M id A tlantic Real Estate Journal — Financial Digest — Spring Preview — April 22 - May 19, 2022 — 9A A ttorney
www.marej.com
By Neil Andrew Stein, Esquire, Kaplin, Stewart, Meloff, Reiter & Stein Is your property tax exempt? Don’t bet on it
P
ennsylvania may be at the forefront of a national trend that has
to an exemption remains with the property owner. If you must defend a chal- lenge in court, do not assume that the initial grant of an exemption by the county board will hold much weight. When it comes to the burden of proof, a court may be far more exact- ing. An organization loses if it is unable to meet just one element of the HUP Test. Problems often arise due to a sale. If the property becomes a revenue source from the payment of rent, or if a ten- ant receives the benefits of the owner’s charity, the exemption may be lost.
Charitable organizations should keep the following prin- ciples in mind when structuring lease arrangements: (1) the ten- ant should share in the owner/ charity’s mission and use the property in furtherance of that mission; (2) the overall leasing arrangement should not be profitable, i.e., rent that is at or below market rates; (3) the owner/charity should be respon - sible for building maintenance and improvements; and (4) the owner/charity should continue to occupy a portion of the leased property and should maintain its right to continued posses- sion and control. Exempt status
generally cannot be granted on the basis that the tenant, rather than the owner, is an institution of purely public charity. Nonprofit entities must un - derstand the importance of the HUP Test and required burden of proof. A property owner must have well-drafted documents and present strong testimony to push back against increased scrutiny from local taxing jurisdictions. Neil Andrew Stein, Es- quire is a principal of Kap- lin, Stewart, Meloff, Reiter & Stein and a member of the Land Use, Zoning & Devel- opment Department. MAREJ
exemption because that por- tion of the property was leased to other nonprofits. On appeal, the Commonwealth Court re- manded the case to the trial court to determine whether each of the five prongs of the HUP Test had been satisfied. So once granted, is a tax exemption ever safe from challenge? The answer is no. Local taxing authorities have very little, if anything, to lose by challenging an exemption. The property owner must also understand that even though the challenge was initiated by the taxing authority, the burden of proving entitlement
s e en l o c a l governments r emo v e o r modi fy the f a v o r a b l e property tax t r e a tme n t for nonprof- its, particu- larly hospi-
Neil Stein
tals and universities. Munici - palities and school districts are always on the hunt for additional tax revenue, and successfully challenging an ex- emption is one way to achieve that goal. Exemption law is rooted in the Pennsylvania Consti- tution, which permits the exemption of “institutions of purely public charity,” Pa. Const. Art. VIII, §2(a)(v). However, there is no stat- ute defining a “purely public charity.” Hospital Utilization Project v. Commonwealth first laid out the Pennsylvania Supreme Court’s vision of a clear standard, requiring that an exempt entity must: 1) advance a charitable purpose; 2) gratuitously provide a sub- stantial portion of its services; 3) benefit a substantial and indefinite class of persons who are legitimate subjects of char- ity; 4) relieve the government of some of its burden; and 5) operate free from private profit motive (“HUP Test”). In 1997, the passage of the “Institutions of Purely Public Charity Act” (“ Charity Act ”), resulted in the adoption of the HUP Test and the creation of additional eligibility tests. While the Charity Act was intended to reduce confusion, the courts interpreted the Charity Act as adding a second layer of criteria, i.e., an orga - nization must satisfy the HUP Test and the Charity Act test. A tough nut to crack. Litigation ensued. In one case, a court revoked the tax exemption of a Jewish summer camp on the grounds that it did not relieve the govern- ment of some of its burden. In another case, a court consid- ered the exemption claim of a wholly-owned subsidiary of a Section 501(c)(3) charitable trust. The Trust’s sole pur - pose was to own, operate and maintain a historic property. The Chester County Board of Assessment denied a full exemption but granted a 72%
Firmly Rooted in the Law and in the Community We are well grounded in every facet of real estate law, from acquisition to construction. We are committed to serving the needs of our clients and our communities.
Contact: NEIL A. STEIN • nstein@kaplaw.com 910 Harvest Drive, Blue Bell, PA 19422-0765 • 610-941-2469 • kaplaw.com Other Offices: • Cherry Hill, NJ 856-675-1550 • Philadelphia, PA 215-567-3120 Kaplin Stewart A t t o r ne y s a t Law
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