies for exemption, … and that standard contains no requirement that the owner be the entity that operates the school. It follows that a community school that leases its building may still receive the benefit of tax exemption as a public schoolhouse.”

“But property subject to a commercial, for-profit lease is a different matter. Gerke specifically limits the exemption of privately owned property to property that is used ‘without any view to profit.’ The second question raised by AMP’s argument is whose use should be considered, the lessee’s, or both the lessor’s and the lessee’s? AMP relies on Bexley Village, Ltd. v. Limbach (1990) … to maintain that the commissioner and the BTA must focus exclusively on the lessee’s use of the property. … Because Bexley Village addresses the public-college exemption, we regard the case as inapposite. We hold that under the public-schoolhouse exemption, the restriction that the property not be used with a view to profit requires examination of the total use of the property by both lessor and lessee. If the lease is intended to generate profit for the lessor, the property does not qualify for exemption; similarly, the property does not qualify if the lessee’s use is intended to generate profit. It follows that because AMP leases the property to CCPA under a for-profit lease, the public-schoolhouse exemption is not available in the present case.”

“The BTA erred by granting a public-schoolhouse exemption for property owned by a commercial landlord and leased to a community school under a for-profit lease. We therefore reverse the decision of the BTA and reinstate the Tax Commissioner’s denial of the exemption.”

Justice Lanzinger’s opinion was joined by Chief Justice Eric Brown and Justices Paul E. Pfeifer, Maureen O’Connor, Terrence O’Donnell and Robert R. Cupp.

Justice Evelyn Lundberg Stratton entered a separate opinion in which she concurred with the majority in judgment based on established Ohio case law, but expressed concern that the Court’s holding renders operators of many community schools ineligible for property tax exemption while other provisions of state law explicitly prohibit them from using the state funds they receive to operate their schools to pay such taxes.

She wrote: “My concern is that our holding creates a predicament for community schools that lease the property and buildings that they use to operate the schools. Under our holding, lessors who lease property for use as a schoolhouse will fail to qualify for an exemption under R.C. 5709.07(A)(1) when the lessor leases the property with a view to profit. The property-tax obligation is passed on to the community school pursuant to the triple-net lease. However, community schools are prohibited by law from using state funds to pay these taxes. In my opinion, disqualifying property from the schoolhouse exemption when it is used for a public schoolhouse merely because the property’s lessor has a view to profit seems to run contrary to the general intent within R.C. 5709.07, and causes community schools that lease property to face a conundrum as to how they will pay the real estate taxes. Accordingly, although I concur in the holding in this case, I invite the General Assembly to amend R.C. 5709.07(A)(1) if they share my concerns.”

Contacts
Graham A. Bluhm, 419.241.6000, for the Anderson/Maltbie Partnership.

Sophia Hussain, 614.466.5967, for the State Tax Commissioner.

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